petronet lng ltd Management discussions

State of the Global & Indian Economy

While majority of global economies faced slowing growth with high inflation, on account of unprecedented volatility in the global energy and commodities markets, however, India remained a bright spot, mainly driven by expansion in infrastructure, private consumption, expansion in rural demand, and its focus on manufacturing.

Chart 1: World and Regional real GDP growth

As per S&P Global outlook (Chart-1), World real GDP growth is expected to slow down from 3.0% in 2022 to 2.3% in 2023 before improving in 2024. The slowdown is centered more towards Europe and the American regions where high inflation and monetary policy tightening is pushing down consumer and business spending. Thereafter, Global growth is expected to pick up to 2.7% in 2024. Mainland China, India and other emerging markets are expected to lead the acceleration. (Source: S&P global Platts global economic outlook).

According to the United Nations, India has become the most populous country in the world in 2023. Indias large and demographically young population is now regarded as an asset and an opportunity. In a world in which many countries are facing issue of population decline and meeting requirement of ageing population, by contrast,

Indias population is young with - the median age of 28 years. Every sixth working age (15-64 years) person in the world is an Indian. This presents a huge potential for expanding investments that will considerably enhance Indias emergence as the worlds economic powerhouse of the future, followed by the exponential growth in the energy and gas consumption. With the move towards clean energy, high polluting energy consuming sectors are likely to see more shift towards natural gas.

The Government of India has implemented several major policies aimed at developing and improving the countrys infrastructure across various sectors, which will directly enhance energy requirements and thus natural gas consumption in the country.

Global LNG Market

The global energy markets continued to be under crisis, first with the COVID lockdowns in 2020 and 2021, which caused unprecedented demand destruction, followed by the Russia- Ukraine war which led to unmatched high energy and gas prices.

As per S&P global IHS Markit database, Global LNG trade reached 402.8 million MT in 2022 (refer Chart 2), which was 5.09% growth year-on-year (Y-o-Y).

LNG trading patterns in 2022 went through their largest shift owing to Russia Ukraine conflict in February 2022 and followed by a subsequent severe decline in Russian gas pipeline deliveries to Europe. The shift in demand center was strongly reflected in the spot trade market. Europes gas market crunch pushed up spot gas and LNG prices consistently throughout the year 2022 and price sensitive

LNG buyers in many other importing countries stayed out of the market. The largest LNG import quantum decline came from mainland China, where decline in LNG imports was attributable to increase in the pipeline gas imports, domestic production increase and weaker economic growth.

The series of crisis has led to paradigm shift in energy trade flows for oil and gas sector. With this paradigm shift, since last year Asia is now competing with Europe for energy supply, and there has been a shift in the LNG contracting as well.

Buyers are now again placing more emphasis on long term contracts, for ensuring their supply security and along with this "oil linkage" is making a comeback as Gas hubs in Europe like TTF and NBP have become very volatile and continue impacting Asian LNG spot prices.

Global LNG Trade

Despite more US exports in 2022, there was limited additional global supply available given various infrastructure outages and a low level of new capacity coming online. As prices rose sharply, mainly due to disruption in pipeline gas supplies to Europe resulting into panic buying to a large extent and to rebalance the market, spot cargoes were diverted to Europe from more price sensitive Asian markets (e.g., Bangladesh, India, and Pakistan). Japan regained the top spot as mainland Chinese demand dropped. As per Chart 3 and 4, Qatar and Australia were almost tied for the position of the largest exporter in 2022.

US was at third place due to an outage at one of LNG liquefaction plants since early June 2022, which took offline around 8.7 MMT of LNG volumes (S&P global estimates). Qatar increased its production beyond 77.6 MMTPA again in year 2022 (81.6 MMT) as depicted in Chart 4, to meet increased spot LNG demand.

Source: S&P global commodity insights

LNG Imports:

LNG trade has altered significantly since 2021. Europe became the second biggest LNG importing region after JKT (Japan, Korea, and Taiwan) in 2022, also overtaking mainland China. Europes sudden increase in imports worsened the market tightening that already was underway as economies were recovering from COVID related economic downturn witnessed in the year 2020 and 2021.

Basis S&P global estimates, JKT, the biggest LNG importing region in the world in 2022, accounted for 35% of global LNG demand. However, as a whole, Europes share came second, at 32%-up from around 20% in 2021. There were 46 LNG-importing markets as of 2022, of which two markets— Germany and El Salvador became LNG importers for the first time in 2022.

