Several forces are conspiring to place downward pressure on LNG demand in India. Demand may struggle to surpass 2020 levels if domestic gas production continues to rise and demand weakens from the Covid-19 pandemic. Higher spot prices could also curtail import growth. While buying interest has recovered in May after a second wave of the Covid-19 pandemic reduced LNG imports in April, India is expected to be hit by a third wave that could dampen LNG imports for the full year.
The spread of the highly infectious Delta variant in some states has raised concerns, but the main obstacle to LNG import growth is an imminent increase in domestic gas production. State-owned upstream player Oil and Natural Gas Corp. (ONGC) is expected to issue a tender to sell 5 MMcm/d of gas from its KG basin fields later this year. In April, ONGC had sought bids via an e-auction for the sale of 2 MMcm/d from the KG basin fields at a minimum price of 10.5% of the rolling three-month average of Brent crude preceding the supply month. But the e-auction is now temporarily on hold after two southern Indian power generation companies challenged the process over the price levels.
Reliance Industries had also auctioned 7.5 MMcm/d of gas from the R Cluster field in the KG-D6 block earlier this year. Reliance O2C, an affiliate of Reliance, won 4.8 MMcm/d of the gas, while the remainder went to Gail, Shell, Adani Total Gas, Hindustan Petroleum Corp, Torrent Gas, IRM Energy and Enertech. Reliance O2C and Adani paid a 19ȼ premium over the Platts Japan Korea Marker (JKM) while the rest submitted winning offers at JKM plus 18ȼ. Reliance O2C’s supply is for five years and for the rest of the bidders it is for three years (see LNGWM, Apr ’20). ONGC is also expecting domestic gas prices to rise by 50-60%, following a recovery in the Brent crude oil price.
The local gas price under the Administered Price Mechanism (APM) fell to an alltime low of $1.79/MMBtu on Oct. 1, 2020, which will apply for the next six months. An announcement on the APM is expected shortly. The reduction in gas prices has hit upstream players like stateowned ONGC and Indian Oil, where marginal cost is around $3.70/MMBtu. The Indian government has sought to undertake gas price and pipeline reforms, but progress has been slow due to the immediate focus on tackling Covid-19 pandemic.
India LNG Imports
Currently, the APM is revised biannually and is linked to four global benchmarks, US’s Henry Hub, Canada’s Alberta gas, UK’s National Balancing Point and Russian gas. The APM differs from a separate pricing mechanism for yet-tobe-developed and challenging gas fields such as deep sea, ultra-deep water, and high pressure/high temperature fields.
The price of gas from these fields has a cap derived from alternative fuels (see LNGWM, Jan ’20) LNG demand for city gas, industrial and power sectors recovered in May versus a month ago as the government relaxed lockdown rules. LNG imports in April fell to 1.94 MMt, from 2.25 MMt in March. Indian imports rebounded in May to 2.16 MMt, according to ship tracking data. At least five vessels were deferred in April while Gail and Gujarat State Petroleum Corp. resold some volumes back to their suppliers. Imports for the first five months of the year were at 10.5 MMt, marginally lower than the same period a year ago at 10.6 MMt.
LNG demand was also affected by the Covid outbreak a year ago, but imports rebounded sharply in June last year due to significantly lower summer prices. The same buying pattern is unlikely to be repeated this year due to high summer spot prices in Asia.
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