Liquefied Natural Gas (LNG) is slated to become a commodity in the coming ten years with multiple sources and FOB prices converging. India needs LNG in large quantities to fuel its economy and its success depends on how it negotiates the deals.
India has botched up negotiations on long-term supply contracts for LNG with such alarming regularity that it raises serious questions about its negotiators ability to read and anticipate trends in the volatile world of oil and gas. Is it just a case of bad luck, or are there integrity issues involved as well, given the consistency with which the Indians have ended up on the wrong side of a long-term LNG contract every single time?
One reason is certainly because the country’s so-called “energy experts” who negotiated the deals were mostly bureaucrats who had no knowledge of the LNG business. The business executives who were associated with the negotiations were equally unfamiliar with the intricacies of the relatively new LNG trade. Moreover, Indians have never been known to be a tough or shrewd negotiators. Naturally, India bungled in LNG deals at regular intervals.
India’s tryst with LNG began in the late 1990s with the creation of Petronet LNG Ltd (PLL). The only company that had any knowledge about the LNG business was the state-owned GAIL, whose management was upset that a business that should have legitimately belonged to it had been forcibly taken away. To rub salt into its wounds, it became one of the four state-owned promoters of PLL. Even though it did not receive primacy among the PLL promoters on the strength of its knowledge base, it did not sulk and sincerely prepared the tender specifications for supply of LNG at the proposed terminal at Dahej in the state of Gujarat. The specifications were so framed that the two offers it got for the tender turned out to be quite attractive. The bidders were Petronas of Malaysia and RasGas of Qatar.
PLL accepted the offer of RasGas which offered LNG at a price of $ 4/mmbtu with negligible escalation. However, RasGas soon came up with a crude- linked pricing formula that was deceptively attractive but decidedly risky. In the initial years of the contract, it offered a price that was lower than $ 4 per mmBtu but in later years would be linked to the price of crude.
Before accepting the crude-linked formula, the energy experts in the Ministry of Petroleum and Natural Gas (MoPNG ) decided to seek expert opinion on the likely price of crude in 2015. Through the international trade division of Indian Oil Corporation (IOC), the petroleum ministry obtained expert opinion from a London-based petroleum consultant which certified that the crude price in 2015 would be $ 20 a barrel. The deal was signed and included the crude-linked price proviso without setting a floor or a ceiling. The result: the price of RasGas’ LNG last year soared to $ 13-14/mmBtu even as the spot market price crashed to $ 7/mmBtu.
In 2009, an official team hurriedly negotiated a deal with Gorgon Project of Australia for the supply of 1.4 million tons per annum of LNG to PLL’s Kochi terminal which turned out to be among the costliest in the world. Four years ago, the then petroleum secretary went on record saying that the delivered cost of Gorgon LNG to Indian consumer would work out to $ 20/mmBtu at the then prevailing crude price. That deal has not yet been renegotiated.
P. DasguptaThe third long-term contract was signed by GAIL for a total quantity of 5.8 million tons per annum with two US companies. That deal is also in trouble as it is indexed to the Henry Hub price. According to International Energy Association (IEA), the Henry Hub price, which is around $ 2.5/mmbtu now, is expected to rise go to $ 3.50 in 2017. This will effectively push up the cost of GAIL’s US LNG to $ 9.5/mmbtu.
The 25-year contract with RasGas for 7.5 million tons per annum of LNG was on the verge of collapse. GAIL, which marketed 60 per cent of the imported LNG, refused to lift the promised quantity. RasGas had no option but to renegotiate. True to form, India once again botched up the renegotiation. The LNG price now stands lowered because the crude price is low. If the crude price rises to the previous level, the price of LNG from RasGas will go up accordingly. The renegotiated deal has saved the contract from collapse. Both sides heaved a sigh of relief but this can only be temporary situation.
International energy experts acknowledge that the chapter can be reopened if India plays its cards well. There is still time to do it.
Qatar is the largest LNG producer in the world with an annual production capacity of 77 million tons. It had ramped up capacity to cater to the US market. But it has now run into trouble as the US itself has emerged as a significant LNG exporter amid a boom in shale gas production. Europe prefers to depend on the piped Russian gas. Demand in China has slowed down sharply and Japan threatens to go back to coal. India is the only economy which is growing which will need more and more LNG to fuel its growth.
Qatar needs India desperately to sell its LNG. Equally, India will benefit from sourcing gas from Qatar because of its proximity which reduces transportation costs significantly. Experts say it will be a mutually beneficial arrangement if India can negotiate a comprehensive deal to source LNG from Qatar. This can cover the existing contract as well. A contract that is linked to the price of crude need not be dangerous if the proviso provides for a floor and ceiling price for the linkage mechanism. This will give both the buyer and the seller some comfort in terms of a more or less stable price regime for LNG. This is always done when an LNG contract is negotiated. But for some inconceivable reason, our expert negotiators ignored this vital aspect, either wittingly or unwittingly.
Australia is poised to emerge as the biggest LNG producer overtaking Qatar, but its LNG may be costlier because Australian gas is expensive. Thus, the market is going to be flooded with LNG. “Qatar will remain our best bet and, if we remain honest and carry out negotiations well, we could still get a long-term deal at about $4/MMBTU delivered with a cap of about $5,” said an acknowledged energy expert.
India has the option of teaming up with Japan to promote captive LNG facilities in Iran based on long-term supply of committed gas from a captive field. India should also seek out Petronas; do not forget that it gave a competitive bid in the only true bid that ever took place. However, Petronas will always remain a small player.
India should also use the US and Canada as fall-back options because they will be able to deliver gas on both the West and East Coast at under $6/MMBTU inclusive of a $2-plus transportation cost. Washington Redskins Authentic JerseyShare This