India’s HPCL in advanced talks to sign first long-term LNG deal

India’s state-owned Hindustan Petroleum Corp. Ltd. is in advanced talks to sign its first long-term LNG deal after several years of planning, for its 5 million metric tons/year Chhara LNG terminal in the western state of Gujarat, several market participants said this week.

Negotiations are ongoing for a long-term LNG agreement for 12 cargoes per year supplied for 15 years starting in 2027 and HPCL has shortlisted at least one major portfolio company with which the final deal is being discussed, the sources said.

HPCL could not be immediately reached for comment.

This deal would make HPCL the last of India’s three downstream oil marketing companies to sign a long-term LNG contract, after Indian Oil Corp. and Bharat Petroleum Corp. Limited.

India’s main LNG importers initially were the state gas companies Petronet LNG and GAIL, followed by private energy conglomerates like the Adani Group.

HPCL, India's third largest oil refiner by capacity, has been looking to sign a long-term LNG deal since at least 2021, when it fully acquired HPCL Shapoorji Energy Private Limited, the joint venture that was building the Chhara LNG terminal project, as part of its diversification into the gas business.

HPCL’s latest round of talks in 2024 was initiated as long-term contract prices and terms had started to become attractive to Indian buyers, market sources said.

Contract flexibilities

The current contract discussions likely include flexibilities that the seller can exercise, which has driven the price to a very competitive slope to crude oil for DES basis cargoes delivered at the newly built Chhara LNG terminal, sources said.

The draft term sheet also includes flexibilities such as LNG volume of 3.35-4 TBtu for each cargo with seller optionality of plus/minus 5%, according to documents seen by S&P Global Commodity Insights. This implies that the annual contract quantity can range from 38.1 TBtu to 50.4 TBtu.

Market sources said the seller may have also obtained other flexibilities such as exercising Downward Quantity Tolerance, which refers to lowering the number of cargoes that can be delivered depending on market conditions.

Another negotiable clause was around destination restrictions, which allow sellers to control reselling and diversions of the cargo. More destination flexibility means a higher price premium.

HPCL initially sought rights to nominate any alternative discharge port in India, but the indicative term sheet narrowed down the delivery to any of the LNG terminals in Gujarat state -- Dahej, Hazira or Chhara. Market sources said the final agreement would focus on Chhara with one alternative port on the west coast of India.

The indicative term sheet mentioned a price review mechanism that can be triggered once in seven or eight years to reflect the reference market price, defined as other LNG sales and purchase agreements for South Asia for at least 10 cargoes per year linked to oil prices and with a tenure of at least five years, while also considering factors such as the start date and signing date.

These flexibilities are likely to lower the contract price, similar to Shell’s oil-linked contract with ArcelorMittal Nippon Steel India Ltd., which was priced at an 11.5% slope to crude oil for 0.5 million mt/year for 10 years starting in 2027, sources said.

Downstream demand

In July, HPCL said it aims to start operations at Chhara LNG by November or early December, and the terminal can be further expanded to 10 million mt/year in the future. The project achieved mechanical completion in March, and HPCL even tried to import a commissioning cargo earlier this year.

“The construction of an RLNG terminal is a costly capital expenditure,” a source based in India said. “So, I think they (HPCL) will have to seriously consider signing the long-term contract. It will help in the utilization of the terminal and utilization is required to justify the capex costs.”

The terminal is expected to supply LNG to HPCL’s downstream refinery business where it will displace fuels like naphtha and fuel oil, which become expensive when oil prices surge over $80/b.

HPCL has a refinery in Mumbai and another in Vishakhapatnam, and stakes in the joint venture HPCL Mittal Energy Limited. HPCL also has stakes in refinery and petrochemical companies such as Mangalore Refinery and Petrochemicals Limited and HPCL Rajasthan Refinery Limited.

Market sources indicated that if LNG prices are competitive against alternative fuels such as naphtha, HPCL can absorb 1 million-1.5 million metric tons/year at refineries and for city gas distribution. Further, sources indicate that six cargoes per year can be absorbed by HPCL Mittal Energy Limited.

“In India, refineries are so large in their size financially and operationally, they are their own separate entities and take decisions,” another source based in India said.

“Naphtha has no long-term contracts, crude contracts are not longer than a year or 18 months, so for an entity to say that it will sign a long-term LNG contract, it will have to consider its refineries but also consider the potential to market it.”

LNG will also go to HPCL’s city gas distribution and compressed natural gas businesses, which, together with oil refining, allow HPCL to concede more flexibility in LNG contracts.

The Chhara terminal also has two 200,000 cu m storage tanks, making it one of the largest LNG storage facilities in India.

Platts assessed West India Marker, the price for LNG cargoes delivered to ports in West India, Kuwait and Dubai, at $12.85/MMBtu for November on Oct. 15, S&P Global Commodity Insights data showed.