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Anatomy of an LNG Cargo Swap – GAIL India Case Study

This month, GAIL India is tendering for an LNG cargo swap covering up to a third of its US-sourced supplies. GAIL has contracted for 5.8 mtpa of US LNG from the Sabine Pass and Cove Point projects, starting as soon as 2018. 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 transaction with one such potential counterparty, Qatargas.

As GIIGNL summarizes in it latest annual report, Gas Natural is being supplied with 0.75 mtpa of LNG on an ex-ship (DES) basis from Qatargas 1 through 2025. The laden trip time from Qatar to Spain is 13 days, 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’s western coast, which requires only 4 days. Qatargas would therefore 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 proposed cargo swap. 

Source: Capra Energy

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 just 11 days. By exchanging (or swapping) its obligation to deliver into India for Qatargas’s commitment to supply Gas Natural in the Spanish market, GAIL would not only reduce voyage time-related freight costs (i.e., time charter, boil-off and marine fuel), but would also eliminate the Suez Canal crossing fees associated with the initial route.

Under such an arrangement, Qatargas would also find itself with a much less expensive new delivery route (Qatar to India) from both a voyage-time and canal-crossing 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 final pricing and structuring of the cargo swap transaction.

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 and traders seek to effectively shorten their supply routes to customers and trading counterparties, realizing both freight cost savings and risk mitigation benefits in the process.