Ukraine conflict: India's LNG firms see rising costs, shrinking supplies

Rising costs and shrinking supplies will impact major expansion plans

India’s liquefied natural gas (LNG) import terminals were once known for high utilisation rates, more than twice the global average of LNG regasification facilities. The Covid-19 pandemic, and the Russia-Ukraine war, have short-circuited this record and jeopardised upcoming plants.
 

Overall, utilisation of the installed LNG capacity was around 59 per cent last fiscal, and is expected to drop by half if all the plants come up and LNG imports do not grow substantially, industry officials said. As of fiscal 2022, Petronet LNG operated more than half of India’s LNG import capacity or 22.5 million tonnes (MT) a year. Shell, Gujarat State Petroleum Corporation (GSPC), GAIL and Indian Oil Corporation (IOC) operated the rest.

Usage of India’s six LNG facilities with functioning import capacity of 40.6 MT a year averaged only 50 per cent in May, according to calculations based on oil ministry data. Utilisation ranged from 84 per cent for Dahej to 12 per cent for IOC’s Ennore facility. That compares with 84 per cent average usage in the pre-Covid April-July 2019 period when total installed capacity was 26.7 MT a year. LNG imports grew to a record that fiscal, with utilisation in the first four months ranging from 109 per cent for Petronet’s Dahej to 3 per cent for Ratnagiri. The average usage at 84 per cent was skewed by high utilisation levels at Dahej and Shell’s Hazira LNG.

We are doing much better than the global average of 39 per cent, said Vinod Kumar Mishra, CFO, Petronet LNG, in an analyst call, pointing to 87 per cent utilisation of the 17.5 MT a year Dahej facility on the west coast in Gujarat.
 

Petronet LNG is a standout because of access to less expensive long-term contracts. Committed clients in GSPC, GAIL, BPCL and IOC use the facilities to import and regassify the fuel, to supply fertiliser, industries and CGD (city gas distribution) plants.

Usage of Dahej dropped by only 25 percentage points in May from April-July 2019 compared to a drop of 61 percentage points for Shell’s Hazira terminal.
 

The rate of decline in utilisation registered in May could worsen as Indian companies propose to more than double capacity in the next five years, from 42.5 MT a year now. Adani, Total, Petronet, Swan Energy, H-Energy and HPCL, among others, plan to add 49 MT a year of capacity.
 

But ratings agency CRISIL expects only 32-35 MT to come up by 2027 because of low usage rates. ICRA forecasts 26 MT a year to be added by March 2025. But no one is clear on how much of these facilities will be utilised because the facilities were planned when LNG was affordable to Indian consumers.
 

“Utilisation levels are expected to be depressed due to new capacity additions and high gas prices,” rating agency ICRA’s vice-president Prashant Vashisht said.
 

“Though two or three terminals are expected to be commissioned over the next few years we remain cautious of the utilisation rates, especially if the supplies are not tied up,” Bhanu Patni, associate director, corporates, India Ratings & Research. At least over the short term, the overall demand of imported LNG is expected to remain weak, he added.
 

The success of India’s LNG import terminals hinges on growing fuel purchases on a long-term basis, affordable spot LNG, and adequate pipeline infrastructure to evacuate methane molecules to customers.
 

Delayed pipeline projects or lack of transport infrastructure was always an Achilles heel for India’s gas business, impacting utilisation at Kochi, Ratnagiri and Ennore. But of greater concern are soaring LNG prices, and the inability of Indian companies to secure long-term fuel contracts, which China successfully concluded during the pandemic, at favourable indexation to crude.

Kochi and Ennore operated at 20 per cent and 12 per cent respectively in May, oil ministry data shows, because of lack of pipelines to push gas to users, officials from Petronet and GAIL said. After the Kochi-Mangalore pipeline was commissioned last year usage rose to 28 per cent; once the Coimbatore-Bengaluru link is operational, enabling Petronet to link to the national gas grid, usage will further increase, Mishra said. Years of delays in constructing a breakwater at Ratnagiri LNG, enabling operation of the facility during the monsoons, has crimped functioning capacity to 2.9 MT, or 58 per cent of 5 MT a year of installed capacity.

Dahej is productive despite the pandemic or the Russia-Ukraine crisis because most of its supplies are on a long-term basis, with oil-indexed prices of $11-$14 per million Btu, at a quarter of prevailing spot rates, a Petronet official said. We don’t depend on spot purchases, the official added.

But other existing and upcoming LNG facilities rely more on spot LNG, which was dirt cheap in 2020 but has since climbed to over $50 per million Btu this year. LNG terminals with long-term tie-ups would be better placed than those without term contracts, Vashisht said. CRISIL expects terminals with 40 per cent use to break even.
 

Prospects for LNG have turned gloomier since March, after Russia invaded Ukraine. Demand growth will not happen amid volatility and high prices, officials from GAIL and Petronet LNG said. It’s a challenge to sustain existing demand if prices of the fuel continue to rise in this fashion, a Petronet official said. Kochi’s customers, including MRPL and OMPL, are switching to alternative fuels to run their plants.
 

LNG imports may slow or decline for the third consecutive fiscal year. CRISIL expects purchases to grow just 1-3per cent this fiscal from a year earlier. “Soaring LNG prices in the global market, owing to geopolitical tensions as well as low inventory levels, will put pressure on the growth of India’s LNG imports,” said CRISIL research director Hetal Gandhi.
 

In February, CRISIL had forecast 15-17 per cent growth, more in line with an 18 per cent growth in LNG imports in the 2019-20 fiscal when purchases rose by 3.9 MT to 25.6 MT. Prices averaged $7.10 per million Btu in 2019-20, a sixth of current spot levels.
 

However, in the first quarter of FY23, LNG imports fell by close to 10 per cent from a year earlier in volume terms but cost $1 billion more in value terms from a year earlier. In June, imports declined by 9.5 per cent for the sixth consecutive month. In short, there’s no easy way out for LNG facilities for the next few years.