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8 May 2014, Gateway House

Policy catalyst: energy options with Japan

As large importers of natural gas, India and Japan have a common interest in lower energy prices. The two Asian giants must work together – in North America, Australia and Africa – to help bring new supplies to the market

Fellow, Energy & Environment Studies Programme

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On 24 March GAIL India signed a memorandum of understanding with Chubu Electric Power of Japan to “explore possibilities for collaboration in the area of joint LNG procurement.” 1

This is a big move. GAIL has been trying for some time to establish a buyers’ club for  liquefied natural gas (LNG). India, along with Japan, China, South Korea and Taiwan, is a major LNG importer. In the last year, all have been hit by high gas prices, mostly because after the 2011 earthquake in Japan, all its nuclear power plants shut down and the country shifted wholesale to gas. The subsequent price hike in LNG is deterring users. In India alone, 21,000 megawatts of gas-fuelled power plants are operating at one-fourth capacity because of the cost of gas. 2

For India, the mission for affordable gas is urgent. The country is a net energy importer and spends big money on importing natural gas. Petronet LNG, India’s top LNG importer, spent $6 billion  on buying gas during 2013-14, mostly from Qatar. 3 That was almost twice what it paid in 2010-11. 4

So collaboration is necessary. The GAIL-Chubu MoU is a first step. It could be a precursor for a deeper, pan-Asian cooperation, creatively constructed and expedited.

Hydrocarbon deals can set a good example of how governments can work together. India and Japan have worked together on various national and transnational interests despite hurdles. Japanese companies already have multibillion dollar investments in India led by automakers Suzuki, Toyota, Honda and Nissan. Tokyo is a significant investor and collaborator for the Delhi-Mumbai and Chennai-Bengaluru industrial corridors. Joint naval exercises are now routine.

New Delhi and Tokyo can well collaborate on energy pricing. The only way to get better prices is to focus on increasing supply. This means buyers have to move beyond the purchase transaction and become part of the production chain. For instance, they can help complete new LNG supply projects in the U.S., Canada, Australia and Mozambique – projects whose output adds up to more than the total current global supply of LNG.

The production of shale gas has made the U.S. surplus in natural gas; it is now building LNG supply terminals for export. Total applications for building such terminals currently sitting with the Department of Energy add up to 288 million tons/year 5 – nearly 90% of the global trade. 6 The first of these terminals, the Sabine Pass located on the U.S. east coast, is expected to start exporting by end-2015. 7 India will be a purchasing beneficiary. Neighbouring Canada also has surplus gas because traditional importer U.S. now has its own supply. Canada proposes to set up six new LNG terminals and export gas globally – another opportunity for India. 8

Closer to India are Australia and Mozambique. Australia is already an important LNG exporter, with over 20 million tonnes sold annually, and seven new LNG export terminals under construction. 9 When implemented, they will make Australia the world’s top supplier of LNG, ahead of current leader Qatar. Mozambique has seen major gas discoveries in recent years and has the potential to become a leading supplier of gas with annual exports of up to 50 million tonnes. 10

Top LNG exporters (2012)
Qatar 105.4
Malaysia 31.8
Australia 28.1
Nigeria 27.2
Indonesia 25
Source: BP
Figures in Million tons
Top LNG importers (2012)
Japan 118.8
South Korea 49.7
Spain 21.4
India 20.5
China 20
Source: BP
Figures in Million tons

Source: BP statistical review of world energy 2013.

LNG buyers such as Japan and India must help to expedite and operationalise these projects, increasing supply and reducing costs. Costs, which include the development of gas fields and construction of LNG trains, can be over $10 billion per project.

One way to work together is to have Japanese banks provide the financing for the construction of LNG plants, while India locks in a long-term purchase.

The Japan Bank for International Cooperation, for instance, has funded gas projects in Australia, Papua New Guinea and Qatar. The bank is funding $5 billion of the $16 billion required for Ichthys, one of the LNG supply terminals being built in Australia. Japanese companies – Osaka Gas, Tokyo Gas, Chubu Electric and Toho Gas – are equity holders in this project. Japan will buy 70% of the gas that this terminal will export. 11

Indian banks don’t have similar capacity, but Indian companies such as GAIL can provide long-term purchase contracts – the kind LNG projects need. No developer invests in an LNG project without first tying up buyers. GAIL has already entered into such agreements, of up to 20 years, with Sabine Pass and Cove Point LNG (both in the U.S.) and with Gazprom (Russia). 12

Indian companies can sign more such contracts, and get a fair price. With Sabine Pass, GAIL will pay a liquefaction charge to the terminal, while the gas will be priced at Henry Hub Rates. Henry Hub is the price based on local U.S. market demand and supply – and is half the price that India pays for Qatari LNG.

