South Asia

Published at 10:51 25 Sep 2019 by . Last edited 14:41 25 Sep 2019.

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We see y/y growth in South Asia’s imports over the coming months being encouraged by lower regional LNG spot prices y/y and new marketing deals. This implies substantially greater use of Pakistan's second import terminal and bolsters the need for the next wave of import projects, which gained government support last week. Increasing regional demand will drive up the need for spot LNG purchases in the short term. It is also encouraging firms to seek more supply under long-term contracts, with India's Petronet buying into the US Driftwood project.

We forecast Pakistan's LNG imports will rise to 2.3 Mtpa in Q4 19, from 1.5 Mtpa a year earlier. There will be political pressure on Pakistan’s gas firms not to repeat last winter’s gas shortages, for the chief executives of the country’s two main system operators lost their jobs. And the drop y/y in spot prices for delivery to the region makes the firms better able to afford spot cargoes. The spot price for delivery in the second half of October to neighbouring India—indicative of prices for delivery into Pakistan—was around 5 $/mmbtu on 23 September, down from 10.52 $/mmbtu for the same period a year earlier. The current spot price is also well below long-term contract supply for October, with a 12% slope, which is at around 7.90 $/mmbtu. Pakistani firm PSO’s Qatari imports have a 13.37% slope to Brent prices.

New marketing deals may also unlock more demand. Trading firm Trafigura, which holds capacity equivalent to 1.1 Mtpa at the Gasport terminal, secured a 10-year gas marketing licence in Pakistan in July, making it the first international company to do so. Pakistan’s Universal Gas Distribution (UGDC)—its first private sector LNG importer and which buys for compressed natural gas distributors—earlier this month committed to imports from ExxonMobil, starting in October. The volume of the deal is unclear, but we see this increasing imports y/y in the remainder of 2019.

Both developments will raise imports y/y through Pakistan’s second 5.6 Mtpa Gasport terminal in Q4 19. We expect it to operate at 77% of capacity in Q4 19, in line with April-August and up from just 23% in Q4 18. We see the use of Pakistan’s first 4.5 Mtpa Engro terminal holding around capacity.

Infrastructure growth will also support an increase in Indian imports y/y. This growth is from the expansion of the Dahej terminal to 17.5 Mtpa in July and the expected completion of the long delayed Kochi-Mangalore pipeline in October, which should allow an increase in utilisation at the Kochi regasification terminal to 25-30% by late 2020, from around 15% currently. And Bangladesh is also ramping up use of its two import terminals, the second having started in March, helping unlock import growth y/y.

Falling production boosts import growth

The region's growing demand for LNG imports is being bolstered by falling regional production, with a sharp drop in India in August, and Pakistan and Bangladesh likely continuing their long-term decline.

We do not anticipate any large y/y increases in Indian gas production in Q4 19, given recent trends of lower monthly output y/y. India's production in August dropped to 2.67 bcm, from 2.78 bcm a year earlier, the sharpest y/y fall this year. Production in April-August was down by 0.02 bcm y/y per month, while gas demand averaged a y/y increase of 0.15 bcm per month.

We see Pakistan's production continuing its long-term decline. Monthly output in 2017-18—the last data available—averaged y/y declines of 1%. And output per well has been falling in recent years, indicating increased difficulty in developing new supply. Pakistan Petroleum Limited’s 300 gas wells were averaging production of 0.08 mcm/d in the financial year ending in June 2018, while its 188 wells were averaging 0.15 mcm/d a decade earlier. The country's oil and gas regulator (OGRA) sees output continuing to decline well into the next decade, boosting the call on imports.

Supply diversification

Aggregate growth in South Asia's LNG demand is contributing to the diversification of suppliers to the region. Bangladesh this month permitted spot purchases from LNG suppliers, with these likely adding supply above the country's 3.5 Mtpa under long-term contracts. Pakistan’s government is supporting import terminal projects backed by international firms. And Indian firms are pushing for greater long-term imports from new sources, including the US.

Bangladesh's Petrobangla plans to import 1 Mt of its LNG as spot cargoes next year and 2 Mt in 2021, on top of its long-term supply agreements with Qatargas and Oman Trading International. Bangladesh’s government this month approved 17 firms for the delivery of spot cargoes out of 43 that had applied last year. The slide in LNG spot prices will boost the country’s ability to afford supply from these firms.

Pakistan’s government has given the green light to five proposed LNG projects, each involving international participants in the consortium. International firms sponsoring the next wave of projects include Shell, ExxonMobil, Trafigura, Mitsubishi and Gunvor. The consortia must submit development plans to the Ministry of Ports and Shipping by 5 November for approval. The cabinet has already approved the projects and it wants the terminals to start within two to three years. It plans to bring online the first of these projects from 2021, which is ambitious. But at least three of the projects will use floating storage and regasification units (FSRUs), which can be brought online quickly.

The ability of these projects to supply Pakistan hinges on the development of internal infrastructure capacity. The state will fund the construction of a $2 billion 12.4 bcm/y pipe to move gas from the terminals to the north of the country, as well as underground storage facilities. The pipeline has been under discussion since 2015, when a contract was awarded to Russian firm Rostec, but progress stopped because of a disagreement on fees and US sanctions affecting Rostec. The next wave of terminals will face capacity bottlenecks, without the pipe in place.   

India’s Petronet last week signed a preliminary agreement for up to 5 Mtpa of offtake from US Tellurian’s proposed 16.6 Mtpa first phase of the Driftwood LNG plant in Louisiana. The deal is scheduled to be finalised by the end of March 2020 and provides a boost to the project, which is already backed by Total in the form of a binding agreement for 1 Mtpa. This would be Petronet’s first offtake agreement for US supply and would give it access to supply linked to US gas prices rather than the oil-indexation in its predominantly Qatari and Australian contracts. Tellurian, which plans to retain 6.6 Mtpa of Driftwood’s supply, is still seeking 4 Mtpa of offtake to take a FID on the project. Pending FID, Tellurian expects it can export first LNG in 2023, although we see it more likely starting towards the middle of the decade.

Fig 1: Pakistan LNG imports, Mt Fig 2: Pakistan's terminal use, %
Source: Bloomberg, Energy Aspects Source: Kpler, Energy Aspects

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