It’s taking longer than expected, but we are finally getting visibility that India is investing significantly towards its goal to have natural gas be 15% of its energy mix by 2030. Earlier in Oct, India Oil Minister Dharmendra Pradhan said that there are $60 billion of natural gas infrastructure and LNG import terminals that are “under execution”. He said “I am not talking about potential investment. This number relates to the project that are under execution”. Natural gas consumption in India is only now back to 2011 levels at 5.6 bcf/d and represents only 6.2% of its energy mix. If India hits its 15% target of its energy mix by 2030, it would add natural gas demand, on average, of >1.5 bcf/d per year. At the same time India’s domestic natural gas production peaked in 2010 at 4.6 bcf/d, but has been flat from 2014 thru 2018 at ~2.7 bcf/d, which means the big winner will be LNG. The most important factor driving this expectation for natural gas consumption growth is likely price. Asian LNG landed prices are down about 50% YoY and, more significantly, the expectation is for future Asian LNG prices to be at lower levels than prior cycles. India, by itself, may not be a LNG global game changer, but it is another positive support for why we believe LNG markets will rebalance sooner than expected ie. in 2022/2023. We see mid term Asian LNG landed prices lower than prior cycles in a rebalanced market (ie. +/- $8), which means that low capital costs will be critical for future LNG projects. We believe that BC’s LNG key potential projects (LNG Canada Phase 2 and Chevron Kitimat LNG) can compete in this price environment as they have the potential for brownfield capital costs if they move to a continuous construction cycle following in lockstep to LNG Canada Phase 1, much like Cheniere does for its LNG projects in the Gulf Coast.
India has a pollution crisis. We don’t think it is unfair to say India has a pollution crisis. In every pollution ranking, India has several cities among the most polluted cities. The 2018 World Air Quality Report (AirVisual) list of the World’s Most Polluted Cities 2018 has 20 of the world’s 25 most polluted cities being in India. India has all of the top 25 most polluted cities other than #3 Faisalabad (Pakistan), #7 Hotan (China), #10 Lahore (Pakistan), #17 Dhaka (Bangladesh), and #19 Kashgar (China). Like us, many people have been to Beijing on business and believe Beijing’s reputation as a very polluted city is deserved. But to put in perspective, Beijing’s ranking isn’t even close to the 15 most polluted cities in China, let alone the world. Beijing’s score on their scale is 50.9 vs the other Chinese cities #7in the world, Hotan at 116.0, and #19 Kashgar at 95.7, and the world’s most polluted city #1 Gurugram (India) at 135.8 .
World’s Most Polluted Cities 2018
India natural gas consumption is only now back to 2011 levels. For the past couple years, we have been highlighting that the growth in India’s natural gas consumption (and linked LNG imports) has been very low due to the slow buildout of domestic natural gas infrastructure and LNG import facilities. BP data shows India’s natural gas consumption was 5.6 bcf/d in 2018, and this compares to its peak of 5.8 bcf/d in 2011. To put in perspective, China’s natural gas consumption in 2011 was 13.1 bcf/d and reached 27.4 bcf/d in 2018.
India’s Natural Gas Consumption (bcf/d)
Perhaps the best reason why there is better visibility – LNG prices are expected lower than prior cycles. A key reason for this lack of growth has been the price of LNG relative to coal. Our June 17, 2018 Energy Tidbits [LINK] highlighted comments from the Q&A from BP’s Chief Economist speech “Energy in 2017: two steps forward, one step back” on this relative cost concept. We then wrote on the BP Chief Economist comments from an India company on why there isn’t more natural gas and why coal is still going up. He said that the Indian executive said it was because the cost of natural gas was significantly more expensive than domestic coal and that the push in India is to get more power to more poorer people, but if natural gas is significantly higher, it can’t be done, they have to rely on coal. What has happened since the BP Chief Economist June 2018 comment is that Asian LNG prices are down 50% and the expectation going forward is that future LNG prices are not expected to be at prior cycle highs. But the other question is what does it mean for LNG prices. There is an increasing supply of reasonable priced LNG around the world, whether it from Qatar, Papua New Guinea, the Gulf of Mexico and even Canada. And each of these areas has anchor projects to support future brownfield development. Couple that with increasing linkage of LNG prices away from oil indexed contracts, we believe this means that a balanced LNG market going forward is going is not going to see sustained high Asian LNG prices from prior cycles, but around more costs related more to lower LNG supply basins ie. LNG prices around mid to long term +/- $8 landed Asian LNG prices, and not the prior $10 – $12 range. As the BP Chief Economist highlights, price is a huge issue for India and it is likely that the expectation for lower LNG prices than prior cycles is the most important reason to push India to increased natural gas consumption.
