Sleeping giant – Part One

Asia is the largest regional market for LNG, accounting for around 70% of LNG imports in 2012. The Asian LNG market is also the fastest growing, being the location for more than half of the global capacity of LNG regasification terminals currently under construction. Japan, South Korea and Taiwan are well established LNG markets, while China is emerging as a major LNG importer as well. One overlooked market within Asia for growing LNG demand, however, is South Asia.

The South Asian region consists of four countries – India, Pakistan, Bangladesh and Sri Lanka – with substantial coastline, a combined population of over 1.5 billion people, and a gas market that accounts for 19% of total gas consumption in Asia. Yet to date, only India has LNG import capacity in the region, importing just 14 million tpy in 2012 – just 6% of global LNG imports. This volume also comprises a tiny fraction of India’s total energy consumption. But going forward, South Asia will play a greater role in the global LNG market, with India planning new LNG import terminals, and capacity expansions of existing ones, which will significantly increase its regasification capacity. In addition, Pakistan and Bangladesh are also expected to soon join the ranks of LNG importers – albeit on a small scale initially – with the utilisation of offshore terminals.

Governments in the South Asian region face considerable challenges in meeting rapidly growing energy needs, such as eliminating power and fuel shortages. The task is made harder by limited energy infrastructure, poor investment regimes to attract capital, and the high cost of importing oil and gas. Furthermore, India, Pakistan and Bangladesh are not supplied by any cross-border gas pipelines from nearby gas producers – and will not be for some time – while prospects for rapid domestic gas output growth are not high. These realities make the development of LNG import capacity important to meeting growth in regional gas demand, even if LNG will comprise only a modest share of the region’s total energy consumption.

Coal-dependent India, the fourth-largest energy-consuming economy in the world, will have plenty of challenges to overcome – mainly related to infrastructure and pricing – should natural gas comprise a greater share of the country’s fast-growing energy demand. In Pakistan and Bangladesh, where natural gas already plays a significant role in the energy mix, the absence of cross border pipelines make LNG important to bridging a widening gap between domestic consumption and supply. In these countries, cost will also be a major impediment to more extensive LNG capacity additions.

India

India entered the ranks of the LNG importers relatively late in the scene compared to other Asian economies, developing regasification capacity for the first time in 2004. In 2013 its LNG import capacity reached 21.1 million tpy from four terminals (see Table 1), all of which are located on India’s west coast. India has the fourth-largest LNG import capacity in the Asian region, behind Japan, South Korea and China. LNG accounted for approximately one-third of India’s total gas consumption in 2013, with the balance supplied by domestic production.

As LNG is the sole source of India’s gas imports – given the absence of cross-border pipelines – the further development of LNG capacity is crucial to bridging India’s projected growing gap between domestic natural gas supply and demand. Since the opening of the LNG terminal at Dahej in 2004, imports have taken up a greater share of India’s gas supply as growth in demand has outstripped growth in supply. This trend is expected to continue. According to a report prepared for India’s Petroleum and Natural Gas Regulatory Board, India’s gas demand will triple from 46.7 billion m³ in 2012 - 2013 to 189 billion m³ by 2021 - 2022. Although this forecast may prove to be on the bullish side, it does reflect that demand for natural gas in India will continue to grow rapidly.

Natural gas demand in India is driven by the fertiliser industry, power generation, the industrial sector, and to a lesser extent by household and transport use. In absolute numbers, India is the third-largest gas consumer in the Asian region, but natural gas comprises a small part of India’s total energy consumption (approximately 7% according to EIU estimates). The potential for gas demand growth will not just be driven by industrial development and economic expansion, but also by the successful implementation of plans at a national level to increase the role of natural gas in the energy mix (largely at the expense of coal in power generation).

Like China, coal plays a significant share in India’s energy supply, due to substantial domestic resources and the lower cost of coal as a source of fuel compared to other alternatives. As in China, coal dominates the provision of supply to India’s power generation sector. According to EIU estimates, coal is the source of 59% of India’s power generation, while natural gas supplies just 9%.

Domestically produced coal is less expensive than imported LNG. But a decline in the development of India’s coal resources will lead to increasing reliance on more expensive coal imports. Furthermore, according to a recent report by the Boston Consulting Group, chronic power shortages leave an opportunity for gas-fired power to take up market share, as will proposed power sector reforms. Unless there is dramatic growth in domestic gas production – such as from shale gas or offshore resources – and unless international pipeline projects eventuate, expanding LNG regasification capacity will be crucial to meeting India’s growing demand for natural gas.

