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Shell Expands LNG Import Capacity in India

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Shell, Petronet Expand LNG Import Capacity in India (Update2) 

By Archana Chaudhary and Dinakar Sethuraman

Dec. 18 (Bloomberg) — Petronet LNG Ltd. and Royal Dutch Shell Plc are expanding liquefied natural gas import capacity in India even as the global recession cuts demand and prices of the fuel decline.

Petronet will double capacity at its Dahej terminal to 10 million metric tons by January, investing 16 billion rupees ($335 million), said Amitava Sengupta, director, finance & commercial. Shell has spent $625 million on the Hazira project and is raising investments to increase the capacity by 46 percent, said Deepak Mukarji, spokesman at the company’s Indian unit.

The companies planned the expansions in 2007 when India’s $1.2 trillion economy was booming. Spot LNG prices have more than halved since September as the global recession curbs demand and as customers switch to cheaper naphtha. Petronet has yet to secure supplies for the expanded capacity for 2009, Sengupta said, indicating the companies may operate the plants at reduced rates.

“Petronet may see serious problems next year,” said Ballabh Modani, Mumbai-based analyst at Enam Securities Pvt., who has an “underperform” rating on the stock. “The spot LNG market in India isn’t expected to recover any time soon.”

New Delhi-based Petronet posted a 51 percent increase in earnings per share for the year ended March 2008 by operating its terminal at about 130 percent of the 5 million-ton-a-year capacity and by sourcing spot cargoes at “competitive prices,” according to the company’s annual report.

The shares, which are down 68 percent this year, fell as much as 3.7 percent today on the Bombay Stock Exchange compared with a 3.7 percent rise in the benchmark Sensex as demand for LNG, a fuel used for power generation, dropped with India’s industrial output.

Petronet Imports

The nation’s industrial production recorded its first decrease in more than 15 years in October. Naphtha, a substitute fuel, is trading at a 60 percent discount to spot LNG.

Petronet imports about 5 million tons a year of LNG from Qatar under a multiyear contract and resells the fuel to customers in northern and western India. The company imported four spot cargoes this year compared with 19 in 2007.

Qatar will start supplying another 2.5 million tons a year of the fuel under the multiyear contract in the second half of the year, Sengupta said, declining to specify when the shipments would start. Petronet has also agreed to buy fuel between January and September to supply the Dabhol power plant, he said, declining to provide details of the volume and source.

“The country’s gas market will remain “soft” for the next two to three years as domestic supply rises to 80 million cubic meters a day,” Sengupta said in Barcelona Dec. 10.

Shell and Petronet’s terminals will have a combined capacity equivalent to about half of India’s current gas consumption. The expanded facilities will be ready as India’s economic growth is forecast to slow to 7 percent this year.

Shell’s Mukharji declined to comment on the investments. The European company has stopped spot imports to India since November compared with an average three a month this year, according to AIS Live on Bloomberg and Mukharji.

Naphtha Costs

Naphtha costs have dropped to the lowest level since February 2007 as the global recession sapped industrial demand and as India’s rupee fell about 22 percent against the dollar since January. That’s prompted power and fertilizer companies to switch to buying domestically produced naphtha rather than pay dollars for imported LNG.

“Naphtha use will continue to rise as we expect prices to fall further,” Modani said.

India had an average monthly surplus of 448,000 tons of naphtha from September to November, or 26 percent of monthly consumption, as production exceeded use, according to a report by Purvin & Gertz Inc. The surplus in the 12 months starting December may average 245,000 tons a month.

Shell’s Hazira LNG Ltd., a joint venture with Total SA, charged as much as $22.50 per million British thermal units, excluding transportation, for LNG in September, an official with a fertilizer maker said, asking not to be named because fuel pricing is confidential.

LNG prices have declined to about $11 to $12, along with a 78 percent decline in crude prices, Andy Flower, an independent LNG consultant and a former executive at BP Plc’s LNG business, said this month.

“The economics of price will always prevail,” said S.D. Prasad, general manager at NTPC Ltd., India’s biggest power producer. “With naphtha prices falling, we have already increased our purchases from the refineries and the forecast that we give for purchasing naphtha in the next few months.”

To contact the reporters on this story: Archana Chaudhary in Mumbai at[email protected]Dinakar Sethuraman in Singapore at[email protected].

Last Updated: December 18, 2008 05:12 EST

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