Over the last few months, we have seen a lot of articles discussing a potential excess of LNG in the short run. Most experts highlight three key industry dynamics - low LNG global pricing, excess supply in the short term especially with new production capacity coming online and long-term surge in demand for LNG. The key focus for LNG suppliers has been major markets such as Japan, Korea and China. The hypothesis that poor air quality in China will lead to switching from coal to gas might not be true as China coal companies have $1.3 Trillion of debt and not an easy task for China to switch from coal to natural gas for power generation. Similarly, in Japan, the completion of nuclear-power plant maintenance will reduce the dependence on LNG as fuel for power generation.
Clearly, as we see changes in major LNG markets, it might be time to look at other areas that need gas. India is a region with limited gas availability but has several users that have a large demand for gas. Its ~25GW of gas-based power plants are operating at ~22% Plant Load Factor (PLF) and would like to get the stranded assets operating at much higher PLF’s. The city gas distribution (CGD) network is growing and the current administration plans to have 70% of the country’s population on CGD network in the next 2-3 years. Furthermore, the fertilizer and industrial users are growing thereby increasing the demand for natural gas, a feedstock for these industries. Clearly, there is a demand for LNG in India with its power, city gas, fertilizer and industrial users.
Recently, Narendra Modi was re-elected as Prime Minister and won the elections with a large majority. He has been pushing for energy reforms in his first term and will continue this trend including a focus towards LNG growth in India. The government is planning to restart a revival scheme for gas-based power units and the government has allocated Rs.1,035 crore (~150 Million USD) to the Power System Development Fund (PSDF) in the Union budget to be used for subsidizing distribution companies (Discoms) to purchase electricity from stranded gas power units. Per the budget documents, the State Governments will remove barriers like cross subsidy surcharges, undesirable duties on open access sales or captive generation for Industrial and other bulk power consumers. A package of power sector tariff and structural reforms are to be announced soon that might remove the import duty on LNG.
Furthermore, the government of India is looking at splitting Gas Authority of India Limited (GAIL) into two separate business entities. The pipeline business might be a separate entity with the government divesting a majority stake. This move will provide access to multiple entities to transport gas from LNG terminals to consumers.
Clearly, there is an opportunity to partner with local players, participate in the infrastructure build out and grow the markets not just in India but also in other countries that have similar market dynamics. It’s not going to be a walk in the park, but might be the way for current LNG players to diversify their portfolio while creating demand for LNG.