Geopolitical pressures fuelling India’s gas import deals?

As the demand for fossil fuels drops in the West, oil-rich countries such as the US are looking to play the energy diplomacy card on developing countries such as India in order to sell as much oil, gas and coal as they can—as seen in India’s encounters with struggling Tellurian

As the global energy transition gathers steam, the world is seeing a last-ditch attempt by fossil-fuel-rich countries to sell as much oil, gas and coal as they can—while they can. As they amp up their sales drive, India stands at an especially vulnerable juncture. With dropping demand in the West and China going green, India has become the last big market for global oil and gas majors.

This is a fraught moment for the country and the planet. Imported gas is neither climate-friendly nor, as CarbonCopy reported in 2021, competitive against any of the fuels it seeks to replace. And yet, between geopolitical pressures and the promise of other benefits in return for buying oil and gas, India is yielding. CarbonCopy takes a closer look at one such company, an US Shale gas manufacturer called Tellurian, which has a curious Indian connection. Attempts to forge long-term supply contracts has resulted in an on-again-off-again saga that illustrates why international energy companies see India as a hail Mary. It also shows exactly why gas remains a risky, if not foolish, gamble in India’s long term energy play. 

The India connection

Last December, Tellurian slipped back into the headlines. On December 11, 2023, the US-based LNG exporter fired its co-founder and chairman, Charif Souki. The news came as a limited surprise to industry observers. Tellurian has been struggling for a while. Driftwood, its shale gas export terminal coming up in Louisiana, has missed deadlines. Initial backers have dropped out of the project. The firm’s stock has plummeted.

By November, with cash reserves down to $60 million, matters were grim for the company. Barring a spike in gas prices or a fresh infusion of cash, the firm wouldn’t be a going concern after 12 months. Shortly thereafter, Souki was ousted.

But why should readers in India care about the boom and bust trajectory of an obscure shale gas firm in the United States? They should because Tellurian has a poorly explored connection with India. Over the past five years, overriding objections from state-owned Petronet LNG, the Indian government has kept it in the fray to pick up a 20% stake in Driftwood.

As things stand, India’s connection with Tellurian flags a larger trend. As renewables rise, rival energy producers are scrambling to sign long-term supply deals across the world. Nuclear power producers are pushing small and modular reactors. Middle-eastern countries like Saudi Arabia are trying to hook poor African countries to oil. Australia is pushing coal. The US and Canada are pushing gas. 

Given its large market, India is a large target for such energy diplomacy. Between climate change and accelerating decarbonisation, some of these deals can become white elephants. Tellurian is an instance.

An introduction to Tellurian

Ours is a time with two contradictory impulses playing out. On one hand, global capex into renewables has overtaken investments into hydrocarbons. At the same time, with gas majors pushing gas as a transition fuel, the world is also seeing a massive buildup in natural gas infrastructure.

By the end of 2023, as Global Energy Monitor reported, 436 LNG terminals were under construction worldwide. This includes 199 export terminals, with 109 of them coming up in the US (74), Canada (17) and Russia (18) alone. The rest were import terminals, mostly coming up in Asia-Pacific. These numbers mark an increase from 2019, when 202 LNG terminals were under construction worldwide. Of these, 116 were export terminals.

This buildup is the result of a fundamental shift in gas markets. As recently as 2000, most natural gas was consumed locally. That is changing now. The gas market is getting globally integrated. Driftwood is a part of this buildup. It was also Souki’s comeback into the US shale gas export push. In 1996, he had set up Cheniere Energy, a LNG importing firm he refashioned, after the discovery of large shale gas deposits in the USA, into a major LNG exporter. As such, he is one of the people credited with the creation of the US LNG export market. 

After leaving Cheniere post a falling out with the board, he set up Tellurian. The model he followed had not been tried earlier. Most export terminals, like Cheniere’s Sabine Pass, are standalone entities occupying a single rung in the global gas supply chain.

But not Driftwood. Souki wanted it to be vertically integrated, extending backwards to its own gas production unit (in the Haynesville Basin), pipelines leading to the liquefaction plant, and thence to Driftwood’s export terminal, which would have an eventual capacity of 27.6 MTPA.

Such a model, the company said, would protect Tellurian’s customers from market volatility. “When you tie in the gas supply to world LNG prices, you are exposed to that volatility,” Tellurian president and CEO Ocatvio Simoes had told Indian reporters last February. “The advantage Tellurian has for just about every partner in India is that if they become equity partners in Driftwood, they can lift LNG at the cost of producing LNG.”

It wasn’t that simple. To build this vertically integrated array, Tellurian departed from the industry norm of project financing through equity investors and debt, instead wanting buyers to step in as equity investors. For a $1.5 billion up-front payment, the firm said in 2018, equity partners would secure access to 1 MTPA for 20 years, which Tellurian would provide “at cost.”

The gains to Tellurian were easy enough to spot. Not only would it avoid interest payments, it would also firm up offtake. The gains for investors were less clear.

Is the price right? 

