Is India's LNG deal with US a risky affair?

Majority of PLL’s long-term deals are linked to crude, which faces price challenge from other fuels.

Spot LNG is moving away from this linkage, which puts a question mark on crude linked contracts.

Prime Minster Narendra Modi’s recent US visit saw Petronet LNG Ltd (PLL), a joint sector company, signing a memorandum of understanding with the US-based Tellurian for import of liquefied natural gas (LNG).

However, there are concerns over the LNG demand growth in India because of price sensitivity of the market.

Bullish on US LNG

Under a non-binding memorandum of understanding signed on September 21, PLL and its affiliates have the option to buy 5 million tonne per annum (mtpa) LNG from Tellurian’s Driftwood project on the banks of Calcasieu river in Louisiana.

The deal comes with the option of making an equity investment.

Price pressure

If PLL decides to go alone, it will have to invest around $ 0.5-1 billion for around 1 mtpa.

Based on industry estimates, this LNG could cost upwards of $ 5 per million metric British thermal unit (mmBtu).

Added to it will be regassification and other charges.

The notified domestic gas price for Oct-Dec 2019 is $ 3.23.

Price for domestic gas from deepwater fields is capped at $ 8.43.

Demand growth

According to EY estimates, India’s LNG consumption is expected to increase to 227 million metric standard cubic meter a day (mmscmd) by FY25 from around 73 mmscmd in FY18.

The overall gas demand is also expected to increase from 443 mmscmd this year to 654 mmscmd by 2026-27, according to PLL estimates.

The share of gas in the overall energy basket, however, is around 6 per cent now, down from around 11 per cent during the first half of this decade, mainly because of dependence on costlier imported gas.

In addition, natural gas pipelines in India are running at a capacity utilisation of only around 40 per cent.

Challenges for long-term deals

Majority of PLL’s long-term deals are linked to crude, which faces price challenge from other fuels.

Spot LNG is moving away from this linkage, which puts a question mark on crude linked contracts.

US deal concerns

If the company goes alone with the investment, its finances will be under pressure.

According to the March 2019 quarter release, PLL has Rs 8,566 crore of reserves and surplus.

The company's debt is around Rs 750 crore.

Other long-term deals

PLL has sourced LNG from RasGas of Qatar of about 7.5 mtpa.

The company also has a contract with Exxon Mobil for supply of around 1.4 mtpa of LNG from its Gorgon project.

Major consumers of imported LNG are GAIL (India), Bharat Petroleum Corporation and Indian Oil Corporation.

Photograph: Darrin Zammit Lupi/Reuters