Delinking of new gas contracts from oil augurs well for India

India imports LNG (liquefied natural gas) at very expensive rates due to huge domestic demand and severe fall in domestic gas production due to Krishna Godavari issue.

But that may soon change as world over new gas contracts are being negotiated at cheaper rate and are increasingly getting delinked from oil prices.

GAIL India last year signed a deal with US-based Cheniere Energy Partners to buy 3.5 million tonnes LNG for 20 years, prices of which are linked to Henry Hub benchmark in US.

The landed cost of LNG could be lower than $10/mmBtu (million metric British thermal units).

India at times has to buy spot LNG at prices as high as $18.5-19 per mmBtu.

Following this contract, GAIL had also asked Petronet to renegotiate its expensive deal with Exxon Mobil for Australia's Gorgon project, where landed cost of LNG on Kochi terminal could be as high as $16/mmBtu.

Recently, Japan's Toho Gas signed its first long-term contract based on Henry Hub gas prices to buy 300,000 million tonne/year of LNG from the proposed US Cameron LNG export project at $10 per mmbtu as against $15-$17/mmBtu earlier.

Increasingly world over there is demand to delink gas prices from oil prices and Henry Hub is becoming an important benchmark.

While oil is widely used, gas has issues of availability and accessibility. This has led to huge price differential in LNG prices across the globe.

But trading in gas is likely to steadily increase with development of new buyers and sellers across the globe. "More and more transnational gas pipelines are being talked. For example, China has created east west pipeline from Kazakhsthan to Shanghai. Thus, more gas contract and trading will take place, which will help gas to emerge as independent commodity rather than being a sub product of oil," said Akhil Jindal, executive director at Welspun Corp, which supplies steel pipes to several leading oil & gas companies across the world.

Gagan Dixit, an analyst with Quantum Capital, said that when gas becomes a tradeable commodity, it will have its own benchmark pricing.

"With new LNG terminals being set up by Singapore, Canada, India and Australia, trading in gas will significantly improve. While the US and Europe have their own benchmarks to discover gas price, Asia so far had no such benchmark, but with Singapore building a second receiving terminal, LNG could start trading as a commodity in Singapore Exchange as early as next year," he said.

India, in particular, is likely to benefit from this as the country has a huge demand supply gap at present.

India is 13th largest gas consumer and fourth largest importer in the world, with a demand of 286 million metric standard cubic metre per day (mmscmd) against a production of 80 mmscmd.

India is not able to arrive at market price for gas as the country doesn't have gas coming from all directions. Several gas pipeline projects like Iran Pakistan India (IPI) and TAPI have been pending for more than a decade now.

"India needs 4-5 pipelines from neighbouring countries. We have been talking about prices from last 20 years, the point is gas pipelines are always more economical up to 2,500 km. Rather than talking of price, they should just put up the pipeline and let the gas start flowing," Subodh Kumar Jain, director, SAGE, which is promoted by the Siddho Mal Group.

SAGE, or South Asia Gas Enterprise, is a proposed West Asia-India deepwater pipeline, starting from Iran. The project if sees the light of the day would supply 31.1 mmscmd of gas per day for 25 years.

"Gas prices variability is largely function of transportation inefficiencies. If infrastructure improves gas price will automatically come down, said Jindal.