anatomy of an lng cargo swap - gail india case study - capra energy group
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16/8/2015 Anatomy of an LNG Cargo Swap GAIL India Case Study CAPRA ENERGY GROUP
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08/11/2015Anatomy of an LNG Cargo Swap - GAIL India Case Study
This month, GAIL India is tendering for anLNG cargo swap covering up to a third of itsUSsourced supplies. GAIL has contracted for5.8 mtpa of US LNG from the Sabine Pass andCove Point projects, starting as soon as 2018.GAIL expects to use about half of this LNG toserve customers in India, but given thedistance from the US, it is prudent of GAIL toseek ways to reduce the associated freight
costs. The cargo swap is a transaction structure ideally suited for thispurpose, and there are several potential counterparties that would benefitfrom taking the other side. For purposes of demonstrating this, and how atypical LNG cargo swap might work, we present our proposal for atransaction with one such potential counterparty, Qatargas.
As GIIGNL summarizes in it latest annual report, Gas Natural is beingsupplied with 0.75 mtpa of LNG on an exship (DES) basis from Qatargas 1through 2025. The laden trip time from Qatar to Spain is 13 days, assuminga ship speed of 17 knots. While this is not a long voyage by LNG industrystandards, it is more than three times as long as the trip from Qatar toIndia's western coast, which requires only 4 days. Qatargas would thereforerealize significant freight cost savings if it were able to exchange (or"swap") it obligation to deliver into Spain for an obligation to deliver intoIndia instead. The diagram below presents both the initial delivery routeobligation (in blue) for each supplier and its new route (in red) under theproposed cargo swap.
Figure 1. Proposed Cargo Swap between GAIL India and Qatargas
16/8/2015 Anatomy of an LNG Cargo Swap GAIL India Case Study CAPRA ENERGY GROUP
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Similarly, GAIL would realize substantial savings if it could shorten itsanticipated US to India supply route (24 laden trip days). Deliveries intoSpain, for instance, would reduce the laden voyage by more than 50%, tojust 11 days. By exchanging (or swapping) its obligation to deliver into Indiafor Qatargas's commitment to supply Gas Natural in the Spanish market,GAIL would not only reduce voyage timerelated freight costs (i.e., timecharter, boiloff and marine fuel), but would also eliminate the Suez Canalcrossing fees associated with the initial route.
Under such an arrangement, Qatargas would also find itself with a muchless expensive new delivery route (Qatar to India) from both a voyagetimeand canalcrossing perspective. The ultimate savings will depend onprevailing LNG, bunker and dayrate price levels, and the specifics of thecargo swap transaction will determine how these savings are split amongthe parties. Credit, cargo quality and other issues will also enter into thefinal pricing and structuring of the cargo swap transaction.
As the LNG industry continues to globalize and LNG marketing and tradingbecomes increasingly sophisticated, we will surely see more and moretransactions designed to reduce freight costs, and to optimize operationaland market risks versus expected returns. The cargo swap is one suchmechanism, and its popularity should continue to grow as LNG marketersand traders seek to effectively shorten their supply routes to customers andtrading counterparties, realizing both freight cost savings and riskmitigation benefits in the process.
Source: Capra Energy
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