Multiplying India’s LNG options

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With Russia facing western sanctions, it is looking to Asia as a gas export destination. So is the U.S., which plans to ease exports to non-FTA countries. India can benefit from both. But to increase much-needed supplies, India must build partnerships and scale up pipeline and import terminal infrastructure

As the crisis in Ukraine unfolds, it is beginning to affect the strategic decisions of American and Russian leaders about natural gas exports. At a time when India is poised to expand its imports of natural gas to meet its burgeoning domestic demand, this creates an opportunity for India to diversify its import sources.
Gazprom, the Russian company with one of the largest natural gas reserves in the world, derives over half of its revenues from gas exports to European countries. [1] Russia is now under increasing pressure due to western sanctions, after it annexed Crimea. Amid this tension, the country is looking to strengthen economic ties with Asian countries and significantly increase oil and gas supplies to Asia in the next 20 years. [2]
Meanwhile, in the U.S., pressure is building to speed up approvals of liquefied natural gas (LNG) exports to countries that do not have a free trade agreement (FTA) with the U.S., including Ukraine and other European countries. Currently, LNG exports to non-FTA countries are restricted, and require burdensome regulatory approvals. These can take as many as 36 months to obtain, while the U.S. Department of Energy (DoE) considers whether such exports are consistent with public interest. [3] As a result, European countries cannot easily import LNG from the U.S. and continue to depend on Russian gas supplies. This is seen as a hurdle to loosening Russia’s grip in the region.
If legislation were indeed implemented in the U.S. to ease exports to non-FTA countries, it will not only be an important political signal to Russia, but will also allow India to benefit from U.S. LNG supplies; at present, this potential is limited.
Until recently, Qatar’s RasGas was India’s only long-term LNG supplier. The 20-year LNG deal between GAIL India Limited and Cheniere Energy of the U.S. in 2011 was the beginning of India’s efforts to secure additional gas supplies through stable, long-term agreements. However, Cheniere Energy’s Sabine Pass facility is one of only seven projects approved for LNG exports from the U.S. to non-FTA countries [4]; 24 other applications are under review by the DoE. [5]
In order to meet the country’s natural gas requirements from imports, Indian energy companies will have to secure additional LNG supplies from the U.S. Recently, Petronet LNG (a joint venture between GAIL, ONGC, Indian Oil, and Bharat Petroleum, with additional equity participation by foreign entities and the public) signed a conditional agreement with United LNG of the U.S. for imports from the Main Pass Energy Hub in the U.S.’s Gulf of Mexico. However, a binding sale and purchase agreement (SPA) is conditional upon United LNG getting approval from the DoE; the application is still under review. [4, 6]
Asian countries such as India and Japan are attractive export destinations for U.S. companies due to the higher price paid for gas in Asia, as compared to Europe. Increased LNG exports from the U.S. will at least initially increase the supplies available to Asia; simultaneously, record low gas prices in the U.S. could translate into cheaper LNG imports for Asian countries.
However, to benefit from U.S. LNG, importing countries will have to develop adequate pipeline and LNG import terminal infrastructure; this will require new investments and technologies. Some Indian companies are beginning to make these investments. Apart from Petronet’s current LNG import terminals at Dahej and Hazira, GAIL is involved in the construction of the Dabhol and Kochi LNG terminals on the west coast of India, and is also planning to develop an LNG import terminal on the east coast. [7]
In addition to the Sabine Pass agreement, the company has also entered into long-term agreements to import LNG from Dominion Cove in the U.S. and the Gazprom Shtokman LNG project in Russia. [8]
On the other hand, Indian private companies have not yet begun to fully participate. GAIL dominates natural gas pipeline and transmission infrastructure in the country. Although Reliance Industries also has pipeline infrastructure domestically, it has not yet invested in import terminals or long-term import deals. The company has investments worth $6.5 billion in upstream shale gas projects in the U.S., but is not yet exporting the gas to India. [9] Private Indian construction player Hiranandani Developers has acquired an option to build an LNG export terminal in Canada, but nothing in the U.S., and no participation in domestic import terminals as yet.
