15 July 2018

The India-Russia-US Energy Triangle

By Saurav Jha

In early June 2018, India received its first consignment of liquefied natural gas (LNG) from Russia’s Gazprom. This followed the first ever arrival of an LNG cargo to Indian shores from the United States in March this year. Each occasion found India’s Union Minister of Petroleum and Natural Gas (MoPNG), Dharmendra Pradhan, in attendance, as if to symbolize that India is engaging both the United States and Russia as part of its agenda to diversify away from acute dependence on OPEC for energy sources. It also means that the United States and Russia, besides vying for a share of the Indian defense market, will now increasingly find themselves in competition for India’s energy pie as well.


Nevertheless, India will seek to keep a balance between the two as far as energy cooperation is concerned, despite any complications that may arise due to the United States bringing into force the Countering Adversaries of America With Sanctions Act (CAATSA), which targets third parties engaging in significant transactions with Russia’s energy and defense sectors. While there are similar motivations for India to build ties with the United States and Russia, respectively, either relationship also brings to the table specific value propositions. Besides, the key reason behind India’s diversification strategy is to enhance its own negotiating clout as a major energy importer, not constrict it.

For instance, the LNG cargo supplied by Gazprom came to India only after the Russian company agreed to renegotiate the 20-year supply contract, which originally dates from 2012, with India’s main state-owned natural gas utility GAIL. As part of the renegotiated deal, Gazprom agreed to an 80 percent cut in the previously contracted annual delivery volume of 2.5 million tonnes per annum (mtpa) for the first year, with yearly deliveries reaching that level only from the fourth year onwards. Gazprom also agreed to change the price-indexation formula for the delivered gas from being linked to Japanese Custom Crude (JCC) to Brent, which made the final price significantly cheaper than what it would have been otherwise.

This willingness on Gazprom’s part to accept major changes in the contractual terms with GAIL followed a successful LNG contract renegotiation executed by another Indian state-owned LNG buyer, Petronet LNG (in which GAIL has a stake), with U.S.-based Exxon Mobil’s Australian Gorgon Project in 2017. Petronet had also managed to get Exxon Mobil to agree to a different price indexation formula that led to a lower price for the imported gas, saving India nearly $600 million.

India’s ability to renegotiate existing long-term LNG import contracts stems from its clout as Asia’s third largest LNG buyer at a time when the Asian LNG scene has become a buyer’s market, with short-term contract and spot prices trending significantly below those of old long-term contracts. Moreover, the Indian LNG market is expected to see considerable growth given that India intends to raise the share of gas in its energy mix to 15 percent from the current 6.2 percent, at a time when domestic production remains disappointing and gas imports already account for 45 percent of overall consumption. This turn to a “gas-based economy” is driven by India’s desire to lower the carbon intensity of its growth and meet its COP-21 emission reduction commitments.

However, to facilitate this expansion, India needs to put in place more extensive gas storage and distribution infrastructure and that is why reduced deliveries are being sought in the initial contract period by GAIL and other Indian LNG importers. But the key objective behind renegotiating India’s long-term LNG contracts is to lower the price of the imported gas. As Pradhan told visiting U.S. Energy Secretary Richard Perry, during the inaugural meeting of the India-U.S. Strategic Energy Partnership (SEP) held in April 2018, India is a very “price sensitive” market.

Pradhan’s observation was intended to convey India’s desire to renegotiate contracts for its long-term U.S.-origin LNG supplies. GAIL currently has long-term LNG import deals in place with Houston-based Cheniere Energy for 3.5 MTPA from the Sabine Pass terminal, and with Dominion’s Cove Point for another 2.3 MTPA. The price for these supplies is derived by adding a fixed capacity charge of $3 per mmbtu to 115 percent of the Henry Hub price, which taken together with freight charges, currently make these supplies uncompetitive not just with those from the spot market, but also with respect to Gazprom’s deliveries under the renegotiated contract, given current Brent prices.

