Explained: India And The Complicated Global Dynamics Of LNG

Explained: India And The Complicated Global Dynamics Of LNG

by Venu Gopal Narayanan - Thursday, April 27, 2023 08:50 PM IST
Explained: India And The Complicated Global Dynamics Of LNGPM Modi in Qatar in 2016 (PMO)
  • As India faces a challenging decade ahead, its increasing demand for LNG can be a valuable leverage, provided it is employed judiciously.

In 2014, the government of India decided to increase the import of Liquified Natural Gas (LNG). It was a turning point in our engagement with the world because, LNG has increasingly become as important a commodity as crude oil in the past two decades, with a set of commercial and geopolitical dynamics that don’t overlap neatly with oil.

Consequently, it is important to study and understand this sector, particularly after the severe global disruptions in energy trade following the Russo-Ukrainian war last year, and the West’s radical decision to try and end its dependency on Russian energy, as the ramifications of these factors will continue to impact India for some years to come.

Indian LNG imports nearly doubled between 2014 and 2020 before experiencing a slowdown in 2021 because of the Wuhan virus pandemic, and a drop of 20 per cent in 2022 because of global shortages caused by the conflict in Ukraine, when Europe’s LNG requirements went up sharply.

Nonetheless, India is already the fifth largest LNG market in the world, behind Europe, Japan, China, and South Korea, with our demand set to grow manifold in the coming decade. Much of our LNG imports are used for manufacturing fertilizers, transportation and power generation (although power generated from gas has actually declined since a peak in 2010, in both absolute and relative terms).

A chart below shows how LNG imports have risen since 2014.

Explained: India And The Complicated Global Dynamics Of LNG

Our biggest LNG supplier has traditionally been Qatar. Until 2014, it used to supply around 85 per cent of our requirements. But from 2015 onwards, India has set a cap on imports from Qatar, as it seeks to reduce dependency on that country, and strike better long-term deals with new suppliers like America and the United Arab Emirates (UAE).

These decisions are as much a function of business sense, as they are a function of geopolitics. The truth is that a glut is looming in the LNG sector. As a result, like with crude oil, where too, there is a glut, it will be the buyer who dictates terms rather than the seller.

It may not seem that way when we see look at how steeply gas prices rose last year. But that is because the spot market behaves in a Shylock-ian manner to a mercenary degree during times of crisis, when it gets a larger share of the pie. When gas supplies from Russia to Europe were disrupted by the West’s sanctions on Russia, the spot price for LNG to Europe spiked in August 2022 to $100/MMbtu. 

(In comparison, when Russo-European ties were normal, the average price of piped gas from Russia was around $5/MMbtu. No wonder Europe is in such a mess!)

Thankfully, although the spot market is a seller’s one, most LNG contracts are long-term ones, less susceptible to market vagaries. For proof, the spike Europe suffered is double of what the Far East suffered, simply because China, Japan, and South Korea buy most of their LNG through long-term contracts.

Explained: India And The Complicated Global Dynamics Of LNG

Of course, as the chart above shows, these ‘convenient’ price rises aren’t restricted to one commodity or one geography, since everyone enjoys making money in a crisis – especially ‘friends’.

Norway made four times more money in 2022 from energy sales to Europe than it did in 2021, simply because international prices went up when the West sanctioned Russia. The price of domestic American natural gas, too, went up four times in 2022. The spot price of Indonesian LNG shipped to Japan doubled from 2021 to 2022, as did the price of American LNG exports.

And they all fell sharply when the Russians slashed piped gas prices in January 2023! 

Swarajya predicted that this would happen a full year ago. And this is the international hypocrisy which countries like India have to contend with as they labour to ensure their energy security.

Now, looking forward, and with specific reference to Qatar and India, how is the LNG market going to shape up in coming years?

India’s requirements for LNG will continue to rise. A sizeable portion of that demand growth will be in the fertilizer sector, as India continues to invest heavily in ammonia plants – a key ingredient for making fertilizers. As per industry reports, India will clearly dominate global ammonia capacity addons by 2025. As a chart below shows, this surge is already on in a big way (note the lift-off since 2017).