According to Tellurian, Driftwood LNG would cost around $4.00 FOB (cost at the time of loading onto the ship), and that the delivered price to India would be below $6.00/MMBTU – and, ergo, cheaper than other US LNG projects. 

Three points need to be made here. 

One, to stay cheaper than US peers like Cheniere, Tellurian needed to unlock large savings through vertical integration. In practice, however, the firm overpaid. “In November 2017, Tellurian purchased Haynesville shale natural gas acreage in Louisiana for $85 million,” said an IEEFA report published in 2021. 

“At the end of 2020, Tellurian wrote down the value of its Haynesville assets by $81 million, suggesting that the company had paid about 20 times as much for the acreage as it was worth.” The think-tank flagged similar problems of over-expenditure with Tellurian’s liquefaction plant as well. “Tellurian’s… Phase 1 cost is $12 billion for 11 MTPA output, or $1,090 per tonne of installed capacity,” said its report. In contrast, “Cheniere’s train six expansion now in construction has an announced cost of $2.5 billion for 4.7 MTPA of added capacity, or a cost of $535 per tonne.”

Two. For the longest time, with oil driving much of the global economy, gas played in smaller markets. Most of it was sold—for special uses like heating and industry—through long-term contracts. LNG infrastructure would be built only after demand had been established. Demand, effectively, determined supply. This was changing. As gas majors tried to unload all the gas they could, firms were setting up export terminals even without long-term contracts. “In the US alone, more than 17 million metric tonnes per year of LNG may be sold on spot markets or through short-term contracts, rather than long-term commitments,” wrote IEEFA.

Its report listed some of the capacity entering spot markets. “Shell has no dedicated customers lined up for the 2.4 MPTA of liquefaction capacity it buys from the Elba Island facility in Georgia, so it sells individual cargoes on the global spot market,” it wrote. “The situation will worsen when ExxonMobil and Qatar Petroleum finish the Golden Pass LNG plant in Louisiana in 2024, with 18 MTPA looking for buyers. It will get worse again when Shell and its partners complete the first phase of the LNG Canada project, with 14 MPTA in capacity but less than 4 MTPA in term contracts.”

By 2019, with supply overtaking demand, spot prices were falling. Tellurian ran into this question. Forget shale gas peers, could it be cheaper than spot prices? 

Spot prices, however, are unpredictable. Events like Russia’s invasion of Ukraine have sent costs spiralling upwards—pushing countries like Pakistan into crisis. But here comes the third point. A byproduct of shale oil, US gas is costlier to extract—and becomes competitive only when global gas prices are high. In contrast, gas from countries like Qatar is cheaper. Compounding matters, the kingdom is doubling down on gas as well—it wants to boost capacity from 77 MTPA to 126 MTPA by 2027. This is partly to choke off demand for shale gas producers. “As the low-cost producer, the Qataris… may see a strategic imperative to pre-empt and choke off higher-cost competitors,” noted SPGlobal. 

In addition, it’s cheaper to ship gas from the Middle East than from the US. “Gas from Qatar takes three days to India, which works out to a travel cost of 30-45 cents,” An employee of Petronet LNG had told The Signal in 2021. He didn’t want to be identified. “But when gas is brought from the USA, that takes 22-25 days and the transport cost becomes $1.5-2.”

1. Is Tellurian cheaper than rival shale gas producers?
2. Will Tellurian be cheaper than spot prices?
3. Will Tellurian be cheaper than rival gas producers like Qatar?
4. Is imported gas cheaper than the fuels it seeks to replace in India? 

These questions around price are central to an understanding of this deal. 

The US has been using gas to shift power generation away from coal plants. Europe, too, has been switching to gas for heating and cooling. In India, however, imported gas is not competitive against any of the fuels it wants to replace. For power generation, coal is cheaper. For industry, rival fuels like naphtha and fuel oil are cheaper. In cooking gas, too, prices have risen so high that families have fallen back on traditional fuels. Only in mobility is gas competitive against petrol and diesel, but faces headwinds from electric vehicles.

As things stand, even GAIL has been compelled to renegotiate its purchase contracts with Cheniere and Dominion Energy. Given spot prices are at record lows, the price agreed on the long-term deals were affecting its ability to re-sell the fuel.

That was in 2017. In 2019, however, something strange happened.

Unwilling company, willing government

Prospecting for investors, Tellurian approached India. Under the deal, for $2.5 billion, Petronet would get rights to 5 MTPA from Driftwood. It would, however, also underwrite $5 billion of Driftwood’s project debt. An aggregate commitment of $7.5 billion.

By this time, however, spot LNG prices stood at $2. And so, in May 2019, Petronet LNG’s board turned down the offer. “Members felt that the company should not go ahead with the deal due to changing global gas market dynamics, where the fuel is available in abundance at rock bottom prices,” reported NDTV Profit. “Locking imports for 40 years together with an equity investment in the liquefied natural gas terminal was not favoured,” said the report, adding Petronet’s promoters, including GAIL, Indian Oil Corporation and Oil and Natural Gas Corporation were all against the deal.

