Gail India is looking for LNG savings in U.S. shale downturn

LNG tanks at sunrise
Source: DollarPhotoClub

India’s state-run energy giant, Gail, is planning to add to its 20-percent-stake in Carrizo’s Eagle Ford Shale acreage by spending close to $1.5 billion (about Rs 9,500 crore) on additional shale gas assets in the United States. The company believes that the move will help offset the risk associated with the market-linked pricing of 6 million tonnes of liquefied natural gas it has contracted to purchase annually from the U.S. It will also help to meet future gas demand in India.

At the same time, Gail is attempting to make further savings by swapping one-third of the contracted American LNG with a gas seller nearer to India to save on transportation costs.

Looking for shale bargains

Gail is India’s largest vertically-integrated natural gas company with services comprising exploration and production, processing, transmission, distribution and marketing.

The company has committed to a 20 year sales-and-purchase agreement with Sabine Pass Liquefaction LLC, for the supply of 3.5 million tons per year of LNG, along with a similar deal for 2.3 million tons per year of LNG liquefaction capacity with Dominion Cove Point LNG.

Gail believes that the current low oil and gas price environment will allow it to pick up some quality shale assets from cash-strapped operators.

“In the US, if you stop exploration, you are likely to lose your acreage to the government,” a Gail executive, who did not wish to be identified, told The Economic Times. “Therefore, it makes sense for the shale explorers to sell assets to someone willing to fund exploration and production,” he said.

The company has not yet identified any specific acreage they wish to buy.

“We are searching for an asset that can produce about 3 million tonnes per annum. That will help cover the pricing risk of about 50 per cent of the LNG we have contracted to buy,” the executive said.

Saving on LNG

To achieve further savings, Gail is planning to exchange 1-2 million tonnes – of the contracted 5.3 million tonnes per annum of LNG from the U.S. – with a seller in Africa, the Middle East or Asia-Pacific.

“Transporting LNG in cryogenic ships from the U.S. will not just be time-consuming, but will add a little extra to the cost, wiping away some of the gain accruing from a Henry Hub linked price for gas,” a senior company official told the portal Money Control.

“There are sellers who sell LNG to Europe from the Middle East or East Africa or the Asia Pacific region. Gail’s U.S. LNG can be supplied to European users and an equivalent volume shipped to India,” the official said.

“We would like the saving the seller makes through the swap to be shared with Gail. We believe we can save 40-50 cents per million British thermal unit through the swap,” he said. Gail plans to issue tender for the swap some time in August, he said. “The issue has to go to the Board. Once the Board approves it, we will issue the swap tender through Singapore-based trading arm, Gail Global Singapore Pte,” the official said.

GAIL has already sold 2 million tonnes of LNG to overseas users. “That LNG we do not see coming to India as we did not receive offers from domestic users for that. But we reckon some 3-3.5 million tonnes of U.S. LNG will be consumed in India,” the official said.

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