Driftwood project on India-us agenda, but pricing remains a concern

The $12 billion worth of annual crude oil imports to India, along with a possible LNG deal, are set to take the energy relations of India and the US to a new high. The energy ties between the two nations had picked up after Donald Trump took over as President of the United States in 2017.

Under the deal, India is to get a share in natural gas from the proposed Driftwood project in Louisiana.

Petronet LNG had signed a deal with US’ Tellurian for the project last September. The over-$2 billion deal is likely to get final shape during the current visit of Trump.

With a rise in imports over the past few years, India has become the fifth-largest buyer of LNG from the US. However, with LNG prices dropping to record lows, GAIL and Petronet are likely to push for realigning long-term contracts.

“The gap between the spot and long-term deals are widening, which is a cause for concern. We will take a call on this at an appropriate time,” said Manoj Jain, chairman and managing director of GAIL. Currently, the spot prices of LNG are hovering around $3-4 million standard cubic metres per day (MSCMD).

GAIL has a 20-year contract with Dominion Energy Inc’s Cove Point plant and Cheniere Energy Inc’s Sabine Pass facility in Louisiana to buy 5.8 million tonne per annum (MTPA) of US LNG. The cumulative import of 27,433 million metric standard cubic metre (MMSCM) for the current financial year (till January 2020) was higher by 12.9 per cent, compared with the corresponding period of the previous year.

US LNG is primarily swapped by Indian companies since the shipping cost works out to be high.

“In general, most of the LNG contracts in the past were indexed to oil and since oil prices were high, LNG rates were also high. When the US LNG contracts started linking price to the Henry Hub gas price, it seemed like an attractive alternative. However, since then, oil prices have come down, and some have been re-negotiated, reducing the delta between oil-linked and gas-linked LNG contracts,” said Aditya Gandhi, vice-president (technology, energy and commodities) Publicis Sapient.

This made some of the old contracts, like the one signed by GAIL with Cheniere Energy and Dominion Energy Cove Point LNG, less attractive. It is important to negotiate the terms more aggressively with the US counterparts, so that the landed cost of LNG in India is not significantly higher than other sources, he said.

Crude oil imports have increased over the last few years, from 1.9 million tonne (mt) in 2017-18 to 6.2 mt in 2018-19. The US became a part of India’s energy basket again in January 2017, after about 42 years. During the first six months of the current financial year, India imported 5.4 mt crude oil from the US. The shortfall in imports from Iran and Venezuela was made up by the US supply.

“Over the past six months, there have been multiple instances of unrest in West Asia. This created fear of gas and oil supply disruption in the region. Therefore, it is important that India diversifies its energy supply chains to include sources like the US, Russia, and Australia,” said Gandhi.