Indian LNG procurement strategy calls for improvement in risk management practices

India's demand shift to long-term LNG contracts and the expected increase in imports later this decade could be burdened with risk amid the need for more prudent risk management practices, according to market participants.

Indian LNG procurement strategies are increasingly skewed toward back-to-back contracts, with aggregators approaching the international market after assuring LNG purchases by downstream customers. The strategy also attaches high importance to ensuring alignment between procurement and marketing indexations.

Currently, Indian market aggregators are trying to procure LNG volumes on non-LNG indexes such as Henry Hub and crude oil, because the marketing teams of some companies have already committed these contracts downstream or the downstream customers have a preferred indexation.

While the strategy is seemingly sound and risk-averse, certain stresses can emerge because of this thinking, especially when the deals are concluded in India on non-LNG indexations.

As an example, Indian companies are looking to buy strips of cargoes for 2025-2028, a period when the market is bridging through a phase of tight market supply to a period of glut.

To fulfill this requirement, several Indian companies have signed and are still looking to tie up five-year LNG term contracts so that the period of lower prices later this decade can bring the average price of the contract lower even if the spot LNG prices are higher at the beginning period of the contract.

However, the aggregators have passed on the risks that arise from a potential increase in the effective price due to non-LNG indexation, to the downstream consumers. These consumers have been saddled with contracts on Brent and Henry Hub basis without adequately hedging their exposure.

India's city gas distribution companies, oil companies with refineries as consumers and industrial consumers typically don't hedge their LNG exposure, sources said.

Cross-commodity hedging

A key risk currently in the Indian market is that spot LNG prices may fall below term contract prices linked to crude oil and Henry Hub. With that, at least two Indian companies are engaging in cross-commodity hedging by taking positions such that crude oil or Henry Hub exposures are converted into JKM.

"The idea is that companies can lock the spread between crude-linked price and the spot price," a trader said. "It depends on whether the company is a trading entity, an aggregator or an end-user."

"If, say, the company has a crude oil-linked contract, they can go short on crude futures [sell crude oil futures] and go long on JKM [purchase JKM futures] because the current risk environment in the spot market is of spot LNG prices rising and crude remaining rangebound," the trader said.

"The timing of the hedge and the size of the hedge are important. A company can go short on Brent futures [sell crude oil-linked futures] and purchase JKM futures if the company is buying in the spot market to supply volumes as part of a crude-linked contract."

One of the companies with a Henry Hub exposure recently purchased Henry Hub futures and sold JKM futures to convert its Henry Hub-linked contract price into a JKM-linked price in order to market its volume downstream.

To demonstrate how this would pan out, consider that the Henry Hub contract price is a 115% slope to Henry Hub plus a constant of $5.5/MMBtu, for deliveries into West India, with the current LNG price at $13/MMBtu and Henry Hub price at $4/MMBtu.

The buyer would consider purchasing Henry Hub futures and selling JKM or WIM futures, since the risk for the company is that its upstream price becomes more expensive than the spot LNG price and making this transaction would lock in the spread between its Henry Hub contract and spot price.

Hedging RFQs

However, even the Indian companies that do hedge LNG exposures may not have the best approach, according to sources. Indian companies typically would send their Request for Quotes to more than 10-15 entities, which could increase the risk of slippage and result in higher offers than the current market value.

"Indian companies send it to 15-20 banks, funds, and then these entities go to the market to look for the volume, the offers just recede and as a result, the slippage is sometimes as high as 50 cents/MMBtu," a Singapore-based source said.

Another Singapore-based source said: "If the reason that Indian companies send to so many entities is for compliance purposes, they could send their enquiry to three to five people and then change the name of entities in every iteration, it would reduce the slippage significantly."

Platts, part of S&P Global Commodity Insights, assessed the West India Marker, the LNG price for cargoes delivered to the Middle East and India, for May at $12.588/MMBtu on April 2. Calendar year 2026 derivatives were assessed at $11.875/MMBtu and 2028 derivatives at $8.925/MMBtu on April 2.

Henry Hub futures averaged $4.369/MMBtu for 2026 and $3.582/MMBtu for 2028, as per the forward curve published on the Chicago Mercantile Exchange on April 2.

The Indian market still has a long road to LNG market evolution, but the addition of risk management tools could ensure that companies can still make hay while the sun shines.