GLM Focus: India faces big hurdles to LNG ambition

Source: Heren

2019/02/28

SINGAPORE (ICIS)--Indian Oil’s Ennore LNG import terminal this week received a commissioning cargo. It is one of three new Indian import terminals due to start up - albeit with some delays - in 2019.

India wants cars and trucks, power grids and industries to run on gas to curb air pollution, offering LNG sellers a potential bonanza of demand due with the country’s population of more than 1 billion.

But the country faces severe problems such as poor roads and pipeline connections, tax issues, as well as sluggish market reforms on opening up its national gas infrastructure to third-party access.

Pipeline connection problems

To widen the use of gas, India has pushed for private and state-run companies to expand pipeline infrastructure for city-gas distribution networks across the country, making it the fastest growing segment in the past few years.

But connecting coastal LNG terminals to downstream customers by pipelines has been a recurring issue, with delays in securing pipeline routes and local approvals repeatedly hindering fresh LNG import options.

“Some optimal combination of infrastructure network expansion will be needed, as at the moment infrastructure is heavily skewed towards the industrial markets in the west and northwest of the country,” said Anupama Sen, senior research fellow at the Oxford Institute for Energy Studies.

“The increase [in demand] could be capped if the infrastructure expansion to open new markets in the country does not keep pace,” Sen added.

Highlighting the lack of pipeline access in India, some 60% of gas pipeline and distribution infrastructure is located in the western and northern regions.

As a result, 79% of the natural gas used in India is restricted to a handful of India’s 29 states: Gujarat; Maharashtra; Delhi; Uttar Pradesh; Haryana; and Rajasthan.
Lack of tax is biggest hurdle

LNG can be transported in tank containers via inland waterways, coastal shipping, trucks and railway. But the transportation of LNG tank containers by waterways is non-existent in India, said a source from state-owned gas grid operator GAIL.

And India has no rail set up for carrying LNG, and virtually no system of transporting LNG via trucks, partly due to poor roads.

But the biggest hurdle to LNG trucking is the lack of a unified nationwide goods and services tax (GST) rate on LNG shipments.

Sellers now face a confusing mixture of state tax rates between 0% and 25%, making interstate trucking more time-consuming and less profitable.

The Indian Ministry of Road Transport and Highways reported the transportation time for shipment of goods that were included into a nationwide GST scheme that came into effect in 2017 fell by 20%.
Overarching ambitions

Despite these hurdles, LNG developments in India are expected this year.

India’s spot LNG demand is likely to increase following the commissioning of the three new import projects and the start-up of a new pipeline connecting Petronet’s Kochi LNG terminal to the main demand centres.

The Ennore, Mundra LNG and H-Energy FSRU project near Mumbai are all expected to be supplied from the spot market.

State-owned Indian Oil has no underlying supply contract for its Ennore LNG facility on the east coast of the country.

The project is likely to be supplied through a series of short and mid-term tenders once starting full commercial operations later this year.

The Mundra LNG project, promoted by the Adani Group, is also likely to be supplied on the basis of short-term volumes.

The facility currently lacks pipeline connections with the main centres of demand. But a connecting pipeline, built by state-owned GSPC, is likely to come onstream at some point later this year.

In addition, Adani is currently in discussions with several suppliers about short-term options for the Indian market.

On top of that, Independent H-Energy is also looking for supplies in addition to the mid-term contract signed with Malaysia’s state-owned PETRONAS.

But the company is yet to aggregate sufficient downstream supply to justify significant new commitments in terms of LNG supplies.

Adani’s total demand will depend on the attractiveness of LNG against competing fuels, such as naphtha and fuel oil.

Any significant fall in crude oil prices could render LNG less attractive.

These projects and dynamics feed into the country’s overall ambition. But the difference between the two obvious major potential LNG growth markets - India and China - is clear, with the latter having a more coordinated approach to infrastructure development and with more momentum on domestic market evolution.

India, already the world’s fourth largest importer of LNG, is aiming to have natural gas account for about 15% of energy demand by 2030 from around 6% now.

New Delhi is also in discussions on setting up India’s first gas trading exchange, but there is no indications of a timeline.

The pace of these developments clearly hinges on the country’s ability to overcome the significant challenges it faces.