In the first half of this decade, when India firmed up these U.S.-based contracts, their pricing formula with its Henry Hub linking was precisely what made them attractive with respect to LNG supplies linked to oil prices, which at the time were reaching historic highs. In fact, the prospect of U.S.-based LNG was one of the key factors that forced India’s current top gas supplier, Qatar’s RasGas (which uses an oil-indexed formula), to renegotiate its LNG supply contract in 2015.

Today, securing long-term non-oil indexed gas supplies from abroad is no longer a concern for India, with the Asian LNG spot market being awash with cheap supplies. As such, India now wants the fixed capacity charge part of the price for its U.S.-based supplies to be lowered in order to reflect the new realities of the Asian market. But India’s U.S. suppliers are reluctant to do this, because India was supposed to be an “anchor” buyer for their LNG in lieu of what were then much cheaper Henry Hub-linked prices. This is also why U.S. companies are unwilling to remove the “take or pay” aspect of their contracts, where reduced delivery acceptance by the customer entails penalties.

But the Indian side has already managed to get RasGas to waive accumulated penalties from reduced deliveries and Gazprom is also not sending supplies on a take or pay basis. The India-U.S. Joint Task Force on Natural Gas (JTF-NG), set up in April 2018, whose objective is to increase the share of gas in India’s energy mix, is likely to facilitate negotiations on these issues. It seems the U.S. side is banking on the idea that India will want to keep Henry Hub-priced gas in its portfolio as part of its hedging strategy in an uncertain oil and gas market, where oil prices may be on the rise again. As Perry remarked during the April SEP meeting, “China or Russia may deliver a fuel source to you. Cheaper? I don’t know that.”

Be that as it may, Indian majors have been exiting investments in U.S. shale plays (which till last year stood at around $5 billion), since gas delivered from these acreages isn’t particularly viable for supply to the U.S. domestic market and, as mentioned earlier, locking-in overseas reserves for security of supply to India is not an objective anymore. For example, in March 2018, Indian oil and gas major Reliance sold its shale assets in Pennsylvania, in the United States, at a 60 percent discount to the acquisition price of $392 million. This sale followed similar exits last year from other shale plays.

With the emphasis being on profitability, India now seems more interested in conventional Russian gasfields. Reports suggest that India is looking to purchase equity in the Yamal LNG project, which will supply most of the cargoes that Gazprom will deliver to India as part of its long-term contract with GAIL. If realized, Indian investment into Russian gasfields will follow its already significant exposure to Russian oil projects. In 2017, a consortium comprising various Indian state-owned oil and gas majors bought a 23.9 percent stake in Vankorneft, a subsidiary of Rosneft, as well as a 29.9 percent interest in Taas-Yuryakh Neftegazodobycha, which operates the gigantic Srednebotuobinskoye field.

Taken together with older investments in Sakhalin, Indian investment in Russia’s strategic oil and gas sector now totals $10 billion. This level of exposure is translating into heightened deliveries of Russian crude to India, which rose by a factor of ten in 2017 as compared to the previous year. Another key reason behind greatly increased Russian crude deliveries is the fact that they are currently trading at a discount with respect to comparable sour-crude blends from OPEC and Indian refineries have retrofitted themselves to process these supplies rather easily.

India’s investment relationship with Russia in the oil and gas sector is also not a one-way street, given that a Rosneft-led consortium acquired a controlling stake in the Indian assets of Essar Oil for $12.9 billion in 2017, which is the largest ever overseas acquisition by a Russian consortium. The deal has seen Rosneft gain control over the giant Vadinar refinery, a captive port and a distribution network of over 3,500 filling stations, thereby putting it in a position to push more Russian oil into the Indian market. This fact was recognized by Russian Foreign Minister, Sergei Lavrov, when he stated that “Rosneft has gained a stronghold in the Indian market” on the sidelines of the Modi-Putin informal summit in Sochi, held in May this year.

