India's LNG resurgence may be short-circuited by rising costs of spot fuel

Industries and power plants using liquefied natural gas (LNG) are facing a threat from a surge in prices of the fuel abroad, especially when gas-fired thermal power generation has increased to cope with greater demand and the expanding economy requiring more gas.

Prices of the Asian spot LNG benchmark went above the oil-indexed term contracts for the first time this week since December, with Platts’ JKM (Japan-Korea Marker) index surging more than 60 per cent since early March, driven by demand growth in Asia, said Greg Molnar, gas analyst at the International Energy Agency (IEA).
 

India’s benchmark gas index GIXI, which belongs to the Indian Gas Exchange (IGX), was at $13.2 per million British thermal units (MMBtu) for LNG deliveries this month and $11.6 per MMBtu for July as on June 13.
 

Spot LNG prices in Northeast Asia were at $12.20 per MMBtu, according to US market intelligence agency Energy Intelligence for deliveries four to eight weeks ahead.

Term LNG from Qatar is available at $10-$11 per MMBtu, a Petronet official said. This is $2 per MMBtu cheaper than current spot levels.
 

India’s gas-based power generators need the fuel at $5 per MMBtu to compete with coal-fired power, according to an NTPC official. They took five-six cargoes of spot LNG in May because of limited access to term supplies, prompting dependence on expensive spot fuels.
 

LNG imports in the first quarter of this year were 25 per cent higher than last year, and demand for gas in India is expected to grow 7 per cent in 2024 from a year earlier, according to the IEA.
 

The government will have to subsidise higher generation costs to avoid disruption in power supplies, with heatwaves prevailing in northern India.
 

Pakistan has said it will postpone procuring spot LNG, and Bangladesh too may delay spot purchases, industry officials said.

Indian importers have made no such announcements in the hope that the government will pay for costlier LNG.
 

Gas volumes traded on the IGX in May rose 99 per cent, and 480 per cent in the year at 124 million cubic metres, the market making platform said in a note, attributing higher volumes to an increase in gas demand from gas-based power plants amid hot weather and directives from the government to maximise their output to address the growing demand for electricity.

Demand for gas-fired electricity not only in India but also other parts of Asia has sent prices of spot LNG higher, said Rajesh Mediratta, chief executive officer of the IGX. That demand may reduce once temperatures ease, and “I don't see prices going beyond current levels”, he added. But Mediratta also cautioned that after demand from gas generators declined in July and August, LNG must be affordable in India. High LNG prices will impact demand, he added.
 

India, the world’s most price-sensitive large LNG market, is comfortable when LNG trades at $8-$9 per MMBtu, senior officials of Petronet LNG and the IGX said. Petronet LNG has forecast a 15 per cent increase in demand this year to as much as 27 million tonnes.
 

But surging LNG prices affect Indian fuel use, which in turn is reflected in lower utilisation at Indian LNG terminals.
 

The Petroleum and Natural Gas Regulatory Board has expressed concern over lower utilisation--barring Petronet LNG’s 95 per cent utilisation at its Dahej facility, which accounts around 30 per cent of India’s LNG capacity. The rest average less than 30 per cent, with Mundra operating its facilities at around 15 per cent last financial year. Average utilisation across the roughly 48 million tonnes a year of capacity is below 50 per cent after LNG imports declined. Two new floating regasification storage facilities of over 10 million tonnes a year, in a combined capacity in Gujarat and Maharashtra, were scrapped because of a lack of demand and pipeline connectivity. The sharp surge in spot prices also highlights the dilemma Indian consumers face.
 

Petronet LNG Chairman Akshay Kumar Singh told this reporter in a recent earnings call that Indian buyers must lock up 70-80 per cent under term contracts, with the rest procured from the spot market. But when LNG prices were trading at around $2/MMBtu during the pandemic, LNG importers, including Petronet LNG, had slowed signing term deals.
 

There are reasons why spot LNG prices are rising (the price was as low as $8/MMBtu in March compared to $70/MMBtu in 2022, after Russia invaded Ukraine). A primary one is a surge in demand from China, the world’s largest importer, and India. Coupled with unexpected outages at Australia’s Gorgon, Wheatstone LNG, and Brunei production facilities, and an inability among Asian buyers to take US LNG because of Houthi attacks on tankers crossing the Red Sea, prices soared in the last two months, Molnar said in a post.
 

India imports around 45 per cent of its daily gas needs — around 185 million cubic metres per day. The country plans to increase the share of gas in its energy mix to 15 per cent by 2030.