India needs to be creative to make the most of a dramatic shift in the global LNG market.
Energy conferences seldom occasion surprise. The contours of the market are fairly well known to the participants, and barring the variation in the forecasts made by different consultants, everyone knows what’s on the table. The recently concluded Asia Gas Partnership Summit in Delhi, however, had its moments of frisson because the world’s largest liquefied natural gas (LNG) exporter was represented by its deputy premier and minister of energy & industry — and in a change of roles was actually seeking custom from India instead of the other way round. Qatar’s sudden offer to sell India an additional four million tonnes of LNG on the eve of the conference is the clearest indication that the global LNG industry is changing dramatically from a seller’s market to a buyer’s market. As the industry gets set for a surplus, it is also waiting to see how radically it will alter traditional buyer-seller equations.
| WAY TO BECOME A GAS GUZZLER mmscmd) | |||
| Gas demand 2008 | Gas demand 2015 | ||
| Japan | 258 | China | 452 |
| China | 222 | India | 280-320 |
| India | 113 | Japan | 282 |
| South Korea | 108 | Indonesia | 150 |
| Indonesia | 104 | Malaysia | 134 |
| Malaysia | 84 | South Korea | 101 |
| McKinsey says India can overtake Japan in natural gas consumption by 2015 if three conditions are met: adequate natural gas is supplied to consumers at $10-11 per mmBtu or million British thermal units (customer gate); gas pipeline infrastructure is laid according to target and gas-based peaking power projects take off mmscmd: Million metric standard cubic metres per day Source: BP Statistical Review; EIA; McKinsey analysis | |||
The buzz at the gas summit, organised by Ficci and the International Gas Union centred on the price that India would be willing to fork out for the additional Qatari gas that’s on offer. Would India give in to Qatar’s demand for an oil-linked rate that would price its gas close to $11 per million British thermal units (mmBtu) when the Henry Hub (US market rate) is just $4 per unit? Prices in Asia have customarily been much higher than in the US and Europe, and this is why Qatar wants to divert cargoes it had committed to these markets to Indian and other Asian buyers at a time when its traditional markets are facing a glut.
A combination of factors is contributing to this dramatic shift: Vast LNG capacity addition; huge discoveries of shale gas in the US in 2007 and 2008 (equivalent to 30 years of domestic gas production in the last five years) and the impact of a recession-induced dip in demand in the large traditional markets of North America, OECD Europe and OECD Asia.
The good news for India is that surplus is certain to last the next three years and, according to some forecasts will extend to another two-three years. How well-positioned is India to take advantage of this situation? Experts say that Delhi needs to think creatively to make the most of the situation.
The biggest point in its favour is that India’s gas consumption is expected to soar in coming years, making it an attractive long-term proposition for suppliers. In its latest report, McKinsey forecasts that demand will almost double from the current 166 mmscmd (million metric standard cubic metres daily) to 310-320 mmscmd by 2015 if the price can be contained at $10-11/mmBtu (at customer gate) — and if peaking power demand can be unleashed. Demand of this scale would make the Indian market as large as that of Japan if not slightly larger by 2015, second only to China which is expected to see demand of 452 mmscmd by 2015, according to Director Vipul Tuli. The McKinsey forecast is clearly on the upside compared to some domestic projections. Prosad Dasgupta, managing director and CEO of Petronet LNG, for one, pegs demand at 271 mmscmd by 2017 and expects it to touch 322 mmscmd only by 2022. What is clear is that the gas demand is set to grow, the only concern being at what point the price becomes too sensitive. “In many ways, India is an ideal market because it has huge potential and has shown its willingness to pay international prices,” says Fereidun Fesharaki, chairman of FACTS Global Energy, a leading energy consultancy. Although India has been spoiled by cheap domestic gas under the administered price mechanism or subsidised gas, the perception is that habits are changing. According to his calculation, India can consume quite a lot of LNG at $ 6 mmBtu but much less at rates that are in the $8-10 mmBtu.
There is also the tricky question of domestic gas prices. With gas from Reliance’s DC-6 field fixed at $4.20 per mmBtu, the government needs to walk a fine line on LNG prices, too. So what can India and Qatar do to break the impasse? For Qatar, which is already supplying the country some 7.5 million tonnes annually, India’s strategic location should be a key consideration along with the fact that it could become a promising base-load market for its gas reserves. But would the Gulf state be willing to pay a price to help develop this market before charging it the full international price, as Fesharaki advises?
As for India, it should seek to stagger its purchases with short-term contracts accounting for 50 per cent of the deal, suggest oil experts. In other words, India should not rush into any long-term deals just now, specially straight-line long-term contracts. As some consultants point out, 20 years is too long a timeframe because the situation can change dramatically as it indeed has in the past three years. In fact, there is a lesson to be gleaned from the first deal signed with Qatar in 2003. Because the Gulf state agreed to supply LNG at the extremely low price of $ 2.53 per mmBtu (with additional charges for transport), it was termed a sweetheart deal. But what is forgotten is that the $2.53 was for a fixed five-year period. According to well-informed industry sources, during the subsequent five-year “transition” period, the fixed element is reduced while a market-linked component comes into play. In 2014, the price becomes entirely market-based or linked to the crude price. This could translate to a high of $14 per mmBtu! Industry sources claim Petronet LNG’s agreement signed in August last year with two Australian subsidiaries of oil giant ExxonMobil for 1.5 million tonnes of LNG annually from the proposed Gorgon project in Australia is more careful on this count although no one is willing to reveal the value of the deal.
Gas industry experts say sellers are slowly learning that oil-linked prices can dampen demand and stifle potential growth. Markets are, therefore, moving towards oil-linkages with fixed floors and ceilings or realistic S curves. Eventually, there is bound to be a complete decoupling of prices since gas is being found in increasing abundance and is coming from unconventional sources — the US for instance, can meet all its requirements with its shale discoveries.
New LNG processing capacities that are coming up across continents indicate that competition will hot up among suppliers. While Qatar itself has 23.4 million tonnes per annum (mtpa) under construction that will take it total to 77 mtpa, Australia has 20 mtpa under construction and another 59-110 mtpa planned that could make it the market behemoth. Nigeria and Iran, too, have huge capacities of 40-50 and 72-78 mtpa on the cards.
India could thus offer to buy gas at $1-2 above the Henry Hub price and suggest a staggering of the supplies to enable it develop new LNG facilities as current capacity is not sufficient. Petronet’s LNG terminal at Dahej is locked in for the foreseeable period, while Kochi will not be ready till 2012. In other words, India can afford to wait for a new sweetheart deal. India unlike the other big economies of Asia is not yet hooked on gas, and as such it could well do without gas.
If Qatar’s first deal helped India develop a taste for gas, a new sweetheart deal could ensure that it builds up a hearty appetite for this cleaner fuel.
