High LNG prices, growing natural gas output to impact imports till H1 FY23

New Delhi, January 24 The growth in production of natural gas in the country as well as the continuous uptick in the prices of liquified natural gas (LNG) could impact India’s LNG imports during Q4 FY21 as well as for the April-September period next fiscal, ratings agency Fitch said on Monday.

“We believe rising domestic production and higher spot LNG prices are likely to constrain LNG imports during Q4 FY22 and H1 FY23. Natural gas consumption in April-November 2021 was up 9 per cent y-o-y, as India’s economy recovered from the impact of the pandemic. However, LNG imports were down 2 per cent, as the higher demand was fulfilled by a steep rise in domestic production,” Fitch Ratings said.

Lower LNG imports were also impacted by the high spot LNG prices. Imported LNG constitutes over half of India’s natural gas consumption (FY21 – 55 per cent).

Rising domestic production and the price-sensitive nature of the Indian market may influence the share of LNG imports in the near term. Nevertheless, the agency expects imports to rise steadily over the medium term as consumption picks up pace, it added.

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Production numbers

During April-November period this fiscal, India’s LNG production stood at 22,222 million standard cubic meter (MSCM), while imports totalled at 21,854 MSCM taking the country’s consumption to 44,075 MSCM. In FY21, the country produced 27,784 MSCM of LNG and imported 33,031 MSCM. The country recorded a consumption of 60,815 MSCM in FY21. India Ratings and Research (Ind-Ra) in a report said that LNG imports continued to decline in November 2021 at 14.03 per cent y-o-y and 8 per cent m-o-m to 2.49 billion cubic meters (bcm). The lower imports also led to the lower capacity utilisation of LNG ports. “The imports were lowest since January 2021 where they stood at 2.42 bcm. While the domestic natural gas production has increased y-o-y, supporting the higher natural gas demand, the decline in imported LNG is primarily attributed to high LNG spot prices. Spot Asian LNG prices have been on an increasing trend with average LNG price for February delivery into North East Asia averaging $33.20-34.4 per million British thermal unit (mBtu), after a softening from the record high of $56 per mBtu,” it pointed out.

Dip in power sector

The power sector, which is most sensitive to LNG pricing, reported the largest dip in natural gas imports at 0.13 bcm, down 61.3 per cent y-o-y and 62.4 per cent m-o-m. “Ind-Ra estimates a viable LNG price of around $6 per mBtu for the power sector to operate in, therefore continued high spot prices could lead to a lower LNG demand from the sector. Other major natural gas consuming sector city gas distribution is relatively immune to high import prices, due to their priority domestic gas allocation and continued competitiveness to other fuels. Fertilisers benefit from being under a regulated pooled gas price mechanism,” the agency added.

Domestic production, demand

On domestic production of natural gas, Fitch Ratings said India’s crude oil production declined by 3 per cent y-o-y during April-December 2021, while natural gas production rose by 22 per cent.

The steep rise was in line with the agency’s forecasts due to a production ramp-up at the country’s KG-DWN-98/2 and KG-D6 deepwater projects. Domestic demand from key end-user industries, including fertiliser, city-gas distribution and power, picked up amid low domestic gas prices. “We expect India’s natural gas production to further increase over the next 12-18 months, driven by expanding production at the new fields, before stabilising in FY23,” It said. The government raised domestic gas prices for October 2021-March 2022 to $2.9 per mBtu, from an all-time low of $1.8 per mmBtu during April 2021-September 2021. The price is linked to prices of four global LNG benchmarks, including Henry Hub and National Balancing Point, in the previous 12 months and is implemented with a quarter’s lag. “Global gas prices rose during 2021 and we expect global prices to stay high in Q1 FY22, driven by high demand in Asia, production bottlenecks and uncertainty around Russia’s Nord Stream 2 pipeline as well as limited gas in European storage facilities. This is likely to result in higher domestic gas prices during H1 FY23, helping boost profitability at upstream companies. However, the impact on upstream companies will be marginal, due to its low share in the revenue mix,” Fitch said.

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