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Soaring LNG prices forcing refineries to turn back to oil

Soaring LNG prices forcing refineries to turn back to oil
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First Published: Wed, Oct 19 2011. 08 15 PM IST

Bloomberg
Bloomberg
Updated: Wed, Oct 19 2011. 08 15 PM IST
Ahmedabad/Mumbai: Three years after Indian refiners began migrating to natural gas for a cheaper and cleaner fuel, a delay in the ramp-up of local output and the rising cost of importing gas are forcing them to switch back to oil.
The reversal of trend has seen fuels like furnace oil and naphtha become relatively favourable options for units that operate on a dual-fuel system. Companies that had expected operating margins to improve with the use of natural gas are now reconsidering their fuel procurement strategy.
Reliance Industries Ltd (RIL), which operates India’s largest refinery at Jamnagar in Gujarat, has started using furnace oil as a fuel since September along with some amount of imported liquefied natural gas (LNG), as the prices of the two have nearly levelled, an RIL official said. He did not want to be identified.
Using furnace oil saves transportation costs, compared to LNG.
An official spokesman of RIL refused to comment on the issue. An email sent to the company remained unanswered.
Essar Energy Plc.’s refinery at Vadinar in Jamnagar, too, is affected by the high prices of LNG. A person familiar with the development said Essar, too, has had to shift to naphtha to meet a part of its fuel needs, turning away from LNG owing to high prices. He, too, did not want to be identified.
An email sent to Essar did not elicit any response.
Bloomberg
With gas production in India hitting a hurdle, most notably at the D6 block in the Krishna- Godavari basin, India’s largest gas find being developed by RIL, the country has been compelled to meet the shortfall with imported LNG.
Prices of imported LNG in Asia have spiralled, with Japan driving most of the demand in wake of the earthquake and tsunami that hit the country in March, leading to a shutdown of its nuclear power plants.
The landed cost of imported LNG bought from the spot market has more than doubled in the past one year to around $17-18 (around Rs.900) per million British thermal unit (mmBtu) in India. Analysts and consumers say that at these prices, there is negligible arbitrage in using imported gas over oil.
RIL’s Jamnagar refinery, which requires as much as 14 million standard cubic metres per day (mscmd) of gas, could increase its usage of oil if LNG prices shoot up further, the company official said. It continues to meet more than 60% of its fuel requirements from residual fuel gas that it produces.
At an oil and gas conference held in Mumbai in September, Partha. P. Maitra, president (planning and business development) at RIL, said the firm was “unhappy” with the price it was having to pay for LNG.
An official of Bharat Petroleum Corp. Ltd (BPCL), the state-run oil marketing firm that also has four refineries, said that though the company’s refinery in Mumbai was still using some imported LNG, the price situation was being closely monitored. “We are keeping a close watch to see at what point it becomes more beneficial to use naphtha or furnace oil instead of imported gas,” this official said, who declined to be named.
Imported LNG apart, BPCL’s Mumbai refinery gets gas from state-run gas marketing firm GAIL (India) Ltd and also from D6. The refinery’s entitlement from D6 has been drastically reduced following a decline in production from the field and the government’s decision to prioritize supply to power and fertilizer companies from whatever supplies are available.
B.K. Datta, director (refineries) at BPCL, agrees that imported LNG may soon become a totally unviable option. “It is almost getting totally unviable to use LNG as a fuel and the advantage of using it as a product feedstock is also getting narrower,” he said.
Gas is also used as a feedstock in a process plant in a refinery for producing hydrogen.
India imports around 50 mscmd of LNG, a quarter of total gas demand, through two existing LNG receiving terminals at Dahej and Hazira in Gujarat.
In the last one month, the supply of imported LNG has diminished by around 5-7 mscmd, according to an official of Gujarat State Petroleum Corp. Ltd (GSPC), one of the biggest buyers of imported LNG in India. GSPC is also in the process of setting up an LNG terminal in Mundra, Gujarat.
The fall in the quantum of gas imported is a result of Indian buyers not willing to match the price on offer by their Japanese counterparts, said Hong Chou Hui, managing editor of Asia LNG, a publication from energy research firm Platts.
“The Indian buyers are reluctant to play catch with the Japanese,” Hong said. Though Japan has been buying a lot of LNG from the international market, there was still a lot of cargo available for those willing to pay the price, he added.
Hong links the problem to the unwillingness of Indian downstream users to buy the imported LNG at such high costs, which also serves as a disincentive for importers. “They are used to cheap domestic gas being available and it is bit of a systemic shock for them,” he added.
“No LNG supplier is willing to take a long-term or even short-term call as no one really knows how the underlying crude prices will move in future,” said Harshvardhan Dole, vice-president of research (institutional equities) at IIFL Capital, the institutional equities division of India Infoline Ltd. “Qatar, which is the hub for supplying LNG, is not producing at full capacity and Japan is buying from them at high prices. There is hardly any margin for Indian refiners to use gas beyond $18 per mmBtu.”
Akhil Sambhar, associate director (oil and gas practice) at audit and consulting firm Ernst and Young, said though crude prices have started coming down, the barrel of oil equivalent price of gas is not reflecting the trend. “The demand-supply scenario as far as crude is concerned is better developed than for LNG, as crude is relatively easier to transport,” he said.
Domestically produced gas is the only solution to India’s gas needs in the long-run, Sambhar added.
LNG importers, however, feel that the price of imported gas may have peaked and refiners will continue using it.
“Liquid fuels like furnace oil makes sense for those who produce it on their own,” said A.K. Balyan, chairman of Petronet LNG Ltd, India’s largest LNG importer. “Given the volatility in crude prices, flat growth in Europe, and US all set to export LNG, I don’t see any reason for prices in Asia to go up further.”
Indian refiners will continue to buy LNG if it makes economic sense, he added.
maulik.p@livemint.com
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First Published: Wed, Oct 19 2011. 08 15 PM IST
More Topics: LNG | RIL | Essar | BPCL | Furnace Oil |