Even after securing long-term SPAs and regulatory approvals, roadblocks remain. The GAIL SPA with Cheniere Energy is only part of the second phase of the Sabine Pass project. The success of the agreement depends on Cheniere Energy making a final investment decision to undertake the second phase, and deliveries to India are not expected to begin until 2017. [10]
The deal also includes a cost of LNG to GAIL of 115% of the U.S. natural gas benchmark Henry Hub price. [11] This is an attractive proposition for GAIL, with Henry Hub prices less than $6 per million British thermal units (MMBtu). But if prices increase – and the U.S. Energy Information Administration expects U.S. natural gas prices to increase by an average of 2.4% per year between 2015 and 2040 – then the cost advantage of sourcing gas from the U.S. over other countries could diminish. [12]
Even so, the GAIL deal with Cheniere and other U.S. companies may be the cheapest import option for India in the medium-term to long-term – less than what India is likely to pay for LNG from Qatar, Australia, and Russia. Current deals with these countries are linked to the price of crude oil, which may also increase over the long-term. [13]
A comparison of India’s gas import options
Exporting country Companies/ Project Tenure Pricing benchmark Estimated landed cost to India (per MMBtu)
U.S. Cheniere Energy (Sabine Pass terminal) and GAIL 20 years(plus option to extend another 10 years) Henry Hub $10.5(@$3.78 per MMBtu Henry Hub)
Turkmenistan Turkmengaz (TAPI project) and GAIL 30 years Oil-indexed $12.99(@ $100 per barrel crude)
Qatar RasGas and Petronet LNG 25 years Oil-indexed formula linked to Japan Customs Cleared crude prices $13(@ $100 per barrel crude)
Australia Exxon-Mobil (Gorgon project) and Petronet LNG 20 years Oil-indexed $16
Russia Gazprom (Shtokman project) and GAIL 20 years Oil-indexed n/a
Source: Compiled from various sources, including the websites of GAIL, Gazprom, RasGas, Chevron Australia, ‘Oil and Gas Journal’, and ICRA Equity Research Service
Additionally, linkages to oil prices do not allow for the changing dynamics of the natural gas market. With the shale gas boom, the relationship between oil and gas extraction is loosening, as shale gas reserves are usually independent of co-mingled oil reserves. In the U.S., therefore, natural gas prices are determined by their own market dynamics. [14]
India has made various attempts in the past to obtain gas through pipelines from Iran and Central Asia. But these gas supplies are yet to materialise due to the geopolitical risks involved: western sanctions on Iran created difficulties with the Iran-Pakistan-India (IPI) project, while the Turkmenistan-Afghanistan-Pakistan-India (TAPI) project remains delayed.
The final TAPI gas price for GAIL could be attractive compared to the higher Henry Hub prices, but there are concerns about the security of the TAPI pipeline and a lack of creditworthy partners to finance the project. As a result, imported LNG (which is shipped rather than transported by pipeline) is the only viable medium-term option for India to fulfil its domestic demand-supply gap, unless of course India makes significant strides in developing its own domestic shale resources. [15]
Strategic partnerships to strengthen and diversify LNG import sources are critical. The U.S. Energy Secretary Ernest Moniz’s visit to India in March 2014 highlights several areas of cooperation on energy between the two countries. India must continue to build this partnership and seek policy changes to facilitate approvals from U.S. government agencies for exports to countries that do not have FTA agreements with the U.S.
The partnership will ease price concerns regarding LNG imports and support India in its effort to develop and implement renewable energy and smart grid technologies – in tune with a recent UN report that considers natural gas a “bridge” for mitigating climate change, and urges action towards a massive shift to renewable energy. [16]
Partnerships with other LNG importing countries like Japan will also strengthen India’s negotiating position vis-à-vis other LNG suppliers. GAIL launched just such a partnership at the end of March through its memorandum of understanding with Chubu Electric Power Company (Japan) for collaborating on joint LNG procurement. [17]

Finally, in entering into LNG supply deals with Russia, India may find an opportunity to broaden import sources, but will have to weigh the risks of depending on another partner subject to international sanctions for its energy needs.
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