Low spot liquefied natural gas (LNG) prices are threatening India’s new deepwater supply, with around 35% of uncontracted volumes in 2022 at a higher risk of being replaced by spot LNG.
Analysts at consulting firm Wood Mackenzie said on Tuesday that the full commercialization of upcoming deepwater volumes is at risk due to the impact of Covid-19 on-demand, and prospects of low LNG prices persisting at least until 2022.
Over 1 billion cubic feet per day (Bcf/d) of new supply is expected to come from deepwater fields by 2023. However, only 15%, or 200 million cubic feet per day (Mmcf/d), of this volume has been contracted to date, Kallanish Energy reports.
The Asian country traditionally preferred oil-linked LNG contracts as it offers more transparency and tended to be less volatile than a gas hub or spot LNG prices. However, low spot LNG offers huge advantages to those able to import the fuel.
“Procuring spot LNG mitigates the risk of ‘take or pay’ obligations compared to the new deepwater domestic gas contracts, as buyers are indebted to pay for a minimum 80% of contracted gas volumes regardless of seasonal demand changes,” pointed senior analyst Vidur Singhal.
“Historically, price-sensitive Indian buyers have increased spot purchases when prices drop, and we see this trend playing out through next year,” he added.
Wood Mackenzie believes LNG appears to be more economically competitive compared to domestic gas over the next two to three years. But the regional market, infrastructure availability, upstream competitiveness, and strategic decisions of buyers will influence the level of spot replacing domestic gas.
The critical period for producers will be the 2020/2021 period when spot prices are set to remain low, forecast principal analyst Alay Patel.
“Upstream companies might have to face difficult decisions when they auction their volumes through to 2022. Either accept lower prices and consequently low returns or delay sales until the prices are more attractive,” he added.
Sellers need to ensure the offshore gas prices are viable for industrial and power consumers to absorb additional volumes in the states of Andhra Pradesh and Telangana. These eastern states have no access to LNG.
However, in Gujarat and Maharashtra, analysts estimate deepwater gas to be more expensive than spot LNG at 8.4% indexation after adding the East-West pipeline tariff. The western region has a robust LNG storage and pipeline infrastructure, with access to both LNG imports and domestic gas supply.
This post appeared first on Kallanish Energy News.
