India’s shifting to long-term contracts for procuring liquefied natural gas (LNG) may lead to price mismatch risks in a market that is expected to witness fresh supply, S&P Global Commodity Insights said in a report on Thursday.

It pointed out that Indian demand for LNG cargoes in the spot market is expected to slow down over the next two years as procurement shifts to medium-term and long-term contracts signed by importers, some starting as early as April.

“The higher reliance on term contracts could be poorly timed as the market expects a flush of new supply that could drive spot prices lower, leaving Indian buyers exposed to more expensive contracted LNG,” it said.

Counting only projects that are under construction or approved by financially capable backers, IEEFA in an April 2024 report said it anticipates global LNG production capacity to grow by roughly 193 million tonnes per annum (mtpa) from 2024 through 2028 to 666.5 MTPA.

Suyash Pande, Senior Editor for APAC LNG Pricing at S&P Global Commodity Insights, said, “A mix of new long-term contracts totalling nearly 6 million tonnes per year of LNG supply, with tenures of five years and higher, have commencement dates staggered over the next two years, gradually eating into India’s spot market demand.”

LNG prices a key factor

Prices are critical, for instance, S&P Global said that starting in April, a five-year deal between GAIL and QatarEnergy Trading, a wholly-owned subsidiary of QatarEnergy, for one cargo per month and Bharat Petroleum Corporation’s (BPCL) contract with ADNOC Trading for at least six cargoes per year for a five-year tenure.

The pricing for the two contracts is similar with a slope of 115-121 per cent to Henry Hub prices, with a constant of $5.6-5.8 per mBtu, Platts, part of S&P Global Commodity Insights, reported earlier.

These contracted volumes are cheaper than current spot LNG prices of around $13 per mBtu and the forward curve for LNG in 2025 and 2026, but they will become more expensive for buyers when spot prices fall from 2027 onward as more supply hits the market, it added.

International Energy Agency (IEA) in its India gas market report, released during the India Energy Week last month, said that with global LNG market expected to ease significantly later in the decade, while India’s exposure to spot market dynamics is set to grow after 2028 with expiration of legacy LNG contracts.

“In light of these trends, India’s LNG contracting strategy should adapt to ensure long-term gas supply security and mitigate market risks. Key strategies may include requiring state-controlled importers to ensure that all new LNG contracts are destination flexible (at least within India) and exploring joint LNG procurement for smaller city gas companies to help them negotiate better terms. Leveraging a period of lower international prices in the latter half of the decade could also provide an opportunity to lock in favourable LNG contracts.

S&P Global said that historically, Asian importers used oil slopes, calculated as a percentage of crude oil prices, as a proxy to price LNG contracts from a time when the LNG market was nascent, and buyers were looking to substitute oil products in the downstream market.

However, a robust derivatives market for LNG plus a growing pie of the spot market globally tests the utility of pricing LNG to non-LNG commodities, especially when fundamentally the commodities may be impacted by independent supply-demand factors, S&P Global explained.

Cheaper spot prices

LNG forward curves for the duration of GAIL and BPCL’s term deals indicate that spot LNG prices would be cheaper starting in 2027-28, it has pointed out.

“While market perception has been affected by recency bias, with record-high LNG prices since the Ukraine crisis, during 2018-2021, Indian LNG importers struggled to justify existing long-term LNG contracts that were significantly more expensive than spot LNG prices,” it said.

Over 2018-2021, West India Marker (WIM), the LNG price for cargoes delivered to India and Kuwait, was on average more than $2 per mBtu lower than contracted LNG priced at a 12.67 per cent crude oil slope plus a constant of 82 cents per mBtu. Spot LNG prices in this period were also lower than Henry Hub-linked US LNG, S&P Global pointed out.