Gets US supply deal at substantially lower benchmark than traditional one.
GAIL, the natural gas major, has contracted an import deal from a US-based company for deliveries from 2016-17 at a price far more competitive than the usual benchmark for such deals.
The country’s biggest gas marketer has contracted import of 3.5 million tonnes annually at what is known as the Henry Hub-benchmarked price. Henry Hub is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange.
It is a point on the natural gas pipeline system in Louisiana and spot and future prices set at Henry Hub are generally seen to be the primary one for the North American gas market.
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Gorgon project *
# Current landed price, supplies to begin in 2016
The big change for India is that all import deals signed by Indian companies till now were at a price calculated as a certain percentage of what is termed the Japanese Crude Cocktail (JCC). This is the nickname for Japan Customs-cleared Crude, the average price of customs-cleared crude oil imports into Japan. It is a commonly used index in long-term liquefied natural gas (LNG) contracts in Japan, Korea and Taiwan.
Traditionally, the JCC-linked price has remained substantially costlier than the Henry hub price.
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A K Balyan, managing director and chief executive officer of Petronet LNG, the biggest importer, said it was a good move to look at the US gas market, as it was favourably priced. “It is a good effort by GAIL. It enlarges the source portfolio and impacts traditional gas suppliers, ushering in a more competitive environment. We will also look to source gas from the US,” he said.
The increasing shale gas production in the US has lead to a surplus, likely to increase in the coming years. The US is, therefore, eyeing export to countries like China, Japan, Korea and India.
The increasing gas supply from the US is expected to exert pressure on global prices. In the past, the US has been an importer of gas. “With an increase in US gas production, the gas receiving terminals need to be converted to exporting terminals,” Balyan said.
Timely
The new gas price contract has been entered at a time when output from the biggest domestic gas field, the Reliance Industries’ operated KG-D6, has fallen 30 per cent since March 2010 and is still declining, with a reversal unlikely before 2013-14.
No major discovery by government-owned Oil and Natural Gas Corporation or Gujarat State Petroleum Corporation are expected to start production anytime soon.
Domestic natural gas production is currently about 115 million standard cubic metres per day (mscmd) and another 46 mscmd is imported in the form of LNG. Current demand is 189 mscmd.
The new pricing will help companies into expansion. Indian Oil is setting up a new LNG terminal and Petronet LNG is expanding capacity. Shell is also expanding its Hazira terminal capacity. All these companies are trying to contract import at competitive prices.
“It is good to see that GAIL is diversifying the LNG supply source. It is expected that the landed cost of Henry Hub-price based LNG in India is expected to be cheaper by $5-7 per million British thermal units, based on the prevailing price, as compared to Australian Gorgon LNG (a big project in Western Australia) supply. In terms of energy cost in the power sector, there would be a difference of Rs 1.75-2 per unit,” said Rakesh Jain, associate director (energy) at Feedback Ventures.
He said GAIL’s deal would encourage other LNG sourcing companies to try for similar contracts with US suppliers.
Industry experts anticipate a pressure on the pricing of new gas contracts sourced from traditional suppliers. “Pricing will have an impact after 2012-13, with the new Henry Hub benchmark pricing that GAIL has negotiated. This will lead to a trend of pricing shift from JCC. Everybody is looking for cheap gas. It will happen,” said M Ravindran, managing director, Indraprastha Gas, the monopoly supplier in and around Delhi.