Qatar and India: A Gas Relation Due to Continue

March 23, 2012

 

In the Pacific Basin around 40 percent of gas demand is met by L.N.G. imports from outside the region, mainly from the Persian Gulf (Qatar and Oman, although, given an increase in domestic consumption, the latter is experiencing declining L.N.G. exports) and from Russia. Gas demand is strong in Asia and, in 2010, Japan, South Korea and Taiwan accounted for more than 50 percent of the world's L.N.G. imports. The relentless economic growth of China and India now requires shipments of L.N.G., and according to the International Energy Agency (I.E.A.) gas demand may grow annually as fast as 7.7 percent in China and 6.5 percent in India. In the last five years the two Asian giants have become net importers of natural gas. Both countries have invested heavily, and will continue investing in regasification infrastructure. India's peculiarity is that the country may import gas only as L.N.G. Although the country is in talks with Turkmenistan, Myanmar, Oman and Iran in order to finalized pipeline projects, up to now India has not had any pipeline connection with another country.

According to the Energy Information Administration (E.I.A.), in 2010, India produced approximately 1.8 trillion cubic feet (TCF) of natural gas while consumption attained the level of 2.3 TCF. In practice, India is onow bliged to import around 0.5 TCF of gas per year. And India's natural gas consumption is expected to increase substantially. This is largely driven by the demand in the power sector. Data confirm that 75 percent of gas consumption in the country is related to power generation and fertilizers. But, it goes by itself, that natural gas is expected to increase its share of the energy consumption market as a consequence of India's intention to obtain improved energy diversification, energy security and energy cleanliness.

The rise of Indian imports is also linked to the decline of the domestic production at the Krishna Godavari D6 Block off India's east coast in the Bay of Bengal. In fact, at the beginning of last December, Reliance Industries — this company has a 60 percent interest in the block, then follows U.K. BP Plc with a 30 percent interest and Canada's Niko Resources which owns the remaining 10 percent — saw its gas output drop to an all-time low level of 39.80 million cubic meters (MMCM) per day. And, just in March 2010, the K.G.-D6 production was as high as 61 MMCM per day. This reduction was due to a drop in wells pressure and excessive water and/or sand ingress, which limit gas output. According to the 2006 master plan, K.G.-D6 was supposed to be able to produce 70.39 MMCM per day by the end of 2011. Then, in February 2012 government sources said that by the following April K.G.-D6 block could release an output 66 percent lower than previously estimated. Now, it seems that gas output will decline to 27 MMCM per day. According to the master plan, the block was supposed to be able to produce by April 2012 80 MMCM per day of natural gas. Following this decline, India will be forced to resort to additional imports of L.N.G., said recently government sources.

The majority of India's natural gas production up to now has derived from the western offshore regions, especially from the Mumbai High complex, although the mentioned and much-advertised Krishna-Godavari gas field is located offshore the Bay of Bengal (India's east coast) and exactly there is shifting the center of gravity of the Indian natural gas production. Despite the steady increase in India's natural gas production, since 2004 gas demand has surpassed supply and the country has become a net importer of gas. As explained in table 1 above, India has an interesting geographical position because five out of the seven world's top countries in terms of confirmed gas reserves are close to India. But bringing gas from these countries to India is absolutely a complex task with the exception of Qatar. In specific, the two most interesting possibilities would be linked to Iran and Turkmenistan. But in this regard, it's necessary to underline that building pipelines from Iran (Iran-Pakistan-India pipeline, I.P.I.) and/or Turkmenistan (Turkmenistan-Afghanistan-Pakistan-India pipeline, TAPI) is really complicated because of the very tense political relations between the involved countries. India is also planning to develop unconventional gas, but it's still at an infancy level. Summing up, the only viable short-term solution in order to avoid gas shortages is importing L.N.G.

