Flunging global gas prices have led to favourable terms of trade for net importers such as India. The drop in the price of liquefied natural gas (LNG) by almost 60 per cent over the last 18 months has rendered spot LNG contracts more attractive to importing companies like Petronet LNG Limited (PLL). While spot LNG prices reached a low of $7-8 per million British thermal units (mmBtu), long-term contracts with exporters such as RasGas of Qatar were offering gas at nearly double the price. The recently concluded contract between PLL and RasGas has come after long negotiations, and is certainly a significant development.
Indian Infrastructure examines the deal…
The earlier contract
In 1999, PLL entered into a long-term (25-year) contract with Qatar-based RasGas for LNG supplies. As per the contract, the agreed price was $12-13 per mmBtu. A price of around $13 per mmBtu of LNG was attractive to Indian consumers, given that spot prices were around $17. Supplies started from April 2004, resulting in 11 years of trade (till 2015) between the two companies at the agreed upon price. The contract did not permit any change in pricing, resulting in the buyer often paying more than the prevailing market price. The contract also included a penalty imposition in case the offtake was less than 90 per cent of agreed volumes.
What led to contract renegotiation
When spot prices of LNG mirrored the plunge in crude oil prices and fell to below the contracted prices, many of PLL’s customers in the power, steel and fertiliser businesses preferred to meet their gas requirements from the global spot market. The formula followed thus far linked LNG prices to the 60-month moving average of Japan Crude Cocktail. It has now been linked to the three-month average of Brent crude to make it more reflective of the market scenario.
The renegotiated contract
According to the terms of the renegotiated contract, PLL will secure LNG supplies from RasGas at nearly half the current rate of $13 per mmBtu. A price band has been fixed under the revised contract terms to factor in fluctuations. PLL also secured a waiver of a Rs 120 billion penalty for not having lifted the full contracted quantity in 2015. (During the year, PLL lifted only two-thirds of the contracted 7.5 million tonnes [mt] of LNG.)
The new contract is effective January 1, 2016 and ends in 2028. Throughout the contract period, the price for the buyer will be governed by market dynamics based on a crude price-linked formula. Besides, PLL will buy an additional 1 mt of LNG every year from RasGas till the purchase contract expires in 2028. PLL is slated to save around of Rs 40 billion per year on account of the revised gas prices.
Revival of hopes for gas-based power plants
A number of players created gas-based power generation capacity as soon as significant headway was made in domestic oil and gas discovery, such as the Krishna-Godavari (KG) basin. They were pinning their hopes on a surge in domestic supply at cheaper prices (than those prevailing internationally). However, because KG discoveries remained largely untapped (and continue to be untapped) and international LNG prices were high for a long time, these power generation facilities were stranded.
Case for locking-in low LNG prices in fresh long-term contracts
Apart from Qatar, India has a number of long-term LNG contracts with suppliers from the US, Australia, Russia and Canada. In times of low (and stable) international LNG prices, there is a strong case to lock in these prices in fresh/ renegotiated long-term contracts.
While the availability of imported LNG at low prices will aid companies such as Lanco, GVK, GMR and Torrent Power, which have shut gas-based projects, banks that have lent to these entities for such projects would also benefit. Meanwhile, as and when supplies commence from the KG basin, there will be added benefits.
The way forward
International experts opine that low global LNG prices are here to stay, at least in the near term. Certain developments drive the trend towards cheaper gas. On the demand side, Japan, for instance, is restarting its nuclear power plants, which will reduce demand for LNG (at present, Japan is the world’s biggest LNG customer). On the supply side, significant increase in supply is expected from the US and Iran (after the sanctions on Iran are lifted).
Against this background, securing LNG supplies under long-term contracts at higher than prevailing prices defies economic logic. The restructured contract between PLL and RasGas has been a big positive for India’s energy basket. Such attempts should also be made at the government-to-government level strategically, so as to benefit from the currently favourable scenario of low energy prices.