Japan/Korea Marker (JKM) LNG Price
India is now getting serious about increasing natural gas consumption, has $60b of projects under execution. We follow the key India news as part of our weekly news scan for our Energy Tidbits memos and there is no question that the India government and its people realize they have to deal with this increasing pollution problem. And perhaps most of all, India is now taking specific, significant action to set the stage for increasing natural gas consumption and LNG imports. Earlier in Oct, Japan Times picked up a Reuters story “India investing $60 billion on gas grid to link up nation by 2024” [LINK]. The story notes “India, one of the world’s largest consumers of oil and coal, is investing $60 billion to build a national gas grid and import terminals by 2024 in a bid to cut its carbon emissions, the oil minister said on Sunday. India has struggled to boost its use of gas, which produces less greenhouse gas emissions than coal and oil, because many industries and towns are not linked to the gas pipeline network. Gas consumption growth was running at 11 percent in 2010 but growth slid to just 2.5 percent in the financial year 2018/19.” The most significant part of this story is that this is $60 billion of projects under execution, not planned or potential projects. The story quotes Oil Minister Dharmendra Pradhan “I am not talking about potential investment. This number relates to the project that are under execution”. The critical natural gas infrastructure requirement is a domestic natural gas pipeline network to deliver gas throughout India. The India Ministry of Petroleum & Natural Gas Oct 3, 2019 release [LINK] said “On the issue of moving towards the gas economy, Shri Pradhan said that over 16,000 km of gas pipeline has been built and an additional 11,000 km is under construction. With the tenth bid round for City Gas Distribution completed, it will cover over 400 districts and will extend coverage to 70 percent of our population”. Progress is being made. Plus LNG regasification projects continue to be completed. Below is our updated table of India LNG projects that are estimated to come on stream in 2019 and 2020. We haven’t included the projects beyond 2020, but there are several planned projects already on the books.
India Current/Planned LNG Regasification Projects Est. In Service In 2019/2020
It reminds us of when China got really serious about natural gas in 2018. We should be clear that we do not consider India anywhere near as significant to global LNG markets as China. But conceptually, India getting serious about increasing natural gas consumption reminds us of what we were seeing in China in 2016/2017. India is probably more like China in 2016 as opposed to the summer of 2017, when it seemed clear that China was on the cusp of a major push in natural gas consumption and LNG would be the winner in 2018. India’s impact should start to play out by year end 2020 as opposed to this winter. We first outlined the China LNG thesis in our Sept 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG” [LINK]. Our Sept 20, 2017 blog wrote “The news flow from China this summer on its increasing fight and urgency to fight pollution supports China’s plan to increase natural gas to 10% of its energy mix in 2020 and 15% of its energy mix in 2030. This is a game changer to global natural gas markets and, by itself, can bring LNG to undersupply 2 to 3 years earlier than expected. China’s natural gas consumption increased by ~15% per year from 2005 thru 2016 and ~1.5 bcf/d per year vs China’s 8.5% growth rate in energy in total. Yet natural gas only got to 5.9% of China’s energy mix. If China is to hit 10% by 2020, it will need to increase natural gas consumption by 4 to 5 bcf/d per year. Assuming China continues to grow its domestic natural gas production by 0.6 bcf/d per year (its growth rate for last five years), China will need to import an additional ~3.5 to ~4.5 bcf/d per year. This is “per year”! And if so, we believe BC LNG will be back and there is a higher probability than ever before for a Shell FID on its BC LNG project in 2018.” As it turned out, Shell did FID its LNG Canada project on Oct 1, 2018.
