Moneycontrol Pro Panorama | India's US LPG Import Pact: Strategic diversification or bargaining chip?

The demand for LPG and fossil fuels is expected to grow in India for the foreseeable future.

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On Monday, the government said public sector oil companies concluded a one-year contract to purchase almost 10 percent of India’s annual LPG imports from the US.

The agreement honours India’s commitment to increase energy purchases from the US. “LPG supply from the US would lead to better diversification of LPG imports, reducing dependence on the Gulf, along with narrowing down India’s trade surplus with the USA,” says Hardik Shah, director at Care Ratings.

Pertinently, India’s LPG purchase agreement also matters for the US, which is seeing a major expansion in LPG export terminal capacity. As China, traditionally a large buyer of LPG from the US, has crimped purchases from North America amid their trade war, it has become important for the US to find alternative markets for its fuel.

What’s more, the demand for LPG and fossil fuels is expected to grow in India for the foreseeable future. This makes India a vital market for energy producers across the globe. India is not expected to see peak oil demand till 2045-50, much later than global peak oil demand.

Financial implications

Shipping LPG all the way from the US, instead of Middle East —currently the major supplier to India — can incur significant logistics costs. Also, US LPG has high propane content and is seen to be less suitable for Indian household conditions. Even then, given the large commercial user base, oil PSUs can optimise butane and propane content depending on the requirement.

On the financial implications, readers may note that LPG is largely a money losing business for oil PSUs as they sell cooking gas to retail customers below the procurement cost. The hike in retail prices earlier in FY26 and reduction in benchmark Saudi Arabia contract prices this year are expected to reduce under-recoveries in LPG business in the current fiscal year.

However, the scenario in the coming year will depend on market prices. The latest LPG purchase agreement with the US is linked to a North America benchmark -- Mont Belvieu — and pertains to contract year 2026. Generally, the global demand-supply situation tends to influence overall prices. Still, for US LPG imports to be competitive for Indian oil PSUs, there should be notable difference between the North America benchmark and Saudi Arabia contract prices -- so that they cover higher freight cost.

“The arbitrage for Indian OMCs would depend on the spread between Mont Belvieu and Saudi contract prices. Currently, there is minimal gap between Mont Belvieu and Saudi contract prices mainly due to significant correction in Saudi contract price,” adds Hardik Shah of Care Ratings.

The cost-benefit analysis will become clearer as the new LPG contract comes into force. While investors should keep a tab on financial implications, the latest LPG purchase contract should help India in its trade deal negotiations with the US.

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