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Flexing India's muscles

The country will need to import more oil and gas. But, as recent oil and LNG deals show, the advantage is presently with the buyer

At some point before the end of 2020, liquefied natural gas from the US, Australia or Qatar will land for regasification at a plant in Haldia, a port in West Bengal state. Once they're warmed, the molecules will enter India's domestic pipeline network, supplying fertiliser and steel plants, industrial users and even small customers. It should be a new source of cheap fuel for a hungry economy.

India will need more. Its rapid expansion will translate into ever-rising volumes of fossil fuels and surging supplies from abroad. Domestic production, renewables, and conservation efforts will play a part in mitigating this. And Indian investors are scouring the globe for reserves. But for all that, the gap between supply and demand will widen.

As India is finding out, though, it's a good time to be a buyer—and to cut deals with suppliers willing to accept what they can get for their product.

In oil, India's needs are great. Domestic production runs at about 0.9m barrels a day, but demand is more than 4.5m b/d and rising. Refining capacity in the country alone would allow for processing of 4.6m b/d now—from more than 20 processing plants—and the addition of more capacity will lift the total beyond 6.3m b/d in the coming years. Some of this (usually around 1.2m b/d) is exported. Middle Eastern producers, especially Saudi Arabia (which continues to explore plans to build its own refinery in India), account for more than half of India's internationally bought oil. Venezuela, Sudan, and Nigeria are also suppliers.

But India is casting the net wider too, taking advantage of the excess of supply in the world, cheap benchmarks and its wish to diversify away from politically risky suppliers. In recent months, two major state-owned oil refiners, Indian Oil Corporation (IOC) and Bharat Petroleum, signed deals to buy American oil. IOC's shipment was due to arrive by the end of September. Hindustan Petroleum also wants to import oil from the US for its 166,000-b/d refinery in southern India. Canada's Husky Energy, among others, has also tested the possibility of shipping oil to India—it sent a cargo of 1m barrels to IOC in 2013.

In natural gas, India's market touch is also hardening, as is its willingness to flex its buying power. For now, gas's role in the economy is small, making up just 6-10% of the energy matrix. The government, mindful of climate targets and the growing thirst for electricity, wants this to grow to 20% by 2025. And, though gas's share in India's energy system may be relatively puny, its significance to the world's LNG market—the source of all the country's imports—is not. India is already the fourth-biggest importer.

Domestic production runs at about 0.9m barrels a day, but demand is more than 4.5m b/d and rising

This will grow as more regasification infrastructure is added. With no international pipelines supplying it, India bought about 19m tonnes of LNG in 2016—all regasified in four terminals, with total capacity of 28m tonnes a year. But more terminals are underway, to be built along eastern India's coast, including that at Haldia, in West Bengal. Petronet LNG, the sector's leader, is also expanding its terminal at Dahej, in Gujarat. The developments should add at least 15m t/y of receiving capacity. All told, India wants to increase its LNG regasification capacity to close to 50m t/y over the next five years. Crucially, the interior gas pipeline network should also expand to handle more gas—at present many consumption centres are not grid-connected, stunting demand and the ability of LNG to reach them.

All this should be an opportunity for exporters targeting the country. But, in a buyer's market Petronet, and India generally, have been canny in seizing the moment. This started in 2015, when Petronet renegotiated a contract with Qatar's RasGas. Not only did Petronet secure a waiver of the $1.8bn fee it was due to pay for not taking as much gas as it had committed to, but it also drove down, by about half, the price of the gas it would take. It was a watershed moment for the world's LNG sector.

Petronet pulled off another coup this year, this time with another global LNG heavyweight: ExxonMobil. "Happy to share the good news that India has, yet again, been able to address the long-term price issue of LNG from Gorgon to suit the Indian market," tweeted petroleum minister Dharmendra Pradhan on 9 September. He added that the "amicable price" was struck "in a similar way to what we have done with LNG from Qatar"—a reference to the RasGas deal.

Reports suggested the price cut on LNG supplied under a long-term contract by Exxon from Gorgon LNG in Australia would be about 15%. Exxon will also pay for transport costs. In exchange, Petronet agreed to take another 1m t/y—as it did with RasGas—on top of the 1.44m t/y it agreed in 2009 to buy.

It was a sign of India's power in the market. Gail, the state-run LNG importer, is also locked into its own long-term contracts with US suppliers. It, too, may feel it's time to push for cheaper terms, believe analysts. Like India's decision to import oil from new suppliers, the willingness to take on big suppliers is also a sign that, whatever the potential of India as an importer—in oil or gas—new and even established partners should not expect an easy ride.

This article is part of a report series on India. Next article is: India's sunny uplands

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