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India’s Mundra LNG terminal could face a difficult start

Construction has been completed at India’s 5mtpa Mundra LNG terminal in Gujarat but the commissioning process could be postponed because the facility is expected to close over the course of the monsoon season from June to October.

 The project, led by India’s independent energy infrastructure developer Adani, is also suffering from the lack of a gas pipeline connecting the facility to the target market which will make for reduced operations until late 2019 at the earliest.

 After that time, small volumes could be purchased for the local market, sources said. But this is unlikely to exceed one LNG cargo per quarter. 

The pipeline connection is critical for the commercial operations of the project since it allows Mundra to send out gas to Gujarat’s main grid. 

 State-owned GSPC which is responsible for the construction holds a 50% equity stake in the project. Adani controls 25% with the remaining share still being marketed to a strategic partner. 

While state-owned refiner Indian Oil has previously indicated an interest in buying the stake and a preliminary agreement was announced back in 2017, the deal is yet to be finalised. 

Indian Oil expects to commission its own terminal on the east coast of India at Ennore in the fourth quarter of this year.

The reasons for the delay are not clear, but one source suggested that it would make sense for Indian Oil to sign this agreement closer to the start of commercial operations at the facility. 

Further re-structuring could yet come as GSPC, which heavily relies on government subsidies, could consider selling its stake in Mundra.

Given that the facility is yet to secure a long-term supply agreement for LNG, the company could try to sell its share in the project.

“There are no underlying commitments on the part of GSPC in terms of contractual volumes,” the source said. 

Importers face challenges

Indian LNG importers are facing difficult market conditions.

As downstream gas buyers are heavily exposed to the price of competitive fuels, they are unwilling to enter into long-term contractual arrangements at present.

“I can get a contract with a downstream buyer for up to six months. Three months for some. Rarely someone will sign up for a year,” said an Indian LNG importer.

“I then have to aggregate all these customers into one price basket and work with that in terms of annual and monthly planning,” he said.

This means that without sufficient commitment from downstream buyers, securing LNG contracts on a long-term basis could be an unjustifiable risk for new projects.

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