H-Energy in News

Two years ago, only governments and energy majors could afford an FSRU

June 2, 2017

Two years ago, only governments and energy majors could afford an FSRU’

Mumbai-headquartered H-Energy plans to enter India’s LNG-import market, chartering two floating storage and regasification units (FSRUs) to receive short-term and spot cargoes. Chief executive Darshan Hiranandani outlined his plans to Karen Thomas, editor of LNG Shipping World.

 

H-Energy is new to investing in upstream oil and gas; what are your immediate priorities?

 

Right now, our focus must be on India, on mid-stream and downstream opportunities. If and when we see the gas supply tightening, we will switch our focus to upstream. It is difficult for most players to operate midstream and downstream in India – we believe we have an important role to play here.

 

We expect the strongest demand to come from domestic use and transport fuel. This will push industrial users to source gas in other ways. Our model is to target customers that need around 1 million tonnes a year (mta).

 

What opportunity do you see for LNG demand growth in India?

 

The Indian economy has been very comfortable switching from liquid fuels to gas for transport and for industry. Wherever gas is made available in India, we find industries very eager to make that move. The problem in India is to determine whether demand stands at five or 50 mta.

 

As the LNG industry moves towards shorter-term contracts, and as the customer does the same, there are problems financing the downstream infrastructure. This is where the challenge lies.

 

We have found, moving into new areas, you can achieve good growth. But there is no silver bullet. It’s all about getting the pipelines, about getting new areas connected – which is where H-Energy can play a role.

 

On the west coast, we will initially charter the Engie-owned FSRU GDF Suez Cape Ann at Jaigarh in Maharashtra, with a 60km pipeline to connect to existing customers. We will also have a 600km pipeline that connects to new customers that have no gas at all.

 

For us, this is the missing piece in the jigsaw. There can be no increase in demand if you do not connect to the customer. Otherwise, it’s just commodity shopping.

 

At Digha, we require a 145,000m³–170,000m³ vessel. However, we believe that our permitting process requires three to four months more. Once that is complete, we aim to move ahead with the final investment decision (FID), with a commercial operations date of fourth-quarter 2020.

 

Here, we have made considerable progress in terms of the anchor customer, having signed a heads of agreement for 1 mta of offtake with North West Power Generation Co Ltd (NWPGCL), a Bangladesh Power Development Board-owned utility.

 

Does uncertainty over demand force H-Energy – and other companies seeking to tap India’s thirst for gas – to invest in LNG infrastructure on a speculative basis?

 

You can’t undertake super-projects; you must focus on smaller projects, one at a time, because that’s how the customers sign up.

 

“Increasingly, we are seeing new projects follow the upstream business model when it comes to securing the finance. It must be balance-sheet funded, not project funded”

 

We have customers signed up for our first 60km of pipeline. When it comes to the 635km pipeline, we are probably looking to expand this at the rate of 100-200km at a time, as we sign customers up and move forward. If you don’t get enough takers, you don’t build it.

 

These two projects have a strong business case; we have the spot suppliers. But increasingly, we are seeing new projects follow the upstream business model when it comes to things like securing the finance. It must be balance-sheet funded, not project funded.

 

What is H-Energy’s LNG-development strategy?

 

Right now, we are simply a buyer of natural gas. We take delivery of the gas ex-terminal, at Hazira and at Dahej, for supply to our customers. We started to do this to prepare ourselves to build and manage our own terminals.

 

But for us, it’s not just about the terminal; it’s about delivering a service to the customer. There is a gap in the market, and the role of an aggregator is important.

 

We believe we can play that role, piecing together the chain – whether that’s building pieces of infrastructure, or pulling together the bits that exist. And so we have a marketing entity and an infrastructure entity. They work together to ensure that we develop products that make sense.

 

If we start to import our first cargoes through the FSRU moored at Jaigarh next June, we should import around 2 mta over the following 12 months. We expect our west coast demand to grow within five years to some 4 mta.

