Explained: India And The Complicated Global Dynamics Of LNG
In 2014, the government of India decided to increase the import of Liquified Natural Gas (LNG). It was a turning point in our engagement with the world because, LNG has increasingly become as important a commodity as crude oil in the past two decades, with a set of commercial and geopolitical dynamics that don’t overlap neatly with oil.
Consequently, it is important to study and understand this sector, particularly after the severe global disruptions in energy trade following the Russo-Ukrainian war last year, and the West’s radical decision to try and end its dependency on Russian energy, as the ramifications of these factors will continue to impact India for some years to come.
Indian LNG imports nearly doubled between 2014 and 2020 before experiencing a slowdown in 2021 because of the Wuhan virus pandemic, and a drop of 20 per cent in 2022 because of global shortages caused by the conflict in Ukraine, when Europe’s LNG requirements went up sharply.
Nonetheless, India is already the fifth largest LNG market in the world, behind Europe, Japan, China, and South Korea, with our demand set to grow manifold in the coming decade. Much of our LNG imports are used for manufacturing fertilizers, transportation and power generation (although power generated from gas has actually declined since a peak in 2010, in both absolute and relative terms).
A chart below shows how LNG imports have risen since 2014.
Our biggest LNG supplier has traditionally been Qatar. Until 2014, it used to supply around 85 per cent of our requirements. But from 2015 onwards, India has set a cap on imports from Qatar, as it seeks to reduce dependency on that country, and strike better long-term deals with new suppliers like America and the United Arab Emirates (UAE).
These decisions are as much a function of business sense, as they are a function of geopolitics. The truth is that a glut is looming in the LNG sector. As a result, like with crude oil, where too, there is a glut, it will be the buyer who dictates terms rather than the seller.
It may not seem that way when we see look at how steeply gas prices rose last year. But that is because the spot market behaves in a Shylock-ian manner to a mercenary degree during times of crisis, when it gets a larger share of the pie. When gas supplies from Russia to Europe were disrupted by the West’s sanctions on Russia, the spot price for LNG to Europe spiked in August 2022 to $100/MMbtu.
(In comparison, when Russo-European ties were normal, the average price of piped gas from Russia was around $5/MMbtu. No wonder Europe is in such a mess!)
Thankfully, although the spot market is a seller’s one, most LNG contracts are long-term ones, less susceptible to market vagaries. For proof, the spike Europe suffered is double of what the Far East suffered, simply because China, Japan, and South Korea buy most of their LNG through long-term contracts.
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