Demand-Supply Outlook of LNG and Natural Gas in India : Tracking Opportunities w.r.t. LNG Terminals & Infrastructure Development

LNG in India – An Overview

India has been on a constant economic growth path from past two decades and this rise is coupled with increased  energy consumption to thrust the fast  growing  economy.  Basis  India’s anticipated growth aspirations, it is evident that access to abundant and economically viable energy will be crucial to sustaining the trajectory of this growth. India has limitations in terms of indigenous energy resources apart from coal and will necessarily have to diversify its fuel mix and look to global energy markets for its energy needs. Liquefied Natural Gas (LNG) can be a long term solution to India’s needs  given that it is a proven and commercially viable energy source.

While globally LNG enjoys the status of being half-a-century old industry, in India it is still in the nascent phase courtesy the country’s absence from first round of LNG trade growth. However, over a short period of time the usage of LNG in India has shot up dramatically  but in a haphazard manner. The market participants in the LNG business in India were by and large unable to cash in the advantage of flexibility afforded by the evolving mechanisms in LNG contracting, shipping and infrastructure to contrive favorable terms of trade. India cuts out a sorry state as LNG in the sovereign is associated with spot cargoes and carrier connotations of ad-hoc supplies leaving the consumers reeling at exorbitant rates. On the contrary many Asian {in particular the Japan – Korea – Taiwan (JKT) Trio} counterparts have depicted that a country can have a viable development model driven by LNG provided there is sufficient farsightedness and ample planning.

Thus, it is pertinent to note that due to the structural deficiencies of India’s domestic energy sources, it will have to rely on steady LNG imports. This would lead to an aggressively  competitive environment for LNG capacity additions in both existing and upcoming LNG projects in India. Also, there is consistent evolution in terms of pricing mechanisms and contracting structures too are designed to accommodate new price discovery models and have more equitable distribution of risks.  Hence, while there exists substantial opportunity for LNG in India’s energy mix, there is also an intermittent need to create necessary physical infrastructure and provide ample regulatory stability and clarity in order to realise LNG opportunity. To achieve this herculean task of providing LNG to Indian markets at viable prices the suppliers, marketers, consumers and regulators have to work in unison.

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LNG Demand and Supply Outlook : Global and Indian Case

The development of LNG globally has been the major impetus to globalization of natural gas, thereby by connecting remote areas and distant markets. Currently ~ 24 percent of the global energy supply is catered by natural gas.  LNG trade has gone up to ~ 250 MMTPA contributing 32 percent of the natural gas traded in the world. This section discovers the demand supply scenario of LNG across the globe and derive inferences for same in India.

World LNG Demand : The LNG consumption globally varies as per the continents and availability of domestic gas, total available energy resources and the gas transportation infrastructure.  The share of LNG vis-à-vis natural in the energy mix of the continents is depicted in Exhibit 02. Interestingly, the share of  LNG in the energy mix of Middle East region is just of 3% as compared to natural gas share of 49%.

region-wise-share-of-natural-gas-and-lng-in-energy-mix

There has been a consistent growth in the demand of LNG across the globe and several countries are importing large volumes of same in a sustainable manner. Japan reigns the LNG imports globally with ~ 90 MMTPA of imports. Second in the race of LNG imports is South Korea with almost one-third of Japan’s import volumes i.e. ~ 37 MTPA.  India stands as the fifth largest LNG importer globally with an import volume of ~ 14 MMTPA.

India LNG Demand : The total natural gas consumption in 2014 in India was ~ 128 MMSCMD. To this capacity of gas supply RLNG contributed ~ 32 percent at 42 MMSCMD.

sector-wise-consumption-of-lng-in-india

India LNG Supply: The supply of LNG in India is catered both through supply-of-lng-in-india-in-mmtpa-from-regasification-terminals_eninconimports and domestic sources. In 2014, India’s re-gasification capacity  stood at ~ 21 MTPA. The  break up of this re-gasification capacity is depicted in Exhibit 04 and nearly 11 MTPA of LNG demand for India is met through imports from Ras Gas, Qatar and Exxon Mobil’s Gorgon Venture in AustraliaThe balance of the LNG demand is met through spot market . The status of imports of LNG in India shown in Exhibit 05.

supply-of-lng-in-india-imports-and-spot-markets_enincon

Natural Gas Demand Outlook in India: The demand of natural gas in India is expected to depict a healthy growth trajectory till 2029-30. The highest demand will be from the power sector and furture-natural-gas-demand-for-india-2030_eninconit is expected to contribute ~ 36% to 47% of the total demand.

