India braces for volatile LNG market outlook

Author: Joachim Moxon

2021/10/18

In late September, ICIS reported that Indian Oil Corp (IOC) had bought a spot LNG cargo at around $26/MMBtu. This was about $10/MMBtu higher compared to a month earlier when the same company concluded a previous tender, but the price rally wasn’t over yet. By early October, at the time of writing, ICIS assessments for spot delivery to India were pushing close to $40/MMBtu.

These price levels are clearly unsustainable, driven by multiple factors, some of which may be one-off events. But most market observers now agree that supply constraints are not going away any time soon. ICIS analysts are currently warning of market tightness until at least early 2023.

This raises a number of questions regarding Indian spot buying strategies in the short-term, and could have wider ramifications for India’s ambition to increase the share of gas in its energy mix by 2030.

Next spot buying window?

With spot prices reaching record highs at the start of the winter season, many Indian buyers are left wondering when to enter the spot market again.

One possible scenario is a crash in prices in early 2022, with relatively mild temperatures leaving buyers in northeast Asia struggling to absorb volumes secured as part of the current hoarding strategy. This could be further helped by an increase of Russian pipeline flows to Europe, or the Norwegian Hammerfest LNG facility returning to service after an extended outage, to mention just a few potential triggers.

Last winter, spot prices crashed from the second of half of January, setting off a flurry of Indian spot buying activity, which lasted until April. As long as prices ranged between $5/MMBtu and $8/MMBtu, Indian importers were happy to buy, but interest in spot purchases quickly evaporated as prices pushed into the double-digits. High storage volumes and a wave of new covid cases further contributed to the lack of buying interest. After a two-month hiatus, some Indian buyers nonetheless re-entered the market from June and several deals have since been concluded, indicating a limit to Indian demand flexibility, at least for certain buyers.

Indian spot buyers concluded a number of spot tenders at above $10/MMBtu over the summer, but successful tenders are now becoming more sporadic for Q4 delivery.

However, it should be stressed that the 2021-2022 winter season could play out very differently, and there seem to be much deeper structural drivers behind the current price rally compared to last winter.

The rally of the 2020-2021 winter was primarily driven by tight gas supplies to northeast Asia, while Europe was mostly shielded thanks to its extensive underground gas storage capacity. This time around, European storage is no longer playing a stabilizing factor.

The next downward price cycle could therefore bottom out considerably higher than it did in early 2021.

Indian price sensitivity

ICIS trade data analysis indicates that price sensitivity has varied between different importers in 2021, and none have been able to stay away from spot purchases indefinitely.

So far this year, the most prolific spot importer has been Indian Oil Corp (IOC). ICIS has recorded at least 15 spot tenders in 2021, the last six of which have been in the double digits. The company is the country’s largest refiner, a sector which is typically seen as one of the least price-sensitive. Nonetheless, LNG consumption by refineries is still down by 17% year-on-year in 2021. This is despite the easing of covid-related restrictions and a higher share of LNG versus domestic gas in the supply mix, indicating at least some price response. IOC could also see an increase in its demand in coming months depending on the completion of its pipeline network in Tamil Nadu, which is scheduled to commission in February 2022.

Another company increasing its spot activity in recent months is GAIL, which may enjoy some advantage as its spot procurement is primarily based on swap arrangements of its US offtake. GAIL could see a significant increase in demand from its fertilizer customers in the winter months, depending on the commissioning of new or revived fertilizer plants. The company has indicated that the four plants in question could increase demand by about 10m cubic metres/day (mcm/day), compared to its current total sales volume of under 100mcm/day. However, the commissioning process has seen significant delays, with at least two of the plants pushed back to mid-2022.

On the more price sensitive-side stands Gujarat State Petroleum Corp (GSPC). It currently has some exposure to Asian spot prices because of indexation in a strip tender closed in March, but it has mostly shied away from prices above $10/MMBtu. With several power producers in its customer portfolio, as well as small-scale industry, the company is supplier to a financially-constrained segment of the market which has traditionally resisted long-term commitments. However, there seems to be limited room for further demand destruction, as most of the switching to other fuels or lowering of production rates has already taken place.

A sharp decrease in spot buying behavior compared to in 2020 has also been observed from Bharat Petroleum and Reliance Industries.

ICIS analysis indicates that Indian buyers will need to supplement contractual volumes with spot to meet its demand requirements, particularly for Q1 '22 delivery.

Domestic gas to the rescue

Reduced LNG spot buying activity has also partly been made possible with the ramp-up of domestic gas production, which was up 13% year-on-year from January to August.

This has likely reduced the overall gas price basket of Indian consumers, particularly in the city gas distribution (CGD) segment, which is highest in the gas allocation mechanism. This is currently the fastest growing demand sector in India thanks to the build-out of new distribution grids.

However, there could be some price shocks ahead. Regulated domestic prices are still near all-time lows, creating headaches for producers. But international gas prices will start to filter in for the six-month period from March 2022, and perhaps more so from October 2022.

This is because regulated prices are calculated on the basis of a one-year average of international benchmarks, with a three-month lag. This means the March-to-September period is set according to prices through the preceding year.

The windfall in domestic gas production may also start to splutter out, as most of the new gas has come from eastern offshore fields by BP/Reliance Industries which have already reached peak production.

By contrast, fields operated by ONGC has so far failed to live up to their promise. The company had indicated plans to ramp up production of its new fields to 3mcm/day in 2021, and reach a peak of 15mcm/day by 2024. Instead, ONGC offshore assets have only continued to decline.

Unless there is a turnaround in this trend, the Indian market will increasingly have to face the challenges of volatile global markets.

This could make it more difficult for Indian utilities to provide stable and affordable energy to its growing population, while at the same contributing to cleaner air and lower emissions.