After the acquisition of 20% interest in Eagle Ford shale gas acreage in Texas, GAIL (India) Ltd. is looking at acquiring stake in more shale gas assets in the U.S. with the primary objective of securing gas supplies.

“Our interest in upstream business is different from that of pure-play exploration companies. The objective is to secure gas supplies, not the returns,” said B.C. Tripathi, chairman and managing director for GAIL India.

The company is in talks with a couple of companies to acquire stake in shale gas assets that would supply gas to its reserved liquefaction capacity of 2.3 million tonnes per annum (MMtpa) at Cove Point in Maryland on long-term contracts starting in 2017, he said.

“We have a plan to invest $500-$700 million in acquisition of minority stake in the U.S. shale gas assets," the company chief added.

GAIL India has incorporated a wholly-owned subsidiary, called GAIL Global (USA) Inc. in Houston, to undertake exploration and development of oil and gas assets, LNG trading and related activities in the U.S.

The U.S. subsidiary has acquired a 20% stake in the Eagle Ford Shale from Carrizo Oil & Gas Inc. Carrizo (Eagle Ford) LLC, the joint venture of GAIL and Carrizo, owns exploration and development rights for about 5,140 acres in Dimmit, Frio, LaSalle and McMullen counties in Eagle Ford, which is considered to be one of the most economically attractive unconventional resource plays in North America. The allocated leasehold is located in the wet gas/condensate window in the core area of the Eagle Ford in South Texas with significant liquid content. So far, proven reserves of about 13.8 MMboe have been identified in this asset.

The operator drilled more than 60 wells in this asset by December 2013, producing about 2,400 boe/d.

The Indian company holds the right of first refusal to acquire a 20% interest in future acquisitions of oil and natural gas leases in the Eagle Ford area owned by Carrizo.

Hedging gas purchases

GAIL India is aiming to secure long-term gas supplies and hedge its gas purchases against price increases.

“The equity holding and ownership of gas will provide a natural hedge in case [the] Henry Hub Index goes high,” a senior company official said.

The company is looking to secure gas supplies for the liquefaction capacity of 2.3 MMtpa it reserved. It entered a terminal service agreement and pipeline precedent agreement with Dominion Cove Point LNG in Maryland for booking capacity rights in its proposed brownfield Cove Point LNG liquefaction terminal and corresponding capacity in the Cove Point pipeline, which links the terminal to other gas transmission pipelines, for a period of 20 years.

Under this agreement, GAIL will procure its own natural gas and deliver it to the Cove Point pipeline for liquefaction at the terminal and loading into ships brought to the facility on Chesapeake Bay.

GAIL also has entered a sale purchase agreement with Sabine Pass Liquefaction, a subsidiary of Cheniere Energy Partners, to purchase LNG of 3.5 MMtpa from Train 4 of Sabine Pass LNG terminal in Louisiana for 20 years starting in 2017. The agreement has an extension option of up to 10 years.

According to the agreement, GAIL will purchase bridge volumes of about 0.2 MMtpa upon the commencement of operations of Train 2 before the commencement of Train 4 operations. It will purchase LNG on an FOB basis for a purchase price indexed to the monthly Henry Hub price plus a fixed component.

Delivery of the bridge volumes are expected to start in 2016 and deliveries from Train 4 by early 2017.

Gail India is aggressively looking to secure more LNG supplies from U.S. due to the price advantage. Shale gas prices in the U.S., based on Henry Hub Index (HHI), are relatively cheaper, and the price of its liquid form is less than that in the West Asia and Asia-Pacific regions. LNG producers from the countries like Qatar and Australia index their prices to crude oil.

The official said that a HHI gas price of $4/MMBtu would make U.S. LNG supplies available to Asian buyers for around $11.10/MMBtu, including liquefaction and shipping. This is less than the oil-indexed LNG price of $15-$17/MMBtu in Asia. It is said that Japan, the world’s biggest LNG buyer, imported liquid gas at an average $16.61/MMBtu in March.

Shale gas prices in the U.S. may not increase substantially in the near future as developers continue to monetize large-scale shale gas deposits.

“We are in discussion with other potential LNG suppliers to tie-up more volumes,” the official said. “Our aim is to source LNG of 10-12 million tons per year from the U.S. in the next five to six years.”

The company is aiming to build an LNG supply portfolio of 20 MMtpa and to become a major liquid gas trading player in Asia by 2020. A new company, GAIL Global Singapore Pte Ltd., has been incorporated at Singapore to pursue LNG trading in Asia.

Diplomatic lobbying

GAIL India is seeking a special status for India in LNG exports from the U.S., despite being a non-Free Trade Agreement (non-FTA) country, to allow Indian companies to gain access to LNG supplies approved for FTA countries.

It says that companies from India have limited options for purchasing LNG from U.S. companies. They are allowed to purchase LNG from companies that have received approval to export LNG to the non-FTA countries, which currently stands at seven. Companies from FTA countries, however, have the option to buy LNG from more than 40 companies.

“(GAIL India) cannot conclude any contractual arrangement with these LNG export terminal companies till the time non-FTA approval is given to them,” Tripathi said in a letter to the external affairs ministry. “This is coming in way of GAIL's efforts to finalize liquid shale gas export from the U.S. to India whereas time is very ripe now to strike LNG deals at competitive prices.

“We are given to understand that approval from DOE (Department of Energy) of the U.S. is largely a policy decision with active involvement of the U.S. government,” he added. “It is, therefore, essential that [the] government of India immediately takes up with the counterparts in the U.S. and impresses upon them for treating India as a special nation by keeping us outside the purview of FTA/non-FTA framework.”

New Delhi raised this issue during an Indo-U.S. Strategic Dialogue meeting held in New Delhi recently, asking the U.S. authorities to allow Indian companies to access LNG supplies allocated to FTA countries.

“LNG imports are crucial for energy-deficit India,” the official said. “The LNG supplies from the U.S. to India will help strengthen the strategic partnership the two countries built over the years.”