Then came a flip-flop. In September 2019, just before Prime Minister Narendra Modi’s visit to Houston, an MoU was finalised. “Petronet agreed to negotiate the annual purchase of up to 5 million tonnes of LNG, over the lifespan of the project, concurrent with an equity investment in Driftwood,” reported Bloomberg.

A government official privy to the deal negotiations told The Hindu: “The pricing of gas is volatile. What looks like a bad deal now will look brilliant when prices change, and they will, and vice-versa.”

Capital markets, however, were less convinced. Tellurian’s stock rose, while Petronet’s fell.

In subsequent years, the deal waxed and waned. On not being finalised by March 2020, as initially projected, the MoU was extended by three months. It didn’t help. It expired once more. In November that year, Petronet LNG’s director (Finance), Vinod Kumar Mishra, told reporters: “Right now, a lot of cheaper LNG is available with us, without any investment, so why should we at all go for an investment.”

By that time, Tellurian’s stock had also fallen after a short-selling attack. In response, the company slashed headcount. Two years later, in September 2022, Shell and Vitol scrapped their deal with Tellurian. The Indian government, however, stayed bullish. In October 2022, Minister for Petroleum and Natural Gas Hardeep Puri met Simoes. “We exchanged notes on the evolving gas markets & opportunities for Indian Oil Marketing Companies to invest in Tellurian’s projects in the US,” he tweeted thereafter. 

In February 2023, when GAIL issued an Expression of Interest for LNG supplies and wanted to pick up to 26% equity in exporters, speculation grew again that the Indian government would revive the Trump-era deal with Tellurian.

This continuing eagerness to invest in Tellurian has not received the attention it deserves.

Plays in the fossil fuel endgame

Why the US pushed Tellurian is easy enough to understand. 

The US shale industry is a big donor to Democrats and Republicans. Under Obama, the country saw a spike in its shale oil and gas production. On becoming president, Trump tried to make the country the world’s biggest natural gas exporter. Under him, not only did Tellurian co-sponsor Howdy Modi, it also got, said an employee of the US India Strategic Partnership Forum, “senior officials in the US administration to call Petronet and others”.

Harder to understand is India’s enthusiasm. As GAIL has been finding, imported shale gas is not a competitive fuel for India. “If you get gas at a high rate, you cannot create a gas-based economy,” the Petronet employee had said.

What makes this moment murkier is the attractiveness of the Indian market. In the past five years alone, India has seen a bevy of large foreign investments in its downstream oil and gas sector. Rosneft picked up Essar’s refinery. Novatek has tied up with Hiranandani to supply Russian LNG to India. Total has partnered with Adani. It has also teamed up with ONGC to explore deep-water oil and gas blocks off India’s east coast. Saudi Aramco has been variously eyeing BPCL—and Reliance’s Petrochemical plant in Jamnagar. Yet earlier, we have the deals struck by Cheniere and Dominion. As this article was being written, Qatar signed a 20 year gas supply contract with India. 

All of them see India as their last big–and growing–market.

These are dangerous waters. Fossil fuel majors seeing their last burst of growth coming from India will not want the country to decarbonise quickly. Instead, as they enter India through partnerships with local business groups, there is a risk that, between corporate lobbying and diplomatic pressure, India will stay locked longer into fossil fuels. All this, needless to say, at a time when the Earth’s overheating faster and faster. 

At this time, even as countries like Japan scale back the role of gas in their economies, India is pushing ahead. Despite the uncompetitiveness of imported gas, the country has accepted the fossil fuel industry line pitching gas as a transitional fuel, and says it will account for 15% of the country’s energy mix by 2030.

The long-term costs of such purchase contracts have to be understood. Take Tellurian. Over 40 years, it would have given India 200 million tonnes of gas. With one tonne of gas holding 51.7 MMBTU, India would have paid $62 billion (at $6/MMBTU, at current exchange rates)—not to mention the $7.5 billion that had to be invested by Petronet in Driftwood—over the next 40 years.

That works out to almost $70 billion, or ₹560,000 crore, over 40 years. Or take the recently concluded $78 billion LNG deal with Qatar. That is ₹624,000 crore over the next 20 years. All this is money which, instead of creating fresh import dependencies, could be used to double down on renewables. 

A senior bureaucrat familiar with the government’s energy policy feels fossil fuel exporters are extending quid pro quos to keep India on fossil fuels. In the case of Tellurian, he said: “India wants diplomatic support from the USA. We also want special materials for armoured vehicles and planes, and some ordnances. The US had been blocking their exports. Many feel these two—these deals and the supply of fracked gas—are linked.”

Much of this drags Enron’s Indian adventures to mind. There too, bending before pressure and corporate lobbying, India had signed up for an expensive power project. 

One wonders what happens next. In August 2023, Gunvor had dropped out of Tellurian as well. It remains to be seen if the Tellurian deal is firmly off the table now – or if it will be revived if Trump comes back to power. Tellurian, however, is just a battle in a larger war. Can India consume—or resell—all the gas it’s committing to? Given the earth’s atmospheric and oceanic systems are already spinning out of control – and India itself is being hit by aberrant weather every single month – what are the ecological and human costs that follow?

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M Rajshekhar

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