Revising Terms: India renegotiates LNG import agreement amid low prices

India renegotiates LNG import agreement amid low prices

In the wake of a global supply glut of liquefied natural gas (LNG) and the resulting low crude prices, in September 2017, Petronet LNG, India’s leading gas importer, successfully negotiated a price cut for long-term LNG imports with Australian producer ExxonMobil in exchange for buying an additional 1 million tonnes (mt) of LNG per year.

The final agreement constituting the renegotiated terms of the contract is likely to be signed in November 2017.

Earlier contract versus new contract

The original deal between Petronet LNG and ExxonMobil was signed in 2009 and had a contract duration of 20 years. The agreement entailed the purchase of 1.44 mt of LNG annually for the contract period from ExxonMobil’s Gorgon project in western Australia, to be delivered to Petronet LNG’s terminal in Kochi. This is the first long-term contract for the purchase of LNG from Australia.

Under the new terms of the contract, the price of LNG would be 13.9 per cent of the prevailing Brent oil prices (down from 14.5 per cent of the Japanese customs-cleared oil prices earlier). The additional 1 mt of LNG will be purchased at 12.5 per cent of Brent prices. In addition, ExxonMobil has agreed to bear the shipping costs of the LNG, which were earlier being borne by Petronet LNG.

Benefits of renegotiation

The renegotiation bodes well for India as the earlier deal was expensive, signed as it was at a time of an unprecedented commodity price boom. According to estimates, the savings over the 20-year life of the contract due to the renegotiation could be in the range of $1.2 billion to $1.5 billion.

This development is expected to lead to a substantial reduction in future losses of raw LNG buyers such as Bharat Petroleum Corporation Limited, GAIL (India) Limited and Indian Oil Corporation Limited. Most of these firms have signed take-or-pay agreements for the purchase of imported LNG. As a result, the agreed-upon volumes will have to be purchased irrespective of demand. These companies will therefore benefit from the reduced gas prices. The consumer is also expected to benefit from the renegotiation as domestic fuel bills will be reduced, since the companies are expected to pass on the price reduction to the end user.

In a previously renegotiated agreement with Qatar’s RasGas, originally signed in 1999, Petronet LNG managed to extract a downward price revision of 50 per cent for LNG imports, resulting in estimated savings of Rs 4 billion per annum.

The way forward

Given the continuous decline in domestic natural gas output coupled with the ever-increasing demand, the dependence on imports is only growing. According to S&P Global Platts’ latest estimates, natural gas consumption in India is expected to hit 72 billion cubic metres by 2021. A significant proportion of the increased demand is expected to come from the power, fertiliser and city gas distribution segments. Besides, factors such as favourable LNG prices and growing environmental concerns are expected to drive LNG demand. Further, the ongoing commodity price crash means that the Indian government’s LNG import bill is going to reduce even if imports rise over the years.

However, from the global supply-side point of view, the trend is bad news for LNG producers who have been looking to diversify geographically by leveraging the high-growth Indian energy market. It is also a challenging market for domestic natural gas output with consistently muted LNG prices. Indigenous production of natural gas has in fact fallen by about 22 per cent since 2012-13.

That said, it is rare for long-term LNG contracts to be renegotiated, although in 2015 Petronet LNG had similarly renegotiated a contract with RasGas. The success with Qatar and Australia has urged India to mull over similar renegotiations with the US and Russia, with whom India has long-term buyer agreements. Ruling LNG spot prices are far below oil-linked contract prices in most of these contracts.

Internationally, Japan, China and South Korea could take India’s cue and rework existing agreements to align with spot prices. Going forward, market trends indicate that sellers are expected to grant flexibility to buyers. The contract renegotiation with Australia and the two in US and Russia currently under consideration reflect a move from a globally supply-constrained market to a supply-surplus market, thus transferring much of the bargaining power to buyers.