Mulling a truck loading unit at Hazira LNG Terminal: MD Rahul Deep Singh

Business model geared towards short-term contracts, says Singh in his interview with Business Standard

A joint venture between Shell Gas BV and Total Gaz Electricité Holdings France, Hazira LNG Pvt Ltd has been servicing the liquefied natural gas (LNG) industry through its five million-tonne-per-annum (mtpa) terminal in Gujarat, touted as one of the first in the state. Having undertaken a technical evaluation work, the terminal is ready for potential future capacity expansion, based on market demand. Among other initiatives, the company is also exploring ideas for an LNG truck loading unit at the terminal, Rahul Deep Singh, MD, Hazira LNG Pvt Ltd tells Vinay Umarji in an interview. Edited excerpts:

Short-term contracts have risen in recent times. What is your plan of action?

Across the globe, LNG trade is changing to meet the evolving needs of buyers, including shorter-term and lower-volume contracts. Buyers are keen on sourcing LNG on short-term flexible contracts to manage volatility in energy markets and opportunistic procurement. At the same time, the trend is also supported by supply-side developments with suppliers taking investment decisions on projects with a higher proportion of uncommitted liquefaction capacities and speculative investments in LNG shipping. 

Since Hazira was among the first merchant terminals, we are quite adept at managing this business environment and able to quickly service requirements and acquire cargoes as required. In that sense, we have been ahead of the game and will continue to build on our expertise.

What kind of long- and short-term contracts have you entered?

When the Hazira terminal was commissioned on April 16 2005, it was not only India’s first LNG terminal by a global energy company, but it also launched the concept of a merchant terminal in India where customers had the flexibility to choose the quantity, duration and other terms when they bought LNG. This was a unique proposition in the Indian LNG market at that juncture. Such a value proposition has been well received by Indian customers, triggering the expansion of the Hazira terminal from an initial capacity of 2 mtpa to its current capacity of 5 mtpa. By the very nature of Hazira’s business model, it is geared more towards short and mid-term contracts instead of long-term contracts.

What factors led to the fall in FIDs in 2016? How do you anticipate it to grow?

With new LNG liquefaction projects coming on stream in Australia and the United States (US), global LNG supplies are expected to increase by about 50 per cent by 2020 over 2014 levels, taking aggregate capacity to around 350 mtpa. One-third of this additional new supply capacity has already been commissioned, while the remaining two-thirds is expected to come on-stream by 2020. Global LNG market developments have kept pace with supply growth so far with the additional LNG supplies being offset by rising demand for new LNG importing countries. 

Given the concentration of new supply projects towards the end of the decade, some imbalance may perhaps emerge in the market but this is typical for any commodity sector where demand growth is continuous, while supply increase comes in somewhat chunky bits from large projects.  In fact, given that global LNG demand is expected to double to over 500 mtpa by 2035, final investment decisions (FIDs) would be required by the industry on new projects beyond 2020, to keep pace with the demand outlook.

Does the shift in LNG buyer credit ratings, from 'A' rating to non-investment grade, pose any long-term risk to the industry?

In the past few years, the profile of LNG buyers has changed. New importers – from small or start-up electricity companies to intermediaries; to national energy companies – are emerging as LNG trade is changing to mirror the evolving needs of buyers, including shorter-term and lower volume contracts with greater degrees of flexibility. Some emerging LNG buyers have more challenging credit ratings than traditional buyers.

The LNG industry has been flexible in developing such new demand with market constraints, particularly through the advent of the floating storage regasification units (FSRUs). The emerging demand-side uncertainty, coupled with shorter and flexible contracts does introduce some risks for new supply projects and suppliers are increasingly adopting a portfolio approach towards customers with a mix of sales to traditional Asian markets, flexible gas markets in OECD Europe and emerging growth markets to develop a balanced portfolio of customers. 

How is LNG consumption spread across the country as of now and how is it changing?

Traditionally power and fertiliser sectors have dominated gas consumption in India. Sales of LNG were also initially geared towards these sectors but over the years the market has evolved significantly. As of today, general industries and refineries account for 50 per cent of the RLNG consumed in India, followed by fertiliser at 30 per cent, city gas distribution (CGD) projects at 15 per cent, with the power sector accounting for the residual 10 per cent share of RLNG sales in the country.

