Price rise delays India’s LNG expansion plans

India’s plan to increase the share of LNG in it’s total energy mix, gets stalled due to rising gas prices in the backdrop of increased demand from Europe. Consequently, India’s reliance on coal has increased over the past few months. IBT analyses the global dynamics of LNG and the long term outlook for India.

• A sustained demand of LNG from Europe is being met by new supplies from US domestic gas market.
• Price sensitive nations in South Asia and China have reduced purchases of LNG due to price hike, induced by rising demand in Europe.
• India has decreased LNG imports and shifted to conventional sources of energy like coal, leading to higher greenhouse gas (GHG) emissions.
• Amidst all the volatility in global LNG market, diversifying import sources and building strategic reserves (PPP) can ensure energy security for India, while aligning with environmental goals. 

Image Credit: Pexels

Russia’s invasion of Ukraine has impacted energy markets across the world, contributing to severe energy price volatility. To replace Russian pipeline gas imports, Europe turned to liquefied natural gas (LNG), driving prices to record levels.

Interestingly, this rise in prices led to a contraction in Chinese gas demand as well as a drop in South Asian imports.  Registering the biggest drop in LNG imports, price sensitive South Asia opted for alternative sources to meet its energy demand. Along with new US LNG supply, this has supported Europe’s need for LNG.

Russia cutting gas supplies

Europe, and in particular Germany, have been heavily reliant on Russian gas for its energy requirements. But over the last year, Russia has cut its gas supplies to EU states by 88%. Wholesale prices of gas in Europe have more than doubled over the same period.

Nord Stream 1, Russia’s largest gas pipeline to Europe, has been closed indefinitely. The undersea pipeline (1,200 km) under the Baltic Sea from the Russian coast to Northeastern Germany is owned and operated by Nord Stream AG, whose majority shareholder is Russia’s state-owned company Gazprom. Germany postponed granting it an operating license because of Russia’s invasion of Ukraine. Consequently, Russia was reducing gas supplies through Nord Stream 1 for a number of months and it was completely shut since August 2022. These gas shortages severely affected international gas market dynamics.

Europe’s reaction to supply cuts

1. Destructing demand for gas:

EU member states have agreed to cut gas usage by 15%. Germany relied on Russia for 55% of its gas and has managed to reduce it to 35%. The German government hopes to reduce gas usage further by 2% by limiting the use of lighting and heating in public buildings. It is also increasing its use of coal and extending the life of thermal power stations, which it had been planning to shut down – despite the negative environmental impact.

2. Shifting to LNG imports:

To fulfil energy demand, EU has increased LNG imports from the US. US LNG exports averaged 11.1 billion cubic feet per day (Bcf/d) during the first half of 2022. The US has more LNG export capacity than any other country and is its second largest exporter. According to the table below, the US exported a total of US$ 26.93 billion of LNG in 2021 and registered a 106% YoY growth.

Top LNG exporting countries

Source: ITC Trade Map

According to Shell LNG Outlook 2023 report, US started exporting more LNG to EU than to Asian nations. The statistics reveal a fall in LNG exports to Asia in Nov 22 as compared to Jan 21 along with a rise in exports to Europe over the same period.

On analyzing world’s top LNG importing countries, China, Japan, Korea, India and Taipei were the top importers in 2021. But as a region, EU was the highest importer.

World’s top LNG importers

Source: ITC Trade Map

Global trade flows somewhat reversed in 2022. China, which registered the highest import growth of LNG in 2021, reduced imports in 2022.  According to the Shell Outlook 2023, the world witnessed a total LNG trade of 397 MT in 2022, where China’s LNG imports registered a negative growth of 15%. On the other hand, LNG imports for European countries like France, UK, Netherlands, Spain, Belgium and Italy, showed a positive YoY growth (0-10%).

Europe’s demand for LNG impacted other markets

Europe’s increased demand for LNG to meet its energy requirements has complicated matters for other markets, especially the more price sensitive ones. China has started construction of LNG terminals, whereas Japan developed a 20-year pool for gas generators energy transition costs, allowed direct government energy purchases and established strategic gas reserves. Australia has introduced gas and electricity caps and Singapore also allowed direct government purchases of gas and LNG with South Korea giving tariff reliefs to gas customers.

India also reduced the quantity demanded of LNG during the same period, recording an overall negative YoY growth of 16.51%. It has imported majorly from Qatar, UAE, US, Oman and Australia in 2023 (Apr-Jan), whereas imports from US recorded a negative YoY growth of -33.72%. Correspondingly, a 101% hike in imports from Australia was also observed.

India’s top 5 LNG import sources and total imports

Source: Ministry of Commerce and Industry, figures in thousands

A change in energy source:  India’s coal utilization during the same period registered a hike, resulting an increase in emissions. According to Shell LNG outlook 2023, a 5.5% increase in GHG emissions in 2022 was witnessed, way above than the world average increase of 2.2%.

India was expected to expand its LNG import capacity by 40% in 2022 with commissioning of new terminals but the targets were missed after LNG prices skyrocketed, reducing demand and disrupting import plans.

As the world’s fourth largest LNG buyer, India currently has six LNG import terminals with a combined capacity of 42.5 million tons per year. Another 17 million tons was expected to be added, but this was only likely to add pressure on the existing terminals due to lack of downstream takeaway capacity. Half of the six operational terminals are operating at around 20% of capacity. The draft LNG policy however outlines a strategy to increase Upstream, Mid stream and Downstream industry by building infrastructure and R&D capacities.

Way ahead

India’s energy demand is likely to rise due to huge population, a burgeoning middle class and rising domestic economic activity, due to which there is an urgent need for becoming environmentally sustainable. The government has thus set a goal to increase the share of natural gas in the country’s total energy mix to 15% by 2030, up from about 6.3% currently. State-run oil and gas companies try to get in talks with gas producers across the world for long term LNG contracts, but volatile energy market having multi-year high price levels offer expensive spot purchases.

Indian public sector oil and gas majors Indian Oil Corporation Ltd (IOCL) and GAIL have been looking for long term contracts for LNG after Russia’s Gazprom defaulted on contracted supplies to GAIL, even as spot prices of gas far outpaced the prices pegged under the contract.

With this background, India is reaching out to the US, UAE, Saudi Arabia and Iraq for LNG supplies with prices coming down lately. Spot LNG prices fell to about US$ 14-15 per metric million British thermal units (mmBtu) from an average of US$ 45 per mmBtu in July-Sep, 2022.

India’s plan to meet energy transition through a gas based economy might have got temporarily delayed with supply side shocks for LNG, but falling prices are helping the nations regain trust. Diversifying import sources and building strategic reserves (PPP) will be vital to ensure energy security in future.