The share of fertilizer sector is expected to drop from current levels of 25% to 15% due to higher growth registered in other sectors. CGD is expected to register fastest growth in the use of natural gas and is expected to contribute 11% of the total demand by 2030.

 

The prospects for LNG have improved over the last two years, as total domestic gas production has been steadily declining. Although the domestic gas production could increase over the next 5-6 years, the same is expected to remain significantly lower than the demand potential. The high level of domestic demand-supply deficit would prompt consumers to increase consumption of R-LNG, which is costlier than domestic gas but still economical in comparison to liquid fuels (at prevailing high crude oil prices).

 

 

Further, improvement in domestic gas availabilitydemand-for-r-lng-in-india-estimates-in-mmscmd would in fact be a positive trigger for R-LNG demand as it would help consumers to suitably blend additional high cost R-LNG along with relatively cheaper domestic natural gas to arrive at a reasonable weighted average cost of gas. As reflected in the Exhibit 07 , there could be fair demand for further long-term (LT) contracts along with spot/short/medium term LNG over the next 5-10 years, given that domestic supplies and the volume of LNG on already signed long-term contracts would not be sufficient to meet domestic demand. The potential gas deficit (based on domestic supply and contracted LNG) is expected to decrease from around 148 MMSCMD in FY 14 to around 125 MMSCMD by FY 20. However, the deficit could increase to around 185 MMSCMD by FY 25 reflecting the scope for the need of more LT and spot LNG contracts to meet the deficit.

Natural Gas Supply Outlook: India has limited natural gas reserves. Development of unconventional natural gas resources is also on cards in India with ample weightage on CBM and Shale gas development bnatural-gas-supply-positioning-in-india-mmscmdut the lack of data and technology is hitting the same. Hence, domestic production of natural gas in India is highly unlikely to keep up with the demand and the country has to rely on imports to meet its demand. Moreover, the domestic production in India has been concentrated over western and southern region of the country and in absence of adequate natural gas pipeline infrastructure the northern and eastern region of the country are gas starved. The TAPI (Turkmenistan – Afghanistan – Pakistan – India) pipeline is expected to be completed by 2017 and the expected supply from it will be nearly 30 MMSCMD. Exhibit 08 depicts supply of domestic gas and the quantum of gas imports (via cross border pipelines).

LNG Terminals and Infrastructure Development Opportunities

Establishing sufficient regasification capacity will be a pre–requisite for satisfying the projected LNG opportunity of 130.00 MMTPA by 2030. At present, India has four regasification terminals at Dahej, Hazira, Dhabhol and Kochi with a combined capacity of 21.10 MMTPA. The capacity is likely to increase to 58.00 MMTPA by 2030 with the planned expansions of existing terminals and the commissioning of terminals  under  construction.  This  will  still  leave  an  additional  requirement  of 70.00   MMTPA   of   regasification   capacity   (at   70   percent   capacity   utilization), requiring ~10 terminals at a capex of US$ 10.00 billion. Similarly, realizing the true potential of the gas economy would require establishing the critical pipeline links that connect the eastern and northern parts of the country to gas supplies.

The LNG ecosystem primarily comprises of regasification terminal operators, marketers and end users. The interactions between them determine how smoothly the LNG supply chain operates. Oil and Gas companies have  traditionally been aggregators in industries where buyers and/or suppliers are fragmented and cannot easily finalize contracts. In the LNG industry, the supply side is significantly consolidated at present, while the demand side spans a spectrum ranging from big standalone customers like power generation plants to smaller consumers like city gas distribution companies.

Going forward, with more countries looking to enter the liquefaction space, the supply side will also get more fragmented. Oil and Gas companies can take the lead in scanning the supplier landscape, especially among new projects coming online and establishing term contracts with them to supply medium  to  small  size  customers  who  are  unlikely  to  establish  supply  contracts themselves.  Additionally,  oil  and  gas  companies  should  also  take  the  lead  in coordinating spot supplies in response to periodic demand–supply mismatches. To accomplish  these  roles  however,  oil  and  gas  companies  will  have  to  build  up sophisticated portfolio management and trading capabilities.

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*The views expressed in this article are solely those of enincon perspectives and do not necessarily represent those of Enincon LLP.

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