But Russia is not the only new growing source for India’s crude imports. In August 2017, a crude delivery from the United States reached India for the first time after an interregnum of 42 years. Like Russian blends, U.S. sour crude from shale deposits is also suitable for Indian refineries and despite freight costs, is still proving to be cheaper than India’s imports from nearby OPEC suppliers such as Saudi Arabia. By late 2017, state-owned Indian oil majors had placed orders for 7.85 million barrels of U.S. crude, with these imports expected to boost India-U.S. bilateral trade by $2 billion, according to the U.S. Embassy in India. Indeed, heightened U.S. crude imports are being offered by India as a confidence building measure to the Trump administration on the trade front. The United States on its part has voiced a desire to help India build its strategic petroleum reserves.

India is also using rising U.S. and Russian crude imports to bargain hard with its primary West Asian suppliers, such as Saudi Arabia, to discard the “premium” they are currently charging India as compared to what OECD customers pay. India also wants its West Asian suppliers to make concessions on credit and insurance terms. Interestingly, due to the availability of U.S. and Russian sour crudes, there is no guarantee that OPEC members in India’s neighborhood such as Saudi Arabia, Iraq, and Kuwait will increase their market share in India as the latter begins to curtail Iranian crude imports due to the re-imposition of U.S. sanctions.

While price is a key factor driving India’s turn toward the United States in oil markets, environmental considerations are ironically leading to greater Indian imports of thermal coal from the latter. Several states in northern India banned petcoke use last year to cut air pollution levels, a move that has led to key users such as the cement industry to import relatively high-calorific content U.S. thermal coal as an alternative. U.S. coal imports to India have grown manifold since the ban last year, a trend which may continue given that environmentalists are pushing for a nation-wide ban on petcoke in India. Meanwhile, Russian higher-grade thermal coal deliveries to India are also on the rise and Indian companies are acquiring mines in the Russian Far East with a view to securing higher calorific value thermal coal deposits. For instance, in December 2017, the Russian subsidiary of India’s Tata Power acquired a thermal coal mine in Kamchatka for supplies to the company’s power plants in India.

Incidentally, coal has been identified as one of the four primary “pillars of cooperation” between India and the United States under the terms of their SEP, alongside “oil and gas,” “power and energy efficiency,” and “renewable energy and sustainable growth.” Cooperation in the coal sector is not supposed to be only about coal imports from the United States but also extends to collaboration in “clean coal” technologies. In fact, the India-U.S. energy relationship purports to be much more than a buyer-seller relationship as reflected by the mission of JTF-NG, which “provides a team of U.S. and Indian industry experts with a mandate to propose, develop, and convey, innovative policy recommendations to Government of India in support of its vision for natural gas in the economy of India.”

The United States is already involved in surveys for estimating shale gas reserves in India and scientists from both countries are also working together to develop an economically viable method for exploiting gas hydrates, of which India has the world’s second largest reserves. It is probably left unsaid that U.S. help to India in its own upstream oil and gas sector, which the Modi government wishes to revive in order to reduce dependence on imports, will make it easier for the United States to gain a larger share of the Indian market in the interim. Especially since India-Russia cooperation in the hydrocarbon sector is already quite wide and deep with interlocking investments underlining a convergence of interests.

That convergence of interests means that India is not likely to let provisions of CAATSA, which can lead to secondary sanctions on non-U.S. entities involved in “Special Crude Projects” in Russia, deter it from further investments in the same. Indian investments have helped balance the influence of the Chinese in Russia’s upstream sector, something that has served to highlight India’s continuing geostrategic relevance to Moscow. In fact, India’s hydrocarbon imports from the United States and Russia will lead to both having an added interest in ensuring freedom of navigation in the Indo-Pacific. Besides, diversifying it energy imports, India will always look to balance that diversification.

Saurav Jha is a commentator on energy and security issues. Follow him on twitter @SJha1618.

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