Explained: India And The Complicated Global Dynamics Of LNG

But on the supply side of the coin is an impending problem of excess. It has multiple facets.

A large reduction in LNG demand will happen when the madness which has presently gripped Europe passes, when her politicians finally regain independence of thought, and they accept that it makes no sense to buy LNG when they can get piped has from Russia for a third or a fifth of the cost.

Meanwhile, Norway continues to make a string of gas discoveries year after year, the latest, largest one being ConocoPhillips’ Warka. Obviously, Europe’s LNG demand will reduce by that much more, when these Norwegian fields are commercialised and their gas is piped to Europe and the United Kingdom.

At the same time, a few countries have recently embarked upon their LNG journey with vigour. The UAE is building a massive LNG terminal at Fujairah which will raise their export capacity by 260 per cent in a few years. They will be increasing exports to India soon, and have already contracted a floating storage vessel for mooring at one of our terminals on the west coast.

Here's an interesting fact very few know: since 2019, the UAE exports around half of its LNG to India, and LNG imports from UAE have ballooned from a mere two per cent of the India pie to a substantial 14 per cent in 2021.

Explained: India And The Complicated Global Dynamics Of LNG

Iran, which has the second-largest reserves of natural gas in the world, has finally thrown its hat into the LNG ring. Last year, they announced that their first LNG plant would be set up through a mega joint venture with Gazprom of Russia, with a capacity of around 15 bcm. That is roughly equal to what Algeria, Indonesia and Oman export at present. The first LNG shipment is set to sail in 2025.

Put together, that is depressing news for Qatar. As it is, they have had to suffer an unwritten cap on their LNG exports ever since they ramped up capacity in 2011. Their exports have been stuck at a plateau of around 105 billion cubic meters (bcm) since then.

This is the result of dadagiri (for want of a better word), while Australia and America rushed to become two of the three largest LNG exporters in the past decade.

Explained: India And The Complicated Global Dynamics Of LNG

Now, Qatar will have to contend with aggressive new competitors as well, even as it pursues another round of capacity expansion. 

But to whom will they sell that additional gas when the existing market space has been so thoroughly occupied by Australia and America? Worse, would Qatar be able to even hold on to its existing market share, once Iran and the UAE get going, or if demand for LNG reduces when Russia resumes piping gas to Europe?

It’s a cause for genuine, existential worry, because under such a scenario (which is already approaching fast), the only way Qatar can survive is by slashing prices. But it is doubtful if this tiny Arab nation, which has few friends in its region, would have the political clout to see such a move through. If they tried, and if history is a good teacher, we can most probably expect a regime change instead. This is how merciless the real world is.

Ominously, for exporters, two gas-rich countries aren’t on the list yet: Saudi Arabia, which currently follows a policy of utilizing is substantial gas reserves for domestic use only; and Turkmenistan, which has a full 7 per cent of global reserves, but is unable to commercialise its bounties adequately because of its geographical location, and the lack of a secure land route to India, its nearest, largest potential market

All of this is good for India, but we will need to progress judiciously, because the exporters’ stakes are so high. Qatar needs India more than India needs Qatar. But so is the case with Australia, whose exports to India have dropped to 1 per cent in the past few years; and America, who now supply close to a sixth of our LNG needs; and Nigeria; and Oman; and Angola; and Russia.

In fact, as a table below shows, it is a long list of countries who are eager to supply LNG to India, and this list is set to grow.

Explained: India And The Complicated Global Dynamics Of LNG

Every row is a chapter in international relations, and every column, one step forward by India towards its due place in the sun. For exporters, India represents one of the few available avenues to avoid getting trapped in an LNG glut. For India, its growing LNG requirements is the powerful leverage it will have to employ wisely, as it navigates this tricky decade. 

What course that engagement takes will be one of the defining features of modern geopolitics.

Venu Gopal Narayanan is an independent upstream petroleum consultant who focuses on energy, geopolitics, current affairs and electoral arithmetic. He tweets at @ideorogue.
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