Is India the Next Hot Spot for LNG?


If an oil and gas company, especially natural gas, does not have a presence in the emerging markets of Asia, then it is definitely losing out on a big opportunity. The growth prospects in the continent, especially in countries like India and China, have already attracted oil biggies like Shell (NYS: RDS.A) , Total (NYS: TOT) , and BP (NYS: BP) . The Asian liquefied natural gas market witnessed 9% year-on-year demand growth in the first half of 2011, while India and China witnessed a staggering year-on-year growth of 26% and 10%, respectively, in the first half of 2011.

Grab the opportunity with both hands
India, Asia's third largest economy, has been using imported LNG for a little over seven years now and has just two operating LNG terminals. In a country of more than 1 billion people, we're talking about an enormous opportunity. In fact, of the two terminals, one is a joint venture between Shell and Total located in the western state of Gujarat and commenced operations back in 2005. Shell and Total now plan to expand the terminal's capacity to 5 million tonnes from 3.6 million tonnes. The other LNG terminal is also in Gujarat and is operated by Petronet -- India's largest LNG company. Petronet has also decided to expand its LNG regasification capacity by 150% to 25 million tons by 2015. This could not have come at a better time.

The Indian natural gas market is growing by leaps and bounds. Demand for natural gas in the country is likely to more than double to 473 million standard cubic meters per day by 2016-17. BP has also pointed out in its Energy Outlook 2030 that there is going to be a huge surge in demand for natural gas in India. No wonder the company has chalked out elaborate plans for the region. BP has entered into a deal with India's major oil and natural gas player Reliance Industries. The deal will give BP a 30% stake in 23 oil and gas blocks in India. Total investment will be around a whopping $20 billion. The companies will also form a joint venture for sourcing and marketing energy in India.

Demand-supply mismatch = profits
It is obvious that demand for natural gas is increasing at a much faster rate than supply. India's domestic natural gas supply is expected to be around 153 million standard cubic meters per day by 2014-15 from 143 MSCMD in 2010-11. Domestic supply has been hit by the nearly 17% fall in output from the Krishna-Godavari Basin's D6 field. This particular field is India's largest gas deposit but is expected to operate at subdued levels over the next couple of years. This severely affects supplies and further widens the demand-supply gap, which has led to higher imports. Currently, Qatar supplies around 7.5 million tons of LNG a year to India. Imports are expected to reach 47.5 million tons a year by 2015-16, up by almost 250% from its current import levels. This provides a great opportunity for companies like Chevron (NYS: CVX) , Apache (NYS: APA) , and ConocoPhillips (NYS: COP) , which have heavily invested in Australia's LNG projects with a view to serve the Asian market.

The price edge
Asia not only provides high demand but also high prices. The imported LNG price has more than doubled in the past year and costs around $17-18 per million British thermal units in the spot market. This price is twice that of Europe's and four times that of the U.S. price. For India, regasified LNG costs more than domestic gas, but it is still more economical than substitute liquid fuels such as naphtha.

Foolish takeaway
Right now gas accounts for about 10% of India's primary energy basket against the world's average of 24%, so it is only going to go up. With India being one of the largest emerging markets -- in fact it is only behind China -- the burgeoning demand makes sense. The expected sixfold increase in demand, shortage in domestic supply, and higher prices make India the next LNG hot spot.

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At the time thisarticle was published Fool contributor Amitabha Chakraborty does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Total and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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