The CGD sector is expected to grow further as the gas grid gets extended in the country. The government envisions to triple the amount of piped natural gas connections from the current level of 3.6 million connections to over 10 million connections by 2019 itself, which will stimulate new demand growth. In addition, the Indian power sector is currently going through a transformative change with its focus on renewables and plans to add 175 Gw of renewable capacity. As the sector evolves, a stronger emphasis would be needed on grid balancing operations and for managing the intermittency issues associated with renewables.

What is the potential for LNG cryogenic cylinder fitted vehicles in the country? Are you working or in talks with any OEMs for such LNG vehicle project?

Our shareholders, Shell and Total are pioneers in the LNG domain and are actively propagating the use of LNG as a transport fuel for trucks and ships with potential economic and environmental benefits compared to diesel and fuel oil. The energy density of LNG exceeds that of other liquid fuels, hence LNG is a very efficient fuel choice for heavy-duty road transport. 

The opportunity in the Indian market is significant.The overall transportation fuel demand is about 100 mtpa across petrol and diesel sales. Every year India adds 300,000 new heavy-duty trucks to our existing fleet and even if a fraction of those are powered by LNG, this will grow to be sizeable new demand segment. We are also exploring the idea of an LNG truck loading unit at Hazira.

Will new capacities coming up in Gujarat lead to over-capacity in the short run?  How does that impact your terminal operations? 

In 2016/17, total LNG imports in the country aggregated 19 mt as against total regasification capacity of 30 mtpa across the four operating LNG terminals in the country. The Indian gas market thus has sufficient regasification capacity to meet any foreseeable demand. For any new capacity getting added, the overall impact on regional areas would follow broadly the demand-supply situation nationally. As a well-established, operating LNG terminal which is connected to all major gas grids in the country under a merchant model concept, Hazira LNG is well-positioned to respond to changing market dynamics in the LNG industry both globally and in India.

What is the current capacity and capacity utilisation at Hazira? 

Since the commissioning of Hazira LNG in 2005, the terminal has expanded from an initial regasification capacity of 2 million tonnes per annum (mtpa) to 3 mtpa in 2008 and then further to 5 mtpa in 2013. Hazira LNG is a merchant terminal where capacity utilisation varies widely based on demand profiles that often change on a week-to-week basis.

To what extent is the terminal being expanded and by when?  What will be the project cost for such an expansion?

There is potential to expand terminal capacity further, based on market demand. We have already undertaken the technical evaluation work for potential future capacity expansion. However, India currently has sufficient regasification capacity for the current size of the domestic gas market. The timing of any further expansion would, therefore, be subject to suitable opportunities in the market. The scale and consequent costs of such an expansion would be assessed at that juncture.

How is Hazira LNG's revenue set to grow?

The Hazira LNG Terminal has been playing an integral part in the emerging energy scenario of India by providing LNG supplies to a large customer base across different industrial segments. These include the power, fertiliser, petrochemicals, ceramic and steel industries, along with other small and medium enterprises.  An extensive state-wide gas grid complements the connectivity to major gas grids that enable the supply of gas from the Hazira terminal to Gujarat, Maharashtra, Andhra Pradesh and parts of northern India.

What is the current status as well as the future requirement of pipeline infrastructure in Gujarat as well as the country?

The flow of natural gas is critically dependent on a robust pipeline network. The government is committed to expanding existing pipeline infrastructure and creating new gas grids, which is a critical infrastructure element to boost the country’s energy security.

Compared to other states, Gujarat has a far more developed gas grid in the state. The key challenge in developing new gas transportation infrastructure in the country is the low utilisation factor for pipelines. Average utilisation of cross country gas pipelines in the country stands at 40 per cent only, which challenges economic viability of new pipelines. This triggers the need for viability gap funding (VGF) from the government for new investments in the gas grid. Such VGF support mechanisms will need to be extended to other pipelines under development, besides accelerating the development of a national gas grid across the country.

Where do you source gas from and at what volumes?

Hazira LNG has unparalleled access through our two partners Shell and Total to LNG liquefaction projects across the world. Till date Hazira LNG has sourced cargoes from 17 liquefaction facilities across the globe, ranging from Peru LNG at the extreme west to Sakhalin LNG in the extreme east.