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Market Watch
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Companies
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Press Release [FREE Access]
Petro Intelligence Ľ The Changing Dynamics Wrought By US LNG

by R. Sasankan

The incredible has happened: global gas prices have tumbled so dramatically in recent times that it has now become imperative to undertake a complete overhaul of the energy mix in a country like India which ranks as the world’s third largest importer of fossil fuels.

An energy expert with considerable knowledge of the US oil and gas scenario believes that “it is no longer unthinkable to sign a long-term (20-year) deal for LNG with the US for a price between $5-5.50/MMBTU including re-gasification cost at the Indian coast if negotiated transparently and properly.” That is an astonishing price for gas imports into India, especially when one recalls what an abysmal record the country has had in negotiating long-term gas contracts.

I was taken aback when I heard this expert’s comment, which has enormous significance for gas-starved India, and decided to immediately cross check this fact with other pundits. I was surprised to learn that the US has already reached the magical number for natural gas production of under $1/MMBTU. Russia, Middle East, Bolivia and certain fields in Canada have already produced gas at this price or below it.

On the very next day, there were reports that suggested that the US would emerge as the world’s largest crude oil producer next year. The shale revolution in the US has made this possible. Until now, Indian energy experts had never believed that the US could be considered as a source for crude oil. For the first time last year, Indian companies imported 8 million barrels of crude from the US. The $ 8-10 per barrel differential in the price between Brent and the West Texas Intermediate (WTI) has suddenly made it attractive for Indian companies to start importing crude oil from the US.

But there is one niggling problem: the amount of crude oil that can be imported is limited by the fact that these are sweet crudes with low sulphur content. The crude-mix in Indian refineries is heavily tilted in favour of high sulphur crudes which account for 70 per cent.

There has been a great deal of speculation on whether the entry of India’s state-owned oil companies into the US market last year was motivated by commercial considerations or at the behest from certain people at the helm of the administration. The political angle cannot be ruled out totally as energy cooperation was a key topic in the deliberations that Prime Minister Narendra Modi had with President Donald Trump in February 2017.

President Trump was also reportedly keen to see India import American LNG. Subsequently, US LNG landed in Europe but could not enter India as the spot price for Asian LNG and the crude price were not favourable to justify such a foray. US LNG became a lucrative proposition only when the spot price for LNG rose above $ 10/mmBtu and crude price nudged closer to $ 100 per barrel.

The situation has now changed. The spot LNG price is above $ 10 but the crude price is unlikely to touch $ 100 per barrel except in the case of a major geopolitical turmoil.

The significant reduction in the production cost of American LNG has turned the US into a formidable competitor to Qatar, the world’s largest gas producer. The cash cost of drilling, production and transport to markets together will be approximately $ 2.25/MMBtu. It is this low cost factor that can propel US LNG to distant markets like India.

True, gas-rich Qatar has a production cost that is below $ 1 per MMBtu. Qatar will try to block the entry of US LNG and this can be done only by lowering its price. India stands to benefit in the ensuing competition provided India negotiates the deal “transparently and properly”.

Transparency is essential for any deal to succeed. Unfortunately, this characteristic has been completely absent in the deals that India has signed in the past. The 25-year deal that Petronet LNG Ltd signed with Ras Gas of Qatar for the supply 7.5 million tons per annum of LNG was murky from the very start.

The deal turned out to be a disaster for India in many ways. The leadership of Petronet LNG Ltd (PLL) permitted blatant violation of the terms of the contract which favoured Qatar while sacrificing India’s interests, raising suspicions about massive kickbacks. PLL was able to circumvent scrutiny from the vigilance authorities that it was technically a private company outside the purview of enforcement agencies. Net result: the senior executives of PLL, at least in its initial years, acted and behaved as if they were employees of RasGas.

Permit me to digress a little. RasGas’ original offer had a floor price of $ 16 and a ceiling of $ 24 per barrel of crude. This was accepted even by ministry of petroleum and natural gas. Had this formula been accepted, India would have got LNG at a price of $ 3.04/MMBtu. But that was not to be. RasGas followed it up with a fuel-linkage price which looked attractive initially but carried a time-bomb in the fine print of the agreement: the price would eventually be linked to the moving average of the past five years. PLL opted for this disastrous deal and ended up paying $ 14/MMBtu. RasGas reduced its LNG price after the collapse of the crude price in 2014 but still charges a premium of 75 cents per MMBtu. The deal with Gorgon LNG of Australia was also renegotiated successfully. But the irony of all this is the fact that the LNG exporters are able to treat the entire exercise as a gesture of magnanimity on their part.

The developments on the gas price front in the US changes the entire ball game, unless India once again choose to mess things up by negotiating similar “disaster deals” for the supply of US LNG. The US does not encourage kickback-induced deals and that should not be a disincentive for not buying US LNG. India has a powerful LNG lobby which has been active since 1998. This lobby could try and scuttle moves to import cheaper LNG from new supply sources.

LNG is fast becoming just another commodity, much like crude oil. In another five to 10 years, the regional price differentials may vanish. In a commoditised markets, low-cost suppliers should win.



To download the latest issue 'Volume 25 Issue 15 - November 10, 2018', click here
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Monthly Downstream Data
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Oil and Gas Separation, Refineries, Gas Processing Plants, Olefin and Aromatic Mother Plants
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Tenders [FREE Access]
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