 

We are considering whether to build a land-based terminal to meet that demand. But we must wait and see whether we get good deals on Q-max tankers, whether there is additional liberalisation, and so on, before deciding whether to replace GDF Cape Suez Ann. We have several options.

 

On the east coast, we see about 1.5 mta demand on day one, from Bengal and Bangladesh, and that will ramp up to about 3 mta by 2025.

 

“Two years ago, FSRU charter rates were so expensive that only governments or super-majors could afford these vessels, to support 20-year offtake contracts” What progress have you made so far at Jaigarh?

 

We have chartered the vessel and have set the commissioning date for GDF Cape Suez Ann next June. We expect to finish work on the jetty by December, and have moved that deadline forward. We have permitting for the land that covers all the options; for an FSRU, for a floating storage unit (FSU) with vaporisation and for a completely land-based import terminal.

 

We can ramp this project up in whatever way makes most commercial sense. Two years ago, we couldn’t afford an FSRU because of the charter rates. Those rates were so expensive then that only governments or super-majors could afford these vessels, to support 20-year offtake contracts.

 

Today, we can afford to charter an FSRU to import an initial 2 mta, because of the way the market has changed. I can’t tell you the charter terms. What I will say is that if we needed to import 5 mta off the bat, a land-based terminal would of course make better financial sense. Because we don’t, and are expecting demand to ramp up, it suits us to start off with an FSRU.

 

Does the deal with Engie include an LNG-supply agreement?

 

No, it’s purely a vessel-charter agreement. Engie of course remains a strong contender to provide LNG but we are talking to a range of suppliers. We have signed an initial deal, but the details are confidential for now. We won’t be announcing any 15-year contracts with the likes of RasGas; rather, we’ll be revealing the agreements for our first five or 10 cargoes.

 

That short-term structure gives Jaigarh and Digha a very different business model to the LNG-import terminals at Hazira and Dahej, with their long-term, large-scale supply deals, doesn’t it?

 

It’s very different. But we think the demand is there, to create a broad base for our offtake. One option is to sign commodity-based contracts like those linked to coal or ammonia, for example – depending on the size of the customer, we can be flexible.

 

The customer, of course, wants the moon. But they are not in the business of LNG; they are in the business of steel, or cement, or glass. Our objective is to source gas for them on that basis. We don’t take any speculative risk. Everything is back to back. We will sell what we’ve bought.

 

“The customers want the moon. But they are not in the business of LNG; they are in the business of steel, or cement, or glass. Our objective is to source gas for them on that basis”

 

Is there a risk that as demand grows for small-quantity, short-term LNG supply, it becomes harder to invest in future gas supply, which could lead to shortages later?

 

We have an option agreement for the proposed AC LNG project in Canada, on the east coast in Nova Scotia. Here, we have secured the export permits and are waiting to secure the environmental permits. This is a beautiful, deepwater site near Halifax. Connecting the site to the grid is not the problem; there’s a cost attached to getting Marcellus shale gas to that site.

 

Canada has made slow progress with its LNG-export ambitions: how confident are you that AC LNG will succeed where others have stalled?

 

Our concept in eastern Canada is a plug-and-play terminal that’s already connected to a pipeline. It’s not about building miles and miles of pipelines. The future of that project depends on whether the North America Free Trade Agreement survives. But we think that exporting LNG out of western Canada is now a no-go.

 

We are looking for supply deals that will directly support our two terminals at Jaigarh and Digha and so are also talking to prospective LNG suppliers in the US Gulf. Right now, we don’t know where this will take us. We expect the supply overhang to last until 2024, at the very least.

 

However, we also expect the technology for liquefaction to improve, with a dramatic impact on project cost structures and on unlocking stranded fields. The market is extremely dynamic – it is extremely hard to predict how things will change.

 

We need to work out how viable AC LNG will be. We also need to get a grip on the changes taking place in floating liquefaction technology. So we will wait to see how these issues play out.