GAIL stares at massive losses in its LNG business from 2018-19, Part-II: It took only a short time for the outlook to change dramatically – 13 Apr 2016

It took only a short period of time for outlook on the LNG market to change.

-- Japan has begun the re-start some of its nuclear plants, Australian LNG exports have surged ahead, and gas consumption growth in Asian markets, such as China and Korea, has slowed due to lower economic growth and competition from renewables and coal.
-- Meanwhile, gas demand in Europe has struggled to recover from post-recession lows and much of the continent’s regasification capacity remains underutilised.
-- GAIL is now confronted with a glut rather than a shortage, with substantial Australian and US LNG capacity expecting to enter the market right up to the early 2020s.
-- This does not even take into account LNG from other potential sources, such as Canada and East Africa, or the fact that in many key markets, LNG demand growth is showing worrying signs of weakening.
-- In addition, the oil price collapse that began in the middle of 2014 has also contributed to the precipitous drop in oil-indexed natural gas prices, especially in Asia.
-- As a result, the arbitrage opportunity, even allowing for the concomitant fall in the US HH gas price, has drastically narrowed.
-- Currently Henry Hub (HH) gas prices are at just below US$2/mmbtu, but spot LNG prices in Asia has gone down concommitantly to $4-4.5/mmbtu.
-- As a result, taking into account transportation costs, and a high fixed cost of $3/mmbtu for liquefaction, GAIL is left with heavy negative margins if its US cargoes are imported to India.