Different contract types can ease LNG price volatility: Shell Asia's Shah

Shell India bullish on Indian LNG and natural gas demand

The different types of contracts that are now available can help mitigate Liquefied Natural Gas (LNG) price volatility. This can be an approach for assuring consumers that runaway LNG prices, as were seen in January 2021, do not hamper prospects for wider adoption of natural gas.

Speaking to Business Standard, Ajay Shah, vice president - Shell Energy Asia said, “These days you have spot, short-term, long-term, and optional contracts. There are contracts that last for one cargo and also those that last for hundreds of cargos. Not only that, we have indexations which are emerging all the time.”

This is an evolution from earlier times when there were simpler contracts for gas supplies from point A to B, with fixed volumes and prices linked to crude oil.

Shah was responding to a query on how consumers can avoid getting spooked by surges in LNG prices. “JKM (Japan Korea Marker) is the spot marker of Asia, but also we have WIM (West India Marker) now. There is also willingness of buyers and sellers to talk about different indexations. So, for me, depending on what a buyer wants, there is almost certainly a contractual way of getting there,” he said.

Shah heads Shell Energy Asia and is responsible for shaping and executing the strategic direction of Shell’s in-country gas and power market development across Asia.

Spot price surge

Spot LNG prices had climbed to record high levels in January 2021. Natural gas price in the spot market (headed for North East Asian countries) is broadly represented by JKM. Prices for deliveries due in February had zoomed to over $ 32 per million British thermal units (mmBtu).

According to Shell’s LNG Outlook 2021, as LNG demand grows, a supply-demand gap is expected to open in the middle of the current decade with less new production coming on-stream than previously projected. “Just 3 million tonnes in new LNG production capacity were announced in 2020, down from an expected 60 million tonnes,” the outlook said. This may result in higher LNG prices.

“Every other commodity in the world also trades in a very volatile fashion! There often you don’t have the variety of contracting types that are there with LNG,” Shah added.

Shell Energy Asia Vice-President Ajay Shah says there is an uptick in efforts to bring more LNG into India

Domestic LNG demand growth potential

Commenting on Indian gas demand and the growth potential, Shah said, “I am optimistic on a number of fronts. We launched an LNG truck loading unit in Hazira in December 2020 and have already loaded our 50th LNG truck. We are able to serve different types of consumers including those who are not necessarily linked to the pipeline network, or are linked to the pipeline network, but do not feel their gas supply is reliable.”

He said the intermittency and play between natural gas and renewables is also a growth opportunity in India with rising clean energy deployment.

“There is a significant uptick in efforts to bring more LNG into the country by setting up of new import terminals. Domestically, Reliance and BP have put together the next tranche of supply from the KG Basin. In fact, Shell Energy India participated in the recent auction and is also a buyer of domestic gas,” Shah said.

He said that there is an opportunity to promote the adoption of LNG trucks in India for long distance routes. “We are at the absolute beginning of that in India. Think of the number of trucks and converting them to LNG really has some scope in India,” Shah said.

Using more IGX platform

He also said that Shell India is a registered member of the Indian Gas Exchange (IGX). “It is another market place above and beyond being able to transact bilaterally. We will be using that more in the years to come,” he said.

Responding to a query if Shell too, would want to buy a stake in IGX, following the likes of other gas majors like GAIL, Adani Gas and Torrent Gas, Shah said, “For me it is much more important that we are able to participate freely in the exchange.”