A challenging year ahead for Indian LNG buyers

Joachim Moxon

13-Jan-2022

In the previous edition of our quarterly take on Indian LNG, ICIS had just reported a record-high spot purchase by an Indian buyer at around $26/MMBtu. At the time, in early October 2021, price assessments for delivery into India were even wilder, pushing close to $40/MMBtu.

Fast forward to early January 2022, at first glance, it doesn’t seem much has changed. The most recent spot purchase by an Indian buyer was reported at above $29/MMBtu and price assessments were close to $30/MMBtu.

What is more, supply tightness is expected to persist through 2022, with the ICIS Global LNG Balance currently showing an overall supply deficit, requiring a market response from sellers and/or buyers to achieve balance.

All in all, it looks like a rough year ahead for Indian buyers seeking spot LNG opportunities. Rising procurement costs and an uncertain outlook for domestic gas production also present severe challenges to demand growth.

Elusive spot window?

Mindful of making price predictions, we still maintain LNG prices will likely fall during the March-to-May delivery-period.

In early October, we speculated that prices could begin to slide from the second of half of January, in line with seasonal patterns, but also as result of northeast Asian storage dynamics. Motivated by heightened security-of-supply concerns buyers in China, Japan and South Korea were busy filling surface inventories into late 2021, but may now have to relax imports to allow storage to draw down.

Last year, we also considered that an increase in Russian pipeline flows to Europe might help to cause some slack in the market, though this looks increasingly unlikely. As it now stands, the relaxation of demand in northeast Asia could simply pull LNG volumes into Europe, limiting availability that could otherwise benefit south Asia.

A downward price cycle is therefore expected to bottom out considerably higher than it did in early 2021. As such, prices may fall to levels that could generate some additional buying for the refinery and petrochemical sectors. But opportunities for the power sector, which would presumably require LNG prices in the single digits, look implausible.

It doesn’t look too good for the second half of the year either. Europe is likely to end winter with low storage volumes for a second year in a low, and with Asian buyers still wary of supply shortages, this should generate renewed storage efforts in summer. The ICIS Global LNG Balance currently points to increased market tightness in June, and particularly from September onward.

Prices fell below $10/MMBtu and sparked a three-month flurry of spot buying from late January to late April 2021. But the price outlook appears much less favourable for the same period in 2022.

Domestic gas blues

A further complication to the prospects of Indian gas supply is found at home. While domestic gas production rose in 2021 and cushioned some of the country’s exposure to international prices, the potential for continued growth now seems remote.

Gas production from ONGC’s KG-98/2 Cluster-II in the eastern offshore basin has been pushed back repeatedly, primarily because of manufacturing delays of subsea equipment.

About a year ago, it was thought that output from the cluster could average 3.4 million cubic metres per day (mcm/day) in the current fiscal year, which ends on 31 March. In the upcoming fiscal year this was projected to increase production to 8.5mcm/day.

But ONGC’s production in the eastern offshore has instead been moving in the opposite direction: from just over 1mcm/day in April 2021, to 0.6mcm/day by October last year. This is despite the fact that some gas production from Cluster II already started in March 2020, by tying back to existing facilities.

The latest reports indicate that further development is still off by several months and that overall project completion will push back to May 2023. This may in effect knock off about 8% of the domestic gas production that had been expected in the 2022-2023 fiscal year. Further relief is not expected until first gas from Reliance Industries’ MJ field in late 2022. More LNG will therefore be needed to sustain growth in natural gas consumption, which will surely test the buying power of the Indian market.

A period of cheap domestic gas is also nearing its end, with high international prices about to filter through to the domestic price mechanism. From current pricing at $2.9/MMBtu, the level is likely to double to above $6/MMBtu from March, and depending on international price benchmarks in the first half of 2022, it could push to above $8/MMBtu from October.

This will make it harder to reduce costs by blending LNG with domestic gas. The two main growth sectors, fertilizer and city gas distribution will certainly be impacted. The former uses a pooling mechanism to set a uniform delivered price, while the latter has the highest priority in the domestic gas allocation mechanism.

Cause for comfort

The ICIS Global LNG Demand Forecast shows that India will need to step up its LNG imports from February onward to meet demand requirements. In order to do so, the country still has a few options available.

The ICIS forecast shows widening gap between demand and contractual supply, indicating increasing spot requirements that importers may be unable to fulfill.

As much of the projected increase in fertilizer and city gas demand is coming from GAIL’s downstream customers, the company will play a pivotal role. GAIL holds 2.8m tonnes per annum of offtake from US liquefaction projects and has signaled it will use some of the LNG that was previously sold to international markets to sustain demand growth at home.

However, ICIS has estimated that about 2.5m tonnes arrived into India already in 2021, either directly or as a result of swap arrangements, indicating that this resource is already close to fully utilised. Nevertheless, GAIL recently secured a multi-year charter agreement, which should reduce its reliance on swaps. The company can also count on an increase in its contractual volumes with supplier Gazprom.

Petronet LNG has also requested additional volume stemming from previously deferred cargoes, but it’s unclear to what extent the supplier can or will accommodate.

And while some of these factors may help to lift LNG imports in 2022, supply is still expected to remain heavily constrained. It’s also unclear if there’s much room left for demand destruction; with consumption in the power, refinery and petrochemical sectors already pared down as a result of the high prices.

ICIS is still forecasting higher LNG imports in 2022 but this will rely on growth in fertilizer and city gas demand, which Indian importers may simply be unable to meet. In a relatively unconstrained supply scenario, LNG imports could reach as high as 27m tonnes in 2022, though this would be very difficult to achieve in present circumstances.

For more information, see the ICIS LNG supply-demand forecast.

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