LNG Import Sourcing in India -Value Chain Risks
July 20, 2019
THIS ARTICLE IS WRITTEN BY MR. AJAY MARCHANDA, DIRECTOR (ENERGY AND INFRASTRUCTURE),ALAYA LEGAL
India has emerged as one of the major LNG markets today. The roubust economy has led to increase in LNG consumption beyond the capacity of domestic production, leaving imports as the only viable option to meet its growing LNG demands.
Petroleum and Natural Gas Regulatory Board (PNGRB), has come out with several rounds of bids for City Gas distribution projects and natural gas pipeline grid expansion to facilitate supply of natural gas/ regasified LNG. Despite diverse channels of LNG supply, India has been slow in signing new contracts, as market aggregators in India are unable to pass all LNG value chain risks to end consumers. Such risks involve:
Price Sensitivity – India is a very price sensitive market. The key demand industries like power and fertilizers need government support in case of price of fuel increases. For other industries which have higher affordability there is fuel to fuel competition. The end consumers therefore are not willing to commit on long term basis as Long Term LNG contracts led to much higher prices than the spot LNG prices, as observed recently. In other words, the end customers though are desirous to commit for long term LNG , are not willing to take adverse price risk vis-à-vis spot LNG.
Contractual Gaps – Generally the LNG SPAs would not cover risks up to end consumer. End consumer force majeure and Gas Transporter force majeure are risks to taken by market aggregators.
LNG price Index Risk – Indian consumers seek comfort in predictability of prices vis-a-vis the alternate fuel. They would like the relationship to be as linear as possible. This limits the choice of LNG price Index to crude oil for Indian Buyers. US LNG purchased by GAIL and IOCL on Henry Hub basis was not accepted by the market on those terms.
It can thus be seen that there are several risks which the gas marketers need to take for importing LNG into India.
Competition amongst gas marketing companies – All gas marketing companies are competing with each other for customers. The customer therefore has many choices for gas procurement and is in a position to have some say in contract conditions. For end consumer therefore, security of supply is no longer a concern.
The ongoing trends of the LNG imports suggest that limited risk appetite of Public Sector marketing companies will result in spot LNG sourcing to meet market demand in near future.