Another option is joint development by Indian and Japanese firms. For instance, in Mozambique, Indian companies BPCL, ONGC and Oil India along with Mitsui of Japan already have a stake in a major offshore field, the Area 1 of Rovuma Basin. 13 The three state-owned Indian companies have strong balance sheets and a combined market capitalisation of Rs. 330,000 crore  ($54 billion). If they can provide some project finance and long-term contracts, it can speed up the project substantially.

In the long term, there can be operational synergies between India and Japan, which can cut costs. Japan’s LNG supply sources are geographically diverse and distant – from Qatar, Australia, Indonesia, Malaysia, Russia, Nigeria and Brunei. It’s expensive. The U.S., Canada and Mozambique will be among the major future sources of LNG.

India and Japan can sign cargo swaps. For instance, if India buys LNG from the U.S. or Russia, the individual ships don’t need to sail across the Pacific Ocean and the Strait of Malacca to an Indian port. They can take the much-shorter journey to a Japanese port, and in return, cargo owned by a Japanese firm coming from Qatar or Mozambique could sail into an Indian port. Shorter journeys will also mean owning fewer LNG carriers – which typically cost $200 million each 14 – a huge saving. GAIL has already suggested such swaps for the future, when it starts importing LNG from the U.S.15

The new government in New Delhi can immediately establish a single government agency, modelled on METI in Japan, to coordinate the needs and work of the many Indian public sector companies which have expertise in different areas of the hydrocarbon business – exploration, production, shipping, petroleum refining, and marketing of products. This agency can then bring on board the major Indian banks for project finance. Its functions can be expanded to help any Indian company/group/consortium looking to invest in energy assets overseas – assets that can help meet India’s energy needs at appropriate prices.

Amit Bhandari is the Energy and Environment Fellow at Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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References

1. Gail (India) Limited. (2014). Gail executes MoU with Chubu Electric of Japan for joint LNG procurement. Retrieved from http://www.gail.nic.in/final_site/pressrelease_march24_14.html

2. Central Electricity Authority. (2014). Energy generation, programme, and plant load factor for gas / liquid based stations. Retrieved from http://www.cea.nic.in/reports/monthly/generation_rep/tentative/mar14/opm_17.pdf

3. Petronet LNG Limited. (2014). Audited financial results for the quarter and year ended 31 March 2014. Retrieved from http://www.petronetlng.com/PDF/Audited_Financial_Results_for_the_quarter_
and_year_ended_31st_March_2014_30042014.pdf

4. Petronet LNG Limited. (2011). Audited financial results for the year ended 31st March 2011. Retrieved from http://www.petronetlng.com/PDF/Results_Q4_201011.pdf

5. U.S. Department of Energy. (2014). Applications received by DOE/FE to export domestically produced LNG from the lower-48 states (as of March 24, 2014). Retrieved from http://energy.gov/sites/prod/files/2014/03/f13/Summary of LNG Export Applications.pdf

6. British Petroleum. (n.d.).  BP statistical review of world energy 2013. Retrieved from http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy-2013.html

7. Scheid, B. Platts. (2014). Backers of US LNG exports want to weaken Russia’s hold, but it may not matter. Retrieved from http://blogs.platts.com/2014/04/01/lng-russia-ukraine/

8. Natural Resources Canada. (n.d.). Canadian LNG projects. Retrieved from https://www.nrcan.gc.ca/energy/natural-gas/5683

9. APPEA. (n.d.).  Australian LNG projects. Retrieved from http://www.appea.com.au/oil-gas-explained/operation/australian-lng-projects/

10. Mozambique LNG. (n.d.). Mozambique LNG. Retrieved from http://www.mzlng.com/docs/MozLNGFactsheet.pdf

11. Japan Bank for International Cooperation. (n.d.). Interview: Participating in one of the largest project finance deals to date in international financial markets. Retrieved from http://www.jbic.go.jp/wp-content/uploads/interview_en/2013/10/12061/JBIC_interview_06_en.pdf

12. Gail (India) Limited. (n.d.). Annual report 2012-13. Retrieved from http://www.gail.nic.in/final_site/pdf/GAIL_AR_2012-13.pdf

13. Oil and Natural Gas Corporation Ltd. (2014). OVL announces additional acquisition of 10% interest in the Rovuma Area 1 offshore block in Mozambique. Retrieved from http://www.ongcindia.com/wps/wcm/connect/ongcindia/home/press_release/ovl-announces-additional-acquisition

14. Obayashi, Y., & Wallis, K. (2013, November 29). ‘Japan shippers plan to order 90 new lng tankers worth $17.6 billion by 2020’. Reuters. Retrieved from http://www.reuters.com/article/2013/11/29/us-japan-shippers-plan-idUSBRE9AS05V20131129

15. ICIS. (2013, November 21). Indian GAIL floats plan for time and LNG cargo swap. Retrieved from http://www.icis.com/resources/news/2013/11/21/9728187/indian-gail-floats-plan-for-time-and-lng-cargo-swap/

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