India may face tech, logistical snags as it tries to explore CNG imports

The government's draft policy encouraging imports in compressed form over LNG ignores major technological and logistics hurdles

India’s ambitious plans to explore imports of natural gas, a key driver for a $10-trillion economy, in compressed form (CNG) instead of in liquefied molecules (LNG), may falter in the face of technological and logistics hurdles. A new draft policy encouraging CNG imports on the basis of cost savings will also confuse investors in India’s crowded, but slowing LNG business.

At the peak of Covid-19, in September 2020, then Gujarat chief minister Vijay Rupani approved a proposal for a CNG import terminal by the UK-based Foresight Group, Padmanabh Mafatlal, and Dutch dredging firm Royal Boskalis. Of the Rs 1,000 crore project cost, 70 per cent would be spent on ships and the rest on terminal infrastructure. Billed as the world’s first CNG import terminal, the facility, when ready, would have a capacity of 1.5 million tonnes a year – that compares with 43 million tonnes a year of existing LNG import capacity, and 49 million tonnes in announcements.

Since the US shipped the first parcel of LNG to the UK in 1959, and from the first commercial shipment of Algerian LNG to UK and France in 1964, to around 365 million tonnes of the liquefied fuel traded last year, no country has bothered to ship the fuel in compressed form because of concerns over viability and transportation.

“While there are significant savings with CNG imports compared with LNG imports on the liquefaction infrastructure, logistical constraints will act as a significant roadblock for the viable adoption of CNG imports over LNG,’’ said Hetal Gandhi, director, CRISIL Research. “Despite these significant savings associated with the cost of the shore-side infrastructure with CNG imports vis-à-vis LNG imports, there are major concerns associated with the marine transportation of CNG,’’ she added.

If faster implementation of cheaper CNG facilities as compared to 3-4 years for expensive LNG import plants was a consideration for the Gujarat government, India’s biggest gas consumer, that goal is unmet —the CNG import project, three years after an initial agreement in 2019, is still not ready. Now the Modi government has asked state-run natural gas utilities, Gail and Petronet LNG, to evaluate importing the fuel in compressed form.

There is no detailed communication from the government on CNG imports, officials said. A senior official with one of the utilities said that CNG imports are rare globally. For example, 99 per cent of US gas imports last year came via pipeline with only 0.01 per cent of total gas imports shipped as CNG by truck from Canada. CNG transportation is virtually non-existent, and the cost of a gas molecule today is very high, be it in CNG or LNG form, the official added.

Record gas prices question the government’s logic of cost savings behind CNG imports. Liquefaction, or the cost to liquefy the methane molecules, range from $2.5 to $3.5 per million British thermal units (Btu). Additionally, regasification costs, or the money spent to convert the liquid back to gas, amount to $1-$2 per million Btu. CNG imports avoid these costs because the product can be loaded on to ships directly and offloaded directly into pipelines, thus resulting in savings of almost $3.5-$5.5 per million Btu compared with LNG imports, Gandhi said.

But these savings amount to a fraction of the prevailing spot LNG prices, and will still render CNG imports unaffordable for Indian consumers.

For instance, the ANEA price, the Argus assessment for spot LNG prices for deliveries to northeast Asia, was around $43 per million Btu deliveries in August. CNG imports, therefore, will cost around $38 per million Btu after deducting around $5 per million Btu in savings. But Indian consumers can typically afford only $7-$20 per million Btu, depending on the sector, an industry official said.

This apart, lack of CNG carriers prevent meaningful global trade. The energy intensity of CNG is 2.2-2.7 times lower than LNG, meaning one has to ship significantly larger volumes for import of equivalent LNG, Gandhi said. That will require thousands of CNG carriers, but compared to the global fleet of more than 700 LNG carriers, the number of CNG carriers is only a handful, according to Germany-based market data provider Statista.

The world’s first CNG carrier, the Jayanti Baruna, has a nominal capacity of 2,200 cubic meters, miniscule compared to Qatar’s 266,000 cubic meter LNG tankers.  It will be used to transport natural gas from Indonesian fields in East Java to remote communities located across sprawling Indonesian islands where it is not economically feasible to supply by pipeline.

New Delhi must focus on expanding the use of LNG rather than bringing another form of the fuel to market, an official with a state gas utility said, because of the under-utilisation of LNG terminal capacity.

LNG imports account for over half of India’s gas needs, and the recent escalation in domestic gas prices has prompted gas users to switch to alternative fuels. Imports of the fuel may increase by only 3 per cent this fiscal from a year earlier, hurting usage of existing LNG facilities, said Prashant Vashisht, vice president, ICRA. “Utilisation levels are expected to be depressed due to new capacity additions and high gas prices,” he said.

Yet Indian companies expect to more than double LNG import capacity from an existing 42.5 million tonnes a year. Adani, Total, Petronet, Swan Energy, H-Energy and HPCL among others plan to add 49 million tonnes a year of capacity. Overall utilisation of installed LNG capacity was 59 per cent last fiscal, and new facilities will drag it lower.

CRISIL pegs LNG import demand to grow at 1-3 per cent to 25-27 million tonnes — a far cry from the 18 per cent year-on-year growth recorded in 2019-20 — on account of surging global prices, owing to geopolitical tensions and low inventory levels.  LNG prices averaged $7.1 per million Btu in 2019-20 from $9 per million Btu a year earlier, reflecting the sensitivity of the Indian gas users to rates. Spot LNG costs nearly six times today compared to average 2019-20 values.

Domestic gas use declined 2 per cent in the March to May period after the Ukraine conflict began late February. LNG imports fell by 10 per cent but the value of the purchases rose by $900 million, or 39 per cent, according to oil ministry data. In other words, India’s gas economy is in a hard place between LNG and CNG.