Also, during the year 2022, Japan imported 72 MMT, which accounted for 18% of the total LNG trade. While China imported 65 MMT accounting for 16% of the total LNG trade, followed by South Korea, France, Spain and India as depicted in Chart 5.

LNG Pricing

The price of gas has been the single most critical element influencing its demand. Spot LNG prices in Asian and European markets witnessed unforeseen price volatility in last two years from record lows to record highs. The daily assessment of Spot LNG prices as represented by JKM and WIM (Published by S&P Global Platts LNG Daily) witnessed all time low price of US$ 1.83 / MMBTU and US$ 1.76 / MMBTU respectively on April 29, 2020, and then witnessed all time high of US$ 84.8 / MMBTU and US$ 84.4 / MMBTU respectively on March 7th, 2022. High spot LNG prices coupled with volatility led to demand destruction in Asian markets especially growing price sensitive market like India. It dented the confidence of consumers in spot LNG which is evident from the fact that Indian LNG imports stood at around 21 MMTPA in 2022 which was around 26 MMTPA in 2020 and around 24 MMTPA in 2021.

Due to high LNG prices in FY 2022-23, the spot cargo procurement in Asia witnessed a sharp decline. Further as per various publications, European Gas storage levels stood at over 55% at the end of the winter season, the highest level on record. It was far better than it had been feared when Russian pipeline gas supply was gradually reduced in 2022. Europe is expected to witness much lower price volatility in 2023 as compared to 2022, due to gas demand destruction in Industrial Sector, with gas storage level already reaching over 70% of its capacity in June 2023.

Europe and Asia competing for LNG

Chart 6 below, shows the high volatility in JKM (Japan Korea Marker - Asia spot LNG) and TTF (European gas hub) prices during calendar year 2021 and 2022. The various events leading to extreme volatility are incorporated in the graph below. Europe in anticipation of restricted Russian gas supplies for the winter season of 2022 started aggressively stockpiling of natural gas to reach a minimum 80% gas storage level, followed by a target revision to 90% by the end of 2023. As Europes TTF price rose, it started to impact LNG trade flows. As a result, LNG cargoes were drawn from Asia to Europe due to the premium TTF enjoyed over the JKM.

As per various publications, Russian piped gas supplies are unlikely to be restored to Europe in near future. In order to meet anticipated shortfall in piped gas supplies, changes are being carried out in Europes gas infrastructure to enable it to import more LNG. Therefore, European countries like Germany who were major consumers of Russian pipeline gas, are investing in Regasification Terminals and FSRUs to tap the LNG market. This removal of infrastructure bottlenecks is expected to enable flow of larger LNG volumes into Europe and increase availability of gas. As a result, TTF prices are expected to become more moderate and stable in future. The future direction of prices is likely to be determined by three key factors i.e., procurement strategy of Europe and its need to refill storage, Chinas balancing strategy between LNG and piped gas and weather outlook in Europe and Far East both for cooling and heating requirement.

As per various LNG publications of repute, Long-term contract prices are still expected to be predominantly oil-indexed, although there will be a growing share of other index mechanisms like the North American gas hubs (particularly for US LNG exports) and potentially other hubs and price benchmarks too.

Natural Gas and LNG in India

Indias current share of per capita energy consumption is around one third of worlds average. Current energy consumption of India is merely 6% of worlds total energy consumption against population of around 18% (1.40 billion plus) of the world. However, having young people under the age of 25 years accounting for more than 40% of the population, India offers tremendous potential of exponential growth in energy consumption. Such a young workforce equipped with education and high aspirations, along with tremendous infrastructure growth, is likely to result into exponential growth of per capita energy consumption and consequently Natural gas consumption in India. Therefore, with strong economic fundamentals, increasing income levels and rising standards of living, the Country holds a strong economic profile.

Chart 7 below depicts, Coal (55.13%) as the dominant fuel in the primary energy matrix of India, followed by Oil (27.58%). The share of Natural Gas in Indias primary energy basket is merely at around 5.74%. Considering, growing energy need of India, GoIs commitment of substantial reduction in carbon emissions intensity of its GDP by year 2030 and achieving target of transition to Net Zero Emissions by 2070, the GoI has set a target of an increasing share of natural gas from present 5.74% to 15 % in the Primary Energy basket by year 2030 and make India a gas-based economy and a global manufacturing hub. This is expected to translate into a substantial increase in Indias current gas demand from around 160 MMSCMD to more than 550 MMSCMD by end of this decade (year 2030). To cater to growing gas requirement of India, LNG imports are expected to increase from 45% of total natural gas consumption in the country in year 2022-23 to 75% by the year 2035.

