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Anatomy of an LNG Cargo Swap - GAIL India Case Study


08/11/2015

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This month, GAIL India is tendering for an


LNG cargo swap covering up to a third of its
USsourced supplies. GAIL has contracted for
5.8mtpaofUSLNGfromtheSabinePassand
CovePointprojects,startingassoonas2018.
GAIL expects to use about half of this LNG to
serve customers in India, but given the
distance from the US, it is prudent of GAIL to
seek ways to reduce the associated freight
costs. The cargo swap is a transaction structure ideally suited for this
purpose, and there are several potential counterparties that would benefit
from taking the other side. For purposes of demonstrating this, and how a
typical LNG cargo swap might work, we present our proposal for a
transactionwithonesuchpotentialcounterparty,Qatargas.
As GIIGNL summarizes in it latest annual report, Gas Natural is being
suppliedwith0.75mtpaofLNGonanexship(DES)basisfromQatargas1
through2025.TheladentriptimefromQatartoSpainis13days,assuming
a ship speed of 17 knots. While this is not a long voyage by LNG industry
standards, it is more than three times as long as the trip from Qatar to
India'swesterncoast,whichrequiresonly4days.Qatargaswouldtherefore
realize significant freight cost savings if it were able to exchange (or
"swap") it obligation to deliver into Spain for an obligation to deliver into
India instead. The diagram below presents both the initial delivery route
obligation (in blue) for each supplier and its new route (in red) under the
proposedcargoswap.
Figure1.ProposedCargoSwapbetweenGAILIndiaandQatargas
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AnatomyofanLNGCargoSwapGAILIndiaCaseStudyCAPRAENERGYGROUP

Source:CapraEnergy

Similarly, GAIL would realize substantial savings if it could shorten its


anticipated US to India supply route (24 laden trip days). Deliveries into
Spain, for instance, would reduce the laden voyage by more than 50%, to
just11days.Byexchanging(orswapping)itsobligationtodeliverintoIndia
for Qatargas's commitment to supply Gas Natural in the Spanish market,
GAIL would not only reduce voyage timerelated freight costs (i.e., time
charter, boiloff and marine fuel), but would also eliminate the Suez Canal
crossingfeesassociatedwiththeinitialroute.
Under such an arrangement, Qatargas would also find itself with a much
lessexpensivenewdeliveryroute(QatartoIndia)frombothavoyagetime
and canalcrossing perspective. The ultimate savings will depend on
prevailing LNG, bunker and dayrate price levels, and the specifics of the
cargo swap transaction will determine how these savings are split among
the parties. Credit, cargo quality and other issues will also enter into the
finalpricingandstructuringofthecargoswaptransaction.
As the LNG industry continues to globalize and LNG marketing and trading
becomes increasingly sophisticated, we will surely see more and more
transactions designed to reduce freight costs, and to optimize operational
and market risks versus expected returns. The cargo swap is one such
mechanism, and its popularity should continue to grow as LNG marketers
andtradersseektoeffectivelyshortentheirsupplyroutestocustomersand
trading counterparties, realizing both freight cost savings and risk
mitigationbenefitsintheprocess.
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