India is transitioning to long-term contracts for purchasing liquefied natural gas (LNG), a move that could potentially expose buyers to price mismatch risks in a market expected to see an influx of new supply, according to a report by S&P Global Commodity Insights.
The report highlights that the demand for LNG cargoes in the spot market in India is likely to slow down over the next couple of years as procurement shifts towards medium-term and long-term contracts signed by importers, some of which are set to begin as early as April.
With projections indicating a significant increase in global LNG production capacity from 2024 through 2028, reaching 666.5 million tonnes per annum, S&P Global cautions that the increased reliance on long-term contracts by Indian buyers may coincide with a period of declining spot prices due to the abundance of new supply entering the market.
Suyash Pande, Senior Editor for APAC LNG Pricing at S&P Global Commodity Insights, notes that a series of new long-term contracts totaling nearly 6 million tonnes per year of LNG supply, with durations of five years and longer, will gradually reduce India’s demand in the spot market over the next two years.
The pricing terms of these contracts, such as a five-year deal between GAIL and QatarEnergy Trading, as well as Bharat Petroleum Corporation’s contract with ADNOC Trading, are currently favorable compared to spot LNG prices, but they may become less competitive as spot prices decline in the future.
The report suggests that India’s LNG contracting strategy should adapt to ensure long-term gas supply security and mitigate market risks. It proposes strategies such as requiring state-controlled importers to ensure destination flexibility in new LNG contracts and exploring joint procurement for smaller city gas companies to enhance negotiation leverage.
Furthermore, the report emphasizes the changing dynamics of the LNG market, highlighting the limitations of pricing LNG based on oil slopes and advocating for a more nuanced approach in aligning LNG prices with market fundamentals rather than non-LNG commodities.
In conclusion, the report underlines the importance of strategic long-term planning in LNG procurement to shield Indian buyers from potential price mismatches in a market expected to witness fluctuations in supply and pricing dynamics.
