India’s LNG imports drop sharply amid rising domestic gas production, high spot prices

India’s LNG imports are expected to fall back to 2019 levels this year, with arrivals in November dropping to the lowest level since April 2020. While high spot prices continue to push buyers away from the spot market, domestic gas production has risen to a seven-year high which is also eating into demand for LNG. With further upstream developments coming online next year and spot LNG prices expected to remain supported, demand for LNG in the short-term is likely to remain at weaker levels.

India’s LNG imports drop sharply amid rising domestic gas production, high spot prices

India, the world’s fourth-largest LNG buyer, is expected to witness a 33% y/y drop in LNG imports this month, taking arrivals to just 1.6 Mt - the lowest level since April 2020 when the country was stuck in a nationwide Covid-19 lockdown. Imports from January to November are set to come in at 22.4 Mt, down 9% compared to the same period last year as the price-sensitive importer pivots away from the increasingly expensive LNG market.

In 2020, LNG met on average 55% of the country’s gas consumption. That proportion is falling, however, as gas production increases from the deepwater Krishna Godavari basin off the country’s east coast and onshore sites in the state of Rajasthan. The latest data shows that the country’s gas production rose to 2.85 bcm during August - the highest level since May 2014 and 21% higher than August 2020.

Higher production from the Krishna Godavari basin supports offshore production growth

Indian gas production fell by 11% to 27.8 bcm last year as the Covid-19 pandemic reduced fuel demand and the appetite for LNG increased as spot prices plunged to record low levels. But since the second quarter of this year, domestic gas production has exceeded pre-Covid levels – providing some relief as Asian spot LNG prices linger at record highs of around $35/MMBtu, more than six times higher than this time last year.

Recent government reforms, such as changes to pipeline tariffs and the free marketing of gas from new discoveries, have supported investment in the upstream sector. In addition, a hike in the regulated domestic gas price has provided some relief to producers. Prices for gas produced by state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) have been set at $2.90/MMBtu for the period October 2021-March 2022, up from $1.79/MMBtu over the period October 2020-September 2021. Meanwhile, the gas price ceiling for deepwater, ultra-deepwater and high pressure-high temperature sites has increased to $6.13/MMBtu, up from $3.62/MMBtu over April-September.

Offshore production has witnessed the fastest growth, rising to 1.95 bcm in August, the highest since December 2018. Production growth has been supported by the development of BP and Reliance’s offshore KG-D6 block. Two out of three planned projects in the block have now started production – the R-Cluster in December 2020 and the Satellites Cluster in April 2021, two months ahead of schedule. The third, named MJ, is due to start producing first gas in H2 2022. According to stakeholder BP, the three projects in block KG-D6 are expected to produce 30 mcm/d at full production in 2023. This level of supply would displace around 11 standard-sized LNG cargoes each month and would account for 17% of India’s gas demand at current consumption levels. India’s gas consumption averaged 5.3 bcm/month through the first eight months of this year.

Meanwhile, onshore production has also increased to the highest level since records began in April 2012. Output came in at 0.92 bcm in August, supported by increased supply from Vedanta in Rajasthan. Production from the state has grown on average by 30% so far this year.

Domestically produced gas is supplied on a priority basis to specific sectors, with 30% of it consumed by power producers, 27% by the fertiliser sector and 19% by city gas distributors in FY 20-21 (April 2020-March 2021).

LNG imports drop back to 2019 levels

India’s LNG imports look set to drop back to 2019 levels of under 24 Mt this year, down from a record high of 26.5 Mt in 2020. Importers have been noticeably quiet on the spot market of late, relying instead on supply from long-term oil-linked contracts which are considerably cheaper than current spot prices.

At an oil slope of 13% with a three-month lag to Brent crude, an LNG importer would currently be paying around $10.30/MMBtu for a contracted cargo compared to around $35/MMBtu on the spot market. India has around 23 Mt/year of LNG sale and purchase agreements (SPAs) in force currently.

High spot prices and rising availability of competitively priced domestic gas through the rest of the year and into 2022 will likely continue to create headwinds for India's LNG demand over the coming months. Spot prices are expected to remain at elevated levels through the rest of this winter season as Europe and Asia compete for cargoes in the face of La Nina conditions and low storage levels in Europe.