Indian Natural Gas and LNG: Need for long term contracts

In India, Natural Gas is majorly consumed in Fertilizers, Refineries, Petro-chemicals, Industries and City Gas. These sectors require reliability of supply and affordable price at predictable & competitive terms vis a vis alternative fuel.

India traditionally favoured the long-term gas sourcing. India has long term LNG contracts of almost 20 MMTPA, which constitutes approximately 95% of around 21 MMTPA LNG consumption in the CY 2022.

Indian gas market, which is one of the few growing gas markets, can be developed in a better way by having long term contracts rather than relying heavily on spot supplies, prices of which are highly volatile and do not provide energy security.

Review of Gas Production, Pricing and Consumption (incl. LNG Imports)

Year 2022 has also been a challenging year for the Indian gas sector, due to disruption in the global energy markets. Although, majority of Indias long-term LNG contracts provided security of supply at reasonable prices, however substantial part of spot LNG requirement was replaced by an alternate fuel, resulting in decline in total LNG imports during year 2022. However, with the continuing massive infrastructure investment in gas sector and reforms being carried out like unified pipeline tariff and pricing policy for domestic gas, it is expected that India will witness huge growth in Gas and LNG demand in the years to come.

Gross production of Domestic Natural Gas

Chart 8 above shows the domestic gross production in last ten years. In FY 2022-23, total gross domestic gas production was 34,450 MMSCM (94.38 MMSCMD) as compared to 34,024 MMSCM (93.22 MMSCMD) in immediately preceding FY, which was 1.25% more (426 MMSCM or 1.17 MMSCMD). However, the domestic gas production from new fields suffers from short asset-life and are expected to reach their plateaus in coming 4 to 5 years and then starting to decline.

Gas Consumption

Indias total natural gas consumption, share of LNG in gas consumption and sector wise gas consumption is depicted at charts 9A, 9B and 9C respectively. The share of LNG in Indias gas consumption stood at around 44% in the FY 2022-23. Due to unprecedented spot LNG price volatility and increased domestic gas availability, the LNG imports witnessed reduction in the FY 2022-23.

Chart 9 C: Average sector wise gas consumption

Average Sectoral Consumption (MMSCMD) 2022-23 (P)

Sector	RLNG	Dom Gas	Total	Total % Share
Fertilizer	42.0	11.2	53.2	33.0%
Power	3.4	19.0	22.3	13.9%
City Gas	8.7	24.3	33.0	20.5%
Refinery	6.7	4.0	10.7	6.7%
Petrochem	3.1	2.3	5.4	3.3%
Others	6.9	29.4	36.3	22.6%
Total	70.6	90.2	160.8	100.0%

Source: PPAC, (P) is provisional

Indias LNG Imports

As shown in Chart 10 below, there was a reduction of 3.2 MMTPA LNG imports in the year 2022 as compared to immediately preceding year 2021.

Gas Infrastructure Development

The Government of India has been focusing on expanding the countrys natural gas infrastructure, including the development of pipeline networks, LNG Regasification terminals and city gas distribution (CGD) networks.

One important component of the integral gas infrastructure in India is the Regasification Terminals. Since India is a gas deficit country and relies heavily on LNG imports, Regasification Terminals play an important role in the countrys gas development plans. Current regasification capacity in India is 47.7 MMTPA. There are new Regasification projects under construction at various locations namely Jaigarh, Jafrabad, Chhara and PLLs greenfield FSRU based LNG terminal at Gopalpur on East Coast along with expansion of PLLs existing regasification terminal at Dahej from 17.5 MMTPA to 22.5 MMTPA. It is expected that with completion of all these new terminals and expansion projects, the total regasification capacity in India will increase from 47.7 MMTPA to 72.7 MMTPA. In order to achieve 15% share of Natural Gas in the energy basket of India by the year 2030, the country would require around 150 MMTPA of LNG re-gas infrastructure. Thus, creation of additional capacity of over 77 MMTPA would be required.