The prospect for India to import gas via pipeline is not likely in the short to medium-term. India withdrew from a pipeline project that would transport Iranian gas via Pakistan, and the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is several years away at best. There have been talks on India to import pipeline gas from Myanmar, but instead a pipeline exporting gas to China from Myanmar opened last year. A gas pipeline option for India is therefore not on the cards anytime soon.

As Table 1 shows, India has been steadily building its LNG capacity. Four LNG import terminals in India have begun operating with a combined capacity of just over 21 million tpy, all of which are on the west coast. Expansions are planned for the Dahej, Hazira and Kochi terminals, which would boost regasification capacity by 13.9 million tpy. A further four terminals are either planned or under construction, adding a further 18 million tpy in capacity. In total, India’s regasification capacity could reach 53 million tpy by 2017, including three new projects on the east coast where there is currently no capacity to import LNG.

The vast majority of India’s LNG comes from Qatar, in the form of long-term contracts. In 2012, 80% of India’s imported LNG (which totalled 13.7 million tpy) came from Qatar, with smaller volumes from Yemen, Nigeria, Egypt, Algeria and Indonesia making up the rest. However, India’s LNG importers seek to diversify sources of supply, especially by accessing anticipated supplies of non-oil indexed US LNG.

GAIL (India), the state-owned natural gas transmission, pipeline and marketing company that operates the Dabhol LNG terminal, has signed a supply agreement with Cheniere, the operator of what will be the US’s first LNG export terminal on the Gulf Coast, Sabine Pass, which is scheduled to begin operation in December 2015. GAIL has also signed a supply agreement with Dominion, the operator of the planned Cove Point LNG terminal located on the US east coast. Petronet, a joint venture of several state-owned Indian oil and gas companies, has signed a supply agreement with United LNG, the joint operator of the Main Pass Energy Hub, an offshore LNG project in the Gulf of Mexico. The Gujarat State Petroleum Corp. (GSPC), which plans to build the Mundra LNG terminal on India’s west coast, has signed an LNG supply agreement with BG Group. GSPC and GAIL have also signed LNG supply agreements with Gazprom’s marketing subsidiary (Gazprom Marketing & Trading), while Petronet has signed a Memorandum of Understanding (MoU) with the Gazprom subsidiary as well. Petronet has also signed a supply agreement with ExxonMobil for supply of LNG from the Gorgon project off the coast of north-west Australia.

East African LNG will be a distinct possibility after 2020, and India could be a customer for it. In 2013, ONGC Videsh, the international exploration arm of Oil and Natural Gas Corp. (ONGC), bought a 10% stake in an offshore gas field (Rovuma Area 1) in Mozambique from US independent Anardarko. ONGC Videsh subsequently bought a further 10% share in the development from another shareholder of the block, Videocon Hydrocarbon. Rovuma Area 1 will become a source for the planned Mozambique LNG project, which could begin operating in the early part of the next decade.

Nevertheless, there are several challenges for India’s LNG sector to overcome if it is to build on current capacity. For a start, LNG in the Asian market does not come cheaply. The cost of importing LNG is emerging as a significant factor that will impact India’s ability to absorb greater volumes of liquefied gas. Spot prices range between US$ 9.00 - 20.60/million Btu, and long-term contract prices range between US$ 6.24 - 13.28/ million Btu, according to the Boston Consulting Group. These price ranges greatly exceed the fixed low price set for domestically produced natural gas, although a recent move by the Indian government to raise the domestic natural gas price will make imported LNG more competitive. Liberalisation of domestic pricing, as well as freeing up of rules regarding allocation of gas supply to end users, will allow India to absorb greater volumes of LNG and thus make further capacity expansions viable. Inadequate gas pipeline infrastructure poses another impediment, although India plans to double the capacity of its natural gas transmission network by the end of this decade.

Provided that domestic pricing and sectoral allocations for gas usage can be freed up, and infrastructure issues addressed, India will become a larger market for LNG by the middle of the next decade. The size of India’s energy market is vast, and natural gas plays just a small part in it. With appropriate policy amendments this could change, facilitating a much greater role for LNG in supplying India’s energy system.

Written by Peter Kiernan, The Economist Intelligence Unit (EIU), UK. Edited by Callum O'Reilly

The full version of this article is available in the May 2014 issue of LNG Industry.

The second part of this article is available here: 'Sleeping giant - Part Two'.

Read the article online at: https://www.lngindustry.com/special-reports/20052014/sleeping_giant_part_one_621/