The Hindu Business Line : Pricing LNG

BUSY DAYS THESE are for those in the LNG (liquefied natural gas) business. Globally, the demand for LNG is rising with new countries joining the list of importers. Six new LNG trains have come on stream and, with de-bottlenecking adding to output elsewhere, the global production capacity is up by 25 million tonnes per annum. Over 55 mtpa of new production capacity is under construction and a staggering 200 mtpa in various stages of planning. Shipyards have orders for 55 vessels for delivery between 2004 and 2006 and the enquiries for new ones, including a new class of `super' LNG tenders, will keep them busy for many years. Closer home, the scenario is no different. Some 20 shipments have arrived since LNG imports were initiated at Petronet's Dahej terminal early this year. Barring unforeseen developments, Shell's Hazira terminal should start operations shortly while Petronet's second terminal in Kochi still remains uncertain, though being pushed by the Kerala Government for early implementation. Happily, prospective consumers have started lobbying with the Centre on how to access this new source of energy by paying as little as possible.

Against this backdrop the controversy over whether to import LNG on f.o.b. (free-on-board) basis or ex-ship (cost-insurance-freight; c.i.f.) is unseemly. The guidelines of the Director-General Shipping favouring national bottoms for LNG import have not been well received, certainly not by Shell, which insists on complete freedom in the choice of ship as it prefers spot purchases to long-term contracts in line with the customer's short-term requirements. Whether such a buying policy is in tune with the global trend of long-term purchases is another matter but one thing is certain: With 30 new ships delivered, some of the constraints on short-term trading evident in early 2002 are now gone. There are indications that such an un-designated trade pattern could become common in the coming days as buyers seek to diversify their supply sources.

The Government's insistence on a policy to favour the national carriers too is not surprising. After all, the entry barrier in LNG shipping is high. LNG-importing countries have tried to protect the national flag in matter of shipments. Even some of the exporting countries backed their national carriers by insisting on c.i.f. contracts. This is because LNG producers and buyers see control over shipping as a strategic advantage and support dedicated long-term deployment. One option, therefore, could be to persuade Shell to place at least one vessel under Indian flag, meaning 26 per cent equity participation of an Indian shipping company in the purchase of the ship. Of course, the vessel need not necessarily be tied up to Hazira shipments; Shell can have the liberty to deploy it anywhere. The real villain is LNG pricing. Major consumers such as power and fertiliser plants are not only averse to long-term gas purchase contracts but also want LNG prices benchmarked to power generation using indigenous coal. This is impractical, to say the least, as the world over, LNG is usually costlier, now more so because of high prices of crude oil. The issue of LNG pricing vis-à-vis other options, therefore, needs to be carefully examined. As for regulating shipment, the Government must remember that it can protect domestic shipping only at the cost of the consumer.

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