India's growing LNG role

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Some speakers at LNG15 held in the week ending April 27 described India, rather than the US, as the current "market of last resort" for LNG, because it has been willing to pay prices at least as high as the Henry Hub for spot supplies.

Historically, India has been unwilling to pay market prices for spot supplies, but that changed dramatically in 2006, when it bought 12 spot cargoes at "what we perceive to be market prices," Prosad Dasgupta, managing director and chief executive officer of India's state-owned Petronet LNG said.

The industry source said India has been paying about $7.80/MMBtu for its spot cargoes. Before that, the only LNG India was importing was from a long-term contract with RasGas 2, which was signed when global gas and oil prices were significantly lower.

India now imports 5 million mt/year under that contract at prices that have an oil-indexation cap of $20/barrel, significantly less than current prices, the source said. The contract is scheduled to increase to 7.5 million mt/yr in January 2009, at which point the oil-price cap for the entire volume would be increased to $16 to $24/barrel, still significantly less than current prices, the source said.

With such a price, India would pay for its long-term supplies about half of current LNG spot prices of $7-$8/MMBtu, the source said.

Petronet, which opened India's first import terminal in Dahej, became active in the spot market primarily because of government energy subsidies and the escalating price of naphthalene, which is used as feedstock in the country's fertilizer and power sectors, Dasgupta said. Since naphthalene is a byproduct of oil refining, its price is closely linked to oil and shot up to an equivalent of $19/MMBtu last year.

Since the government places a cap on what fertilizer companies can charge for their products in order to help the important agricultural sector, fertilizer producers can only afford to pay an equivalent of $6/MMBtu for their feedstock and still make a profit, Dasgupta said. Because the government does not allow fertilizer producers to pass on to customers their increasing feedstock costs, it has a policy to subsidize the producers if their feedstock costs rise beyond what is considered reasonable, or about $6/MMBtu in today's market, Dasgupta said.

Cheaper to use LNG

As the price of naphthalene soared, Dasgupta convinced the government last year that it would be cheaper to subsidize the cost of spot LNG imports, he said. Gas prices are not as closely aligned to crude oil prices as naphthalene prices, so the price of gas has not increased as dramatically as naphthalene has with recent oil-price spikes, Dasgupta said.

In addition, India's power sector buys domestically produced gas at a subsidized price of $2.60/MMBtu, but generators were only able to get about 24 million cubic meters/day of the subsidized gas, far below their demand of 52 million cu m/d, Dasgupta said. So the power sector was operating at a capacity of about 55-60%, leading to severe power outages throughout much of the country and impeding construction of electricity infrastructure in rural areas, he said.

The government does not subsidize other feedstocks to the power sectors, but power producers have often used more expensive naphthalene to compensate for gas shortages to maintain electrical output, Dasgupta said. But as the price of the alternative fuel soared, they could not pass on the much higher generating costs to consumers, forcing them to operate at lower capacities, he said.

To reach the government's goal of operating power plants at about 85% of capacity, generators have been told to convert all generation facilities to run on gas, Dasgupta said, creating additional demand for LNG in the country.

Even though Petronet's Dahej terminal has nameplate capacity of 5 million mt/yr, equivalent to the current longterm RasGas 2 contract, the company was able to import 12 spot cargoes last year, or 1.5 million mt/yr, through debottlenecking that increased capacity to 6.5 million mt/yr, Dasgupta said.

Dahej would receive all the 1.5 million mt/yr and pipe all the regasified supplies to Dabhol through a pipeline that would soon be ready, Dasgupta said. The gas would be sold to the state-owned Ratnagiri consortium that operates the Dabhol facility at a subsidized price of $4.93/MMBtu, he said.

´Opportunities´ for Shell

The Dabhol plant would operate one if its three generators beginning in July with those supplies, but it is scheduled to start running two generators in January, he said, meaning Petronet would need to start buying four spot cargoes a month at that time, he added.

"This presents opportunities for Shell's terminal in Hazira," Dasgupta said. It was previously reported that a 5- million-mt/yr terminal being built in Dabhol would be ready to start operating this year at a limited capacity of 2.5 million mt/yr, allowing it to receive supplies for associated generation units.

But Dasgupta said it is unlikely Dabhol would receive any supplies until at least 2009, when expensive breakwater facilities are expected to be ready. He said the reports of limited terminal capacity being ready this year assumed that LNG ships would be willing to dock at Dabhol during "quiet times," without the safety of the breakwater facilities. But ship operators do not want to take such risks with their expensive vessels, Dasgupta said.

Until recently, Royal Dutch Shell's 2.5-million-mt/yr terminal in Hazira had been greatly underused since it opened in 2005 because gas customers did not want to pay global market prices for supplies. But with the recent push to use more gas in power generation and subsidies to fertilizer companies, Shell has in recent months been importing about two cargoes a month to Hazira, using about 1.5 million mt/yr of capacity, Dasgupta said. In the fiscal year that ended in March, Shell imported 18 cargoes.

Shell has been importing the cargoes at prices of about $7-$9.50/MMBtu, an industry source said.

That leaves at least 1 million mt/yr of free capacity at Hazira and it could be used for the additional cargoes Petronet plans to start importing in January 2008, Dasgupta said.

Since Hazira is connected to the same pipeline system that would feed Dabhol, Petronet plans to acquire regasification capacity in Hazira from Shell in January 2008, Dasgupta said.

Hazira has storage capacity of 5 million mt/yr and Shell could increase regasification capacity to that amount, but construction would take 24 months, he said.

Other LNG facilities

With a planned expansion of Dahej to 12.5 million mt/yr scheduled to be completed in June 2008, the opening of the Dabhol terminal in 2009, and the planned startup of Petronet's proposed 2.5 million-mt/yr terminal in Kochi in 2011, India should have adequate regasification in the near future, Dasgupta said.

India is negotiating with Australia's Gorgon LNG for 2.5 million mt/yr, but it is also eyeing proposed expansions of other Australian liquefaction projects as possible supply sources.

Landfilling for the Kochi project is almost complete and an engineering, procurement and construction contract is scheduled to be awarded in June 2007, Dasgupta said.

It is unclear whether LNG would be a major fuel source for India in the long-term because of price and potential domestic production offshore the eastern part of the country. The deepwater discoveries could supply a major portion of the country's gas demand, but it is unclear how much gas exists and when it would be produced, he said. In addition, a proposal to send Iranian gas to India via a pipeline through Pakistan is mired in a price dispute and would likely be opposed by the international community if Iran continues its controversial nuclear development.

The role of LNG in India could continue to grow "if the price is right," he said.