Make in India: Spot appetite, flexibility spark rise of a regional LNG trading hub

On Sept. 25, 2014, the Indian government launched the "Make in India” initiative to transform the country into a global manufacturing hub. While debate over the success of this plan persists today, a different kind of hub is emerging.

India has quietly evolved into the nerve center of the LNG trade in the Middle East-India (MEI) zone. LNG imports into India have almost doubled since in six years, with imports in 2020 expected to be over 26 million mt, from 13.9 million mt in 2014.

It's a region where spot LNG cargoes change hands flexibly between buyers and sellers within a network of terminals, with relatively small differences between locations.

Buyers enjoy MEI optionality, or the ability to divert cargoes to terminals in India, Dubai and Kuwait.

This trading hub is akin to bulk commodity zones like Amsterdam-Rotterdam-Antwerp (ARA) and the US Gulf Coast for oil refined products, as well as Japan-China-South Korea-Taiwan (JKTC) for LNG shipments into North Asia.

In 2020, the MEI trading hub will account for about 32 million mt of LNG imports, equivalent to around 16.5% of the JKTC trading zone. But by 2030 this is forecast to reach about 22.5% of the JKTC volume, according to S&P Global Platts Analytics.

Three factors drive this trend. Firstly, India is a mere three-day voyage from key LNG-producing countries of Qatar, Oman, Abu Dhabi and recently, Egypt.

The country also straddles the Asia-Pacific and Atlantic basins where traders frequently manage the optimal pairing of LNG cargoes loading from either basin.

This geographical position has enabled a high degree of flexibility in trading terms—vessel, discharge port and load-port nominations.

It has also allowed the MEI hub to be a valuable delivery outlet for traders seeking arbitrage and portfolio optimization opportunities either side of the Suez Canal, which hinge on a variety of factors like shipping rates, as well as LNG spot prices in North Asia and Europe.

Secondly, India's appetite for LNG is not linked to long-term contracts and has therefore ignited spot LNG demand.

LNG is expected to remain a key component of India's gas consumption as the government aims to boost the share of natural gas in the energy mix from 6.2% currently to 15% by 2030, amid dwindling domestic gas production.

The country is now the fourth-largest LNG importer globally, behind Japan, China and South Korea, and is estimated to import over 26 million mt in 2020.

With a lower number of long-term supply obligations relative to other big markets, India imports at least a third of its total LNG imports on a spot basis—a greater percentage than anywhere else in the world.

By comparison, Japan consumes close to 10% on a spot basis and China about 15-20%, according to Platts estimates.

Thirdly, there is a growing diversity of market participants and supplies delivered into the MEI region, a key ingredient towards the formation of a liquid trading hub.

At least 30 Indian end-users, national energy companies, international trading houses and portfolio majors actively trade shipments loading from the Middle East, Asia-Pacific, Africa and the US, according to Platts estimates.

This market diversity has created a dynamic spot trade with significant cargo churn and flexibility.

Platts has observed 5.59 million mt of tenders for spot deliveries issued for India, Dubai and Kuwait delivery for cargoes delivering between January-October 2020. This compares with 11.15 million mt of LNG tenders for JKTC delivery over the same period.

Since June 2018, Platts has published 320 bids, offers and trades, about 11.5% of all Market-on-Close (MOC) data, for MEI delivery.

Among these, 57.5% of bids, offer and trades were for delivery only to India, whereas 39.6% were for delivery to India, Dubai and Kuwait.

However, a few headwinds remain. The lingering effects of the coronavirus pandemic on LNG demand, as well as the existence of legacy term contracts with non-LNG pricing, could stunt the growth of an active spot market.

On the other hand, the continued decoupling of Platts West India Marker (WIM) from Dated Brent and Henry Hub prices may continue to spur greater adoption of LNG pricing.

Platts WIM is now increasingly used as a pricing basis for LNG tenders and domestic gas supply contracts in India.

Furthermore, the development of a liquid LNG spot market in MEI carries greater significance considering the demand potential of two other fast-growing markets in South Asia—Pakistan and Bangladesh—which has been aided by government policies.

Pakistan has opened its receiving terminals to third parties to boost LNG imports, while Bangladesh imported its first spot cargo in September amid falling domestic gas production and the opening of new LNG-fired power plants.

India is also undergoing a transformative phase in the development of its gas markets, launching reforms of its pipeline tariffs, city gas distribution guidelines and other regulations to boost consumption.

Like the "Make in India” initiative, hurdles remain for a regional LNG trading hub with India as its focal point. But there are good grounds for optimism.