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Castrol India Limited Announces Q2 CY18 Results
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Press Release [FREE Access]
Petro Intelligence » 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 9 - August 10, 2018', click here
Petro Intelligence [FREE Access]
Why A Long-Term LNG Supply Deal With US Makes Sense
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The Changing Dynamics Wrought By US LNG
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Kowtowing to Trump
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Kuwait Prefers A Distance From Saudi
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Foreign Investment
CPC Corp Of Taiwan Studying Petrochemical Plant Investment In India
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Oilex Is Seeking To Take Over GSPC’s Stake In Cambay Block
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Overseas Investment
Petronet Submits Proposal To Set Up $1 Bn LNG Terminal In Bangladesh
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Gas Scene
An Update : Capacity Utilization of LNG Regasification Terminals
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Domestic Gas Prices & International Gas Prices
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Roadmap to setting up a functional Gas Marketing Hub in India
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Sectoral Consumption of Natural Gas In June 2018
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Domestic Natural Gas Scene in June 2018
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An Update of Coal Bed Methane Gas Development in India
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Domestic Gas Scene In totality In Last 3 Years
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Month-Wise, Sector-Wise Consumption of Domestic Gas, R-LNG 2017-18
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LNG imports have consistently increased over the years
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15% Share of Gas in Primary Energy Mix – What it Translates to
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Salient Features of LPG Profile In Fiscal 2017-18
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Approved LNG Export Facilities
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Update: CGD Factsheet as of April 2018
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International Gas/LNG Prices and Domestic Gas Price
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CGD Sector’s Projected Growth In Coming Years
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Update: Source-Wise LNG Imports and List of Importers in February 2018
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Sector-wise Gas Consumption of Domestic Gas and RLNG in January 2018
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A National Gas Grid Still Far Away, But Making Progress
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Data Section
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Special Database
Petroleum Products Import Goes Up In June 2018
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Crude Oil Imports Dip In June 2018, OPEC Share further Declines
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Imported Crude & Domestic Crude Oil Processing
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High Sulphur (HS) & Low Sulphur (LS) crude oil processing
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Power Deficit Situation Region-Wise In June 2018
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ONGC’s Oil and Gas Discoveries In Fiscal 2017-18
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For Better Appreciation of Pricing Of Imported Crude
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Customs, Excise Duties, GST Rates On Petroleum Products
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Update: Profit After Tax (PAT) of oil companies
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Status of blocks under NELP (as on 1st April, 2018)
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Retail Selling Price (RSP) & % of taxes in RSP of petrol and diesel in developed countries vis-a-vis India
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Retail Selling Price (RSP) of major products in India & neighbouring countries
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Break up of Central excise duty on petrol & diesel (effective on 2nd February, 2018)
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Share of taxes in Retail Selling Price (RSP) of Petrol & Diesel in Delhi
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Fuel & Loss in Indian refineries in fiscal year 2017-18
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New Petrochemical Complexes and Estimated Feedstock requirement
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Update of Distillate yield of PSU refineries
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Update Of Hydrocarbon Reserves In India
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India’s Import Of Petroleum Products Down in May, Up In April-May 2018
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Gross Refining Margins (GRMs) of Indian refineries during FY 2017-18
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