The problem with L.N.G. in India is that in fiscal years 2010 and 2011 Qatar supplied 90 percent of India's imported L.N.G. This percentage will remain equal in 2012 while it will probably drop to 60 percent in 2013 and to below 50 percent only in 2015 according to CARE Research and Industries. As stated by Eni's Oil and Gas Review 2011, in 2009 New Delhi imported from Qatar 10.29 million tons per annum (MTPA) and in 2010 10.53 MTPA. The remaining 10 percent of gas imports originated instead from other countries, like Algeria, Australia, Egypt, Nigeria, Oman, Russia and United Arab Emirates. Until recently this dependence on Qatari gas has not had a big impact on India's gas imports. But now L.N.G. accounts for 19 percent of India's natural gas, and projections by the Indian Planning Commission indicate that in four years L.N.G. imports will overpass 28.8 percent of the overall Indian gas demand (In India gas accounts for  only 10 percent of the country's primary energy basket versus a world's average of 24 percent, so there is room to grow consistently).

Energy security is a concept widely utilized by both the media and the academic world, but it's quite evident that a crystal clear definition does not exist. The European Commission (E.C.) Green Paper Towards a European Strategy for the Security of Energy Supply (2000) stated that energy has to be considered according to four parameters: availability, affordability, adequacy and sustainability. In the case of India, relying on Qatar for 90 percent of its L.N.G. imports is indeed a risky option in relation to the parameter of availability. The risk resides not in Qatar itself — Qatar is considered a stable and reliable country — but within Qatar's regional security complex, i.e., the Middle East Regional Security Complex (See table 2 above). And here the main risk is linked to transportation. Qatari L.N.G. has to pass through the Strait of Hormuz, the world's most important energy choke point. The Strait of Hormuz, which is located between Iran and Oman, is wide at its narrowest point 21 nautical miles (39 km), but the width of the shipping line is in either directions only two miles, separated by a two-mile buffer zone. The Strait of Hormuz is mainly considered for its importance in relations to crude oil and in fact around 20 percent of the world's oil or 35 percent of seaborne traded oil, passes through the strait (15.5 million barrels per day in 2009). All this said, if some difficult-to-be-built alternatives to the transit through the strait may still be envisaged for oil, gas is much more vulnerable. Qatar currently ships 25 percent of the world's L.N.G. through Hormuz and there is no alternative and present outlet. Shutting off the Strait of Hormuz would mean blocking L.N.G. exports from the Gulf. Similarly, a war in the Gulf area or just simple military skirmishes could endanger the normal trade flow. In this regard, it's important to underline that during the Tanker War of 1984-88  between Iraq and Iran, 546 vessels were damaged in the Persian Gulf and the U.S. was forced to implement a naval response. And in these initial months of 2012, Qatar has been drawing up a contingency plan to maintenance shut down all of its 14 liquefaction plants in case of a blockade of the Strait of Hormuz.

The Strait of Hormuz — Source: WIKIPEDIA

The current possibility of Iran blocking Hormuz is very difficult, but it cannot be completely ruled out (the Iranian military apparently has played a series of large-scale war games during the last several months). In fact, it's quite probable that Iran would never use the Strait of Hormuz option, unless Iran was forced to a last resort action in order to maintain power or countermand an imminent invasion. Going back to India, were to happen such a blockade of the Strait of Hormuz, India won't be receiving 90 percent of its long-term L.N.G. supplies when, as explained above, India's domestic production is declining and conversely gas demand is spiking. Such a position entails too big a risk for the Indian energy security.

India is fully aware about this risky Qatari L.N.G. dependence and since 2008 it has started signing L.N.G. importing contracts with countries other than Qatar. Among them it's worth mentioning Australia, France, Russia and the U.S. Before 2008 India had received L.N.G. only from Qatar. The reason for this linkage with Qatar was principally based on the subscribed prices. In fact, India has very regulated domestic gas prices and consequently importers are in huge difficulties when they have to pay L.N.G. according to high oil-indexed prices. Until now Qatar has been able to propose to the Indian counterparts contracts that have been only loosely linked to the price of oil. The gas market is currently transitioning toward high prices in India following the development of gas fields in offshore deep waters, which require high investments.