Further, India is adding another 12,000 kms natural gas pipeline network to its current length of about 23,000 kms and with 11 and 11A CGD round bidding completed, the CGD network now shall cover 88% of area and 98% of Indian population. With increased penetration level of CGD network, the gas consumption has potential to increase many-fold at right and sustainable prices.

Development of these infrastructure would enhance the accessibility and availability of natural gas across different regions of India.

Government Policies and Initiatives to increase share of Natural Gas

In order to cater to growing requirement of Natural Gas, India adopted two-pronged strategy, firstly by enhancing domestic supply by incentivising production of Domestic Natural Gas and secondly by setting up Natural Gas infrastructure for import of LNG including the expansion of Natural gas pipeline grid and development of City Gas Distribution networks on Pan-India basis. Considering various policy enablers being put in place by the Government of India and growth in gas infrastructure, Natural gas consumption in India has enormous potential to grow. Few initiatives are as follows.

Pricing reform

APM Pricing - On 7th April 2023, the Government of India based on the recommendations of Kirit Parikh Committee notified changes to the New Domestic Gas Pricing Guidelines, 2014, wherein Domestic Natural Gas Price (APM price) shall be 10% of the Indian Crude Basket Price as defined by Petroleum Planning and Analysis Cell (PPAC) from time to time. For the gas produced by ONGC & OIL from their nomination fields, the APM price shall be subject to a floor and a ceiling. The initial floor and ceiling prices shall be $4/MMBTU and $6.5/ MMBTU respectively. The ceiling price would be maintained for the next two years (FY 2023-24 and 2024-25) and then increased by $0.25/MMBTU each year. The pricing trends of domestic gas since November 2014 are depicted at Chart 11. This pricing reform is likely to provide huge impetus for increased usage of Piped Natural Gas (PNG) and CNG and growth in gas consumption for a long run.

Unified gas pipeline tariff is another major policy reform implemented w.e.f. 1 April 2023. This is based on the principle of one nation, one grid and one tariff, with the objective of reducing the total cost of gas transportation if a customer has to use multiple pipelines for the transportation of gas. Therefore, gas users located far away from the source of gas will not have to pay cascading tariff, which used to result in prohibitively high charges for gas transportation. The Petroleum and Natural Gas Regulatory Board (PNGRB) notified a levelized Unified Tariff of Rs 73.93/MMBtu and created three tariff zones for Unified Tariff. The first zone (Z1) is up to a distance of 300 kms from gas source, second zone (Z2) is 300 - 1200 kms and third zone (Z3) is beyond 1200 kms. The tariff will be apportioned over three zones with tariff of Rs 39.45/ MMBtu, Rs 74.97/ MMBtu and Rs 99.90/ MMBtu for Z1, Z2 and Z3 respectively. The Zonal tariff has been subsequently revised to Rs 40/ MMBtu, Rs 79/ MMBtu and Rs 114.52/ MMBtu for Z1, Z2 and Z3 respectively via Tariff Order dated 27th June 2023 applicable w.e.f. 1 July 2023.

The introduction of a unified tariff system will make gas affordable in far flung demand centers and encourage gas consumption in India.

Further, other Government backed policy initiatives includes the development of Gas Exchange, an online gas trading platform leading to more efficient gas market price discovery, where Buyers and Sellers can now trade on Gas Exchange, making gas more competitive and as a result augmenting efforts of increasing gas consumption.

Indian gas outlook for 2023 and beyond

Growing Natural Gas Demand: Indias natural gas demand is on a prime spot and is expected to increase steadily, driven by factors such as population growth, urbanization, industrialization, and government policies promoting cleaner energy sources. Considering Indias commitment of achieving a net zero target by 2070 and Honble Prime Ministers vision of gas based Indian economy, the natural gas demand is expected to increase multifold in coming years.

As energy transition is unfolding around the world, in their efforts to reduce carbon dioxide emissions, governments all over the world are pushing for cleaner fossil fuels like Natural Gas, and renewable energy. Therefore, Natural Gas/LNG is expected to play a key role throughout the transition with its wide range of applications. Further, considering cyclic nature of Renewables (solar and wind), Natural Gas and Renewables are going to stay together to complement each other. In this energy transition journey, Natural Gas shall be at the center stage for 3 to 5 decades, where it ensures energy security and at the same time supports decarbonization.

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