Natural gas is only 6.2% of India’s energy mix vs its target of 15% in 2030. India, similar to China, has a target to have natural gas to be 15% of its total energy mix by 2030. This is not a new target, rather it has been in place and we first highlighted India’s 15% target of its energy mix in our Nov 23, 2018 blog ““India’s Natural Gas Consumption Would Be Up ~1.3 Bcf/D Per Year If Its To Reach Its Target Of 15% Of Its Energy Mix By 2030” [LINK] At that time, we noted some specific steps that were happening in 2019 and 2020 to put them on that long term plan. The impact to get to 15% of energy mix is significant to world LNG markets. This is a big increase from natural gas being 6.2% of India’s energy mix in 2018. To put in perspective, in 2018, natural gas was 30.5% of US energy mix, 21.9% of Japan’s energy mix, 16.0% of South Korea’s energy mix, and 7.4% of China’s energy. Note, China is up from 6.6% in 2017.
Hitting 15% of its energy mix would increase India’s natural gas consumption by >1.5 bcf/d per year. We projected how much India’s natural gas consumption would increase if it can hit its target of 15% of total energy mix in 2030. BP data shows India’s natural gas consumption in 2018 was 5.6 bcf/d and natural gas was only 6.2% of total energy mix. BP also estimates India’s total energy consumption grew at a rate of 5.2% per year for the 2007 – 2017 period, but energy consumption growth increased to +7.9% in 2018 YoY vs 2017 But if we only assume a 5% growth in total energy mix to 2030, then if natural gas is 15% of India’s energy mix, it would be 18.8 bcf/d in 2025 and 24.0 bcf/d in 2030 ie. growth of +13.2 bcf/d to 2025 and +18.4 bcf/d to 2030. India’s domestic natural gas production peaked in 2010 at 4.6 bcf/d, but has been flat from 2014 thru 2018 at +/- 2.7 bcf/d. We expect there to be some increased focus to at least return India to modest domestic natural gas production. But, until then, any growth in natural gas consumption will be met with LNG. Our model forecasts of >1.5 bcf/d per year, on average, in consumption is the equivalent of 2.5 Cheniere LNG trains per year.
India’s Projected Natural Gas Consumption @15% Of Energy Mix (bcf/d)
India may not be a LNG global game changer by itself like China, but does support the call that LNG markets rebalance sooner than expected. We had our SAF Group 2020 Energy Market Outlook on Monday Oct 7. A replay of the call and the supporting slide presentation are available on our website at [LINK]. Two of our key off consensus calls were on LNG including our view LNG market would balance earlier than expected ie. 2022/2023. We noted that we agree with markets that LNG will be oversupplied thru 2021, but where we disagree is that we see LNG markets balancing in 2022 or 2023. Our presentation reminded that LNG supply capacity needs to be in excess of demand to provide for turnarounds and allowance such that suppliers can deliver contract volumes. We also expect the required over capacity of supply is increasing as contract mix shifts away from historical oil indexed take or pay contracts with destination clauses to an increase share of portfolio contracts. There is no firm number, but we believe the required excess supply capacity relative to demand has increased from approx. 5% to 10% to +/-15% ie. LNG markets are effectively balanced when LNG supply capacity is >10% of demand. As a result, we believe that LNG markets rebalance in 2022/2023, a view which is similar to Total’s Sept 25, 2019 Investor Day [LINK] (see below graphs). We should note that our view of balanced LNG markets doesn’t mean a return to $12 or more Asian landed LNG prices, rather, we see the emergence of anchor LNG projects in areas with brownfield expansion potential means that a planning case for mid term Asian LNG price is in the $8 range. Our outlook presentation also includes our view that BC’s LNG key potential projects (LNG Canada Phase 2 and Chevron Kitimat LNG) can compete in this price environment as they have the potential for brownfield capital costs if they move to a continuous construction cycle following in lockstep to LNG Canada Phase 1, much like Cheniere does for its LNG projects in the Gulf Coast. Our outlook call did not specifically work in the India Energy Minister’s comment on in execution projects, but, if anything, it provides us with more confidence for the call for LNG markets to rebalance in 2022/2023.
Total’s Medium And Long Term LNG Supply & Demand