• Is India ready for the U.S. LNG trade?

    The U.S. is expected to become a net exporter of natural gas in a period between 2017 and 2018. The growth of domestic natural gas production in the U.S. is pushing it for speedy development of its liquefied natural gas (LNG) export terminal, as evident from the increase in long term application received and approved by Department of Energy (DoE)/Office of Fossil Energy (FE). For instance, the total number of non-FTA applications approved by DoE/FE have already increased from nine from September 2014 to 24 as of March 1, 2017.

    Presently, 95% of the U.S.’s total gas exports are moved through pipelines to Mexico and Canada. While natural gas exports through pipeline to Canada is already declining, pipeline gas exports to Mexico are expected to flatten before it starts decreasing due to development of Mexico’s own production capacity.

    Energy Information Agency (EIA) has predicted U.S.’s net exports of LNG to reach 6.7 trillion cubic feet (tcf), constituting 16% of its total gas production.

    Given its robust production of shale gas, U.S. has started to diversify its natural gas exports through LNG to consistently seek for the new markets. This is relevant at a time when global LNG industry itself is invigorating, where on one hand, traditional demand from countries, such as Japan, Korea and China is slowing down, with rolling off a long-term oil indexed contracts, on the other hand, the new LNG supply projects from countries like India, Pakistan and Egypt are picking up.

    This signifies a shift from a seller’s market to a buyer’s, wherein the latter having a greater say in LNG market dynamics. Buyers are now using their power not only to re-negotiate their long-term contracts with destination flexibility but also consistently looking for smaller and short-term deals.

    Moreover, reduced regassification cost, increase investments in small scale LNG terminals, increased investments in floating LNG, an urge to move towards clean energy systems through greater use of natural gas is working as a catalyst for increased demand for LNG, worldwide.

    In addition, opening of the expanded Panama Canal in June last year is termed as a potential supply-chain game changer, particularly for LNG sailing through Gulf Coast. This route offers shorter and less costly route to Northeast Asia, a primary destination for the U.S. LNG exports. Though, for India, Suez Canal or around the southern tip of Africa remains the more cost effective option compared to Panama Canal.

    Currently, shale and tight oil plays make up about 50% of natural gas production of the U.S., which has contributed significantly towards its natural gas production growth during the last decade, wherein, it has successfully increased its production of dry gas from 18 trillion cubic feet (tcf) to 27 tcf.

    In case of India, according to International Gas Union’s 2017 World LNG Report, it is the fourth largest LNG importer with 19.2 million tonnes per annum, having a global market share of 7.4%. According to Petroleum Planning & Analysis Cell, India’s LNG imports increased by 15% in 2015-16 on y-0-y basis to 16.08 million metric tons (mmt), while over the last five years.

    LNG imports increased by 38% since 2011-12.

    In September 2014, under a non-FTA category, nine American LNG terminals have been approved to export LNG of which two have inked deals to sell to Gas Authority of India Limited (GAIL). GAIL has signed two agreements with U.S. firms to import LNG. One agreement will bring 3.5 mtpa or 168 billion cubic feet (bcf) from Cheniere’s Sabine Pass in Louisiana, while the other is for 2.3 mtpa or 110.4 bcf from Cove Point in Maryland.

    Thus, while GAIL was one of the first companies to buy U.S. LNG from Sabine Pass and Cove Point, it bought the second shipment of LNG from Cheniere Energy to become the first Asian importer of U.S. shale gas.

    For the U.S., India could thus become one of the biggest LNG markets with flurry of U.S. shipments Cheniere-operated terminals at the US Gulf Coast over the coming months, provided the landed cost of LNG successfully competes with coal, for use in power generation. However, if U.S. LNG fails to compete with coal it would be difficult for India to easily expand the usage of LNG in price sensitive sectors such as power and fertilizer.

    This was already visible from the recent decision taken by the government when on March 31, 2016, when it scrapped subsidized imported LNG scheme in a backdrop of low gas prices and state governments withdrawing from the scheme. This scheme which helped LNG imports surged by 15% to 16.08 mt (Figure) in 2015-16 and to 17 mt in first 11 months in 2016-17 is now set to dip in the absence of this scheme. Decisions like this can have a significant impact on

    government’s plan to shift towards gas based economy, where import of LNG is a significant component.

    Further, India’s LNG expansion plan, is also burdened by taxes, irrespective of reduction of import duties from 5% to 2.5%. Gujarat, a destination for three of India’s four import terminals, namely, Dahej, Dabhol and Hazira, has withdrawn the tax benefit for imported LNG consumed outside the state. Moreover, GAIL, which is set to receive U.S. LNG cargoes from the Cove Point terminal in Maryland has called for imports to be made more economic to the domestic consumers so that sectors outside power, such as fertilizers, chemical plants and city gas distribution are encouraged to use natural gas. These efforts will contribute largely in stabilizing the environment and curb emissions.

    Thus, while the U.S. is gearing up to expand the base of its natural gas exports by increasing LNG exports, India would do well to gear itself to optimize the benefits of U.S. LNG trade by providing tax reliefs to sectors which needs to be pushed for greater natural gas usage. The U.S. on the other hand would be happy to narrow the trade deficit on its side while exporting LNG to India to mutually gain from LNG trade. Eric Fehr Jersey

    Share This