By R. Sasankan

The Narendra Modi government has been consumed by the desire to beef up India’s energy security. It is in the context of the economic turmoil sparked by the Russia-Ukraine war and the dire forecast of a possible recession in several advanced economies later this year that I floated a trial balloon by suggesting that India could explore the advantages of a swap deal for gas sourced from Russian fields with either Japan or South Korea.

The suggestion isn’t outlandish but many readers of the piece in this column dated January 10 titled India May Explore Swap Deals for Sakhalin-II LNG were intrigued by the idea and raised a few queries. Before I explore the idea a little more thoroughly, permit me to recall the basic thrust of the initial suggestion.

“So far, India has shied away from the distant Russia for oil and LNG on account of the high transportation costs involved. According to energy pundits who are familiar with the international energy scene, India could buy LNG from Russia’s Sakhalin-II at favourable prices and swap it for Qatari LNG going to Japan and South Korea. This is not feasible today as neither Japan nor South Korea will break Western sanctions. But it will become possible in the post-Ukraine scenario. The world cannot afford a prolonged war in Ukraine. Russian LNG presents a cheaper energy option for everyone and the benefits are best shared. Any deal with Russia on LNG supplies will also have a sobering effect on Qatar which has dominated the field and tends to dictate prices in the absence of a credible competitor”.

There is no denying the fact that India is wrestling with an extremely difficult situation on the energy front. It ranks fourth among LNG importers and third among oil importers, with domestic production consistently going down. The swap deal that I suggested was meant for a specific area – very different from financial swaps and options that are important elements of normal oil and gas trade. What I have suggested is a swapping of physical cargoes.

Let me amplify on this with two examples.

Let us take Japan and India. Let us say that India agrees to buy LNG from Sakhalin and the cost of shipping works out to $ 2 per MMBTU. Japan also buys LNG from Sakhalin and the cost of shipping is only $ 0.50 per MMBTU because of the proximity to the source of gas. And now let us assume that Japan buys LNG from Qatar and it costs Japan $2 per MMBTU to ship it to Japan. India, on the other hand, buys LNG from Qatar and it costs $0.60 per MMBTU to ship it to India. So technically India could deliver her Sakhalin LNG to Japan and take an equivalent amount of Japan's Qatar LNG and bring it to India.

Under the swap arrangement, Japan could end up saving $1.50/MMBTU while India would be able to reduce its costs by $1.40/MMBTU. This assumes that the underlying LNG has the same specifications. If the specifications are different (one is leaner LNG when compared with the other), then an adjustment can be made for that in monetary terms. The main idea is to save on the cost of transportation.

The second example looks at a way to beat the Western sanctions. We are not dealing with swap arrangements here but they have the same impact. Let us take Russia and Iran. Let us say Iran consumes 1 million barrels a day domestically. Russia agrees to supply a million barrels a day to Iran. For a small charge, Iran provides a million barrels a day to India. India saves on shipping costs and Iran makes money by helping Russia beat sanctions. Russia could use China or India in the same way. If China and India have surplus refining capacity, then Russian crude could flow to India and China and these two countries, in turn, could supply petroleum products to the rest of the world. So, there are multiple ways to skin the cat. And I am pretty sure that some of these things are already happening with Russian crude.

I wrote the piece in the context of the news report that the US, which is already a crude oil exporter, will soon emerge as a natural gas exporter as well. India has, of late, been importing crude oil from the US though the quantity is not large. Before the Ukraine war, Russia only had a negligible share in India’s total oil imports. Once the Ukraine crisis ends, this could revert to pre-war levels. Both Russia and the US are too far away from India to make continued imports of oil and gas viable. This will never happen unless transportation costs come down. And that is where the relevance – and advantage -- of swapping physical cargoes comes in.

The cargo swaps I suggested is possible only if there are two interested parties. It will be easier to seal swap deals in the case of imports from Russia than from the US. Japan and South Korea are LNG importers from both Russia and Qatar. India’s import from Russia can go to Japan and Korea, and their imports from Qatar can come to India.

This swap arrangement may not work in the case of LNG imports from the US. For one thing, the west coast of the US does not have facilities for LNG export. Once the US emerges as a net exporter of natural gas, it may create LNG export facilities on the west coast. US LNG will prefer to deal with the European market. Quite a few European countries have been importing LNG from Qatar. If India ties up with the US for its LNG, its cargoes can be sent to Europe; and Europe’s LNG from Qatar can reach Indian shores. The focus should be on maximising procurement from nearby locations which minimises transportation cost.

Crude oil is a simple product and is easily available. But that is not true about natural gas because availability is unpredictable. This is precisely why a country like India, a very large consumer by any reckoning, needs a regular source for supply of gas.

India should either purchase gas fields abroad outright or pick up a substantial equity participation in large gas-producing projects. At present, India does not have any such stake. Its existing long-term gas purchase contracts  will not match the enormous benefits that could possibly flow if India is able to hook into a really big gas source. The Qatar deal is simply a trading arrangement – and its benefits are considerably limited.

It is time that India’s energy planners woke up and started tossing innovative solutions. Petroleum minister Hardeep Singh Puri should take the lead and kick-start such an initiative.