LNG Projects in India — Source: Interfaxenergy

This tight relation between India and Qatar has been perfectly evident since 2004 when Petronet (a consortium of state-owned Indian companies and international investors), opened the 5 MTPA capacity Dahej terminal in the Gujarat State after having signed a 25-year contract with Qatar's Ras Gas. This gas shipped by Ras Gas uses the whole capacity of this terminal. The following year, India’s second terminal, the Total-Royal Shell Hazira L.N.G. regasification terminal, started operations. This facility has a 3.6 MTPA capacity and Total provides for 26 percent of the imports, while the remaining free capacity is used on the basis of short-term contracts and L.N.G. purchases on the spot market. And last year this terminal started receiving cargoes from the Qatargas-Shell joint venture. New terminals at Kochi (the Kerala State) and Dabhol (The Maharashtra State) are scheduled to come online in 2012 (the latter should be ready by the end of March or as early as April 2012 with a planned capacity of 5 MTPA), and they could partially help reduce Qatar's share in the overall supply of L.N.G. to India.

Given the current impossibility of Indian natural gas production to satisfy India's demand, L.N.G. is currently the only viable means to increase supply. Domestic gas, selling at discounted prices than those of imported L.N.G., still does complicate the picture because it augments the reduced appeal of the international spot market and could slow the negotiations for long-term supply contracts — although it seems that India is now more willing (or it would probably much correct to say "is now forced") to pay higher prices for L.N.G. supplies. The global L.N.G. market will remain tight until at least 2014 because Japanese demand for gas will stay high in light of  the Japanese nuclear plants shutdowns, and because Asian countries require more natural gas. Australia is expanding its liquefaction capacity. It is developing new offshore gas fields and could well supply the Asia-Pacific Region, but its new liquefaction plants (among them the Gorgon and the Queensland Curtis plants) won't be ready before 2014 with no significant contribution to global L.N.G. production before 2015. In other words, in the short-term Qatar is the only reliable L.N.G. provider to Asia. And Doha is seeking to sign now additional contracts to sell L.N.G. to Asian countries. These contracts in general envisage a duration of as many as 20 years. The plan of Qatar is to lock in some customers before other competitors like Australia, the U.S. and Russia, may offer better prices on the Asian market. More players will mean reduced prices and probably a challenge to the until now dominant oil-linked formula for L.N.G. in Asia. So, for Qatar it is important to lock in gas-receiving countries now with long-term agreements. Plus, Qatar originally allocated as much as one-third of its gas supplies to North America before diverting some gas to Asia following America's "natural gas Renaissance".

Notwithstanding its already high dependency on Qatar's gas, since last year India has been requesting additional supplies of L.N.G. from Qatar to meet its growing energy demands and possible disruption of supply from sanctions-hit Iran. In October 2011, India sought an additional three to four MTPA of L.N.G. on long-term deals (20 to 25 years starting in 2013), but negotiations were delayed by price discussions that derived also from the fact that Exxon Mobil was getting favorable L.N.G. prices in Australia in a long term contract. Qatar was looking for a price around $16 per million British thermal unit (Btu). In fact, Qatar sought with India a price of 15 to 16 percent of the Japanese Crude Cocktail (J.C.C., average price of customs-cleared crude oil imports into Japan), which now stands at $105 per barrel. In practice, Qatar wanted a price between $15.75 to $16.8 per Btu, while India was ready to offer up to 14.5 percent of J.C.C., i.e., $15.225 per Btu. After the negotiations had stalled for some months, then in January 2012 the Qatari government announced that it was ready to increase its supplies of L.N.G. to India and at the same time to facilitate the involvement of India's firms in the oil and gas sector. "In the hydrocarbon sector, the Qatari side conveyed their readiness to increase supply of L.N.G. to meet India's requirements and to facilitate the participation of Indian companies in the oil and gas sector in Qatar," according to an official statement which was issued after the meeting.

Emir Sheikh Hamad bin Khalifa al Thani of Qatar is expected to visit India soon and surely L.N.G. exports from Qatar to India will be high on his agenda. It's in fact quite probable that during this visit the Sheikh will be making commitments in order to increase Qatar's gas supplies to India. To conclude, this gas relation between Qatar and India is due to continue, and it's quite likely that it may be expanded in the shape of a two-way cross-sectorial investment partnership related to additional economic sectors than just the oil and gas sector.