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Oil-linked LNG deals add to India’s discomfort as gas prices plunge
Potential deal re-negotiation with Qatar a win-win for all: Platts Analytics Qatar may ask for bigger volume commitment for any price flexibility Platts JKM at 10-year low, has dipped below the $4/MMBtu mark.
Singapore — India is stepping up pressure on Qatar to re-negotiate term LNG deals and move away from oil-linked contracts as gas prices hit multi-year lows, but any flexibility in the future may come at the cost of a larger volume commitment, analysts told S&P Global Platts.
Like the rest of Asia, the bulk of India’s LNG term import deals are oil-linked, but falling spot LNG prices amid bulging global supply have resulted in a pushback from Asian buyers, who are seeking to either re-negotiate those deals or diversify procurement to spot markets.
“As India follows other Asian economies to consider contract re-negotiations, India’s proximity to Qatar and the potential to grow volumes could make a re-negotiated deal a win-win situation for both countries,” said Chinmayee Atre, LNG analyst at Platts Analytics. “But it’s unlikely Qatar will accept lower prices unless it’s compensated for by higher volumes.”
Qatar’s energy minister Saad al-Kaabi held talks recently with India’s petroleum and steel minister Dharmendra Pradhan amid hopes that India and Qatar might look into re-negotiating annual LNG contracts. “Al-Kaabi and I explored ways to make LNG more affordable for a price sensitive market like India, especially in our long-term contact,” Pradhan said in a tweet after his meeting with Kaabi.
But there has been no commitment from Qatar on whether they would look into renegotiating deals, although some analysts said that they won’t completely rule out pricing flexibility in the future. “The price is always negotiated business to business. We don’t disclose commercial terms. We don’t negotiate long-term contracts,” Kaabi told reporters in New Delhi.
Mounting pressure
However, some analysts said India may have an upper hand in the future as it won a price concession from Qatar in 2015 in exchange for a higher volume commitment.
“This is clearly a good time for LNG buyers to request a re-negotiation in their oil-indexed long-term contracts and buyers globally will continue to make these requests,” said James Waddell, senior global gas analyst at Energy Aspects. “Spot cargoes are abundant and around half the price of gas under typical oil-indexed contracts. We see this situation continuing at least through 2021.”
The benchmark for spot Asian LNG prices, JKM, has plunged to a more than 10-year low, falling below $4/MMBtu for the first time since July 2009 due to a wave of new supply from Australia and the US amid slowing demand.
Meanwhile, the DES West India assessment sunk to an all-time low of $3.725/MMBtu in January 2019, the lowest since Platts started the assessment in January 2010. The drop in spot prices has spurred LNG buyers to issue a flurry of tenders since the beginning of the year.
The added pressure on India to renegotiate term contracts emerges from the growing disparity in term prices against spot prices. The average spread between term Dated Brent prices with an estimated slope of 13.5% against spot LNG prices in 2019 was $2.69/MMBtu compared to minus 29 cents/MMBtu in 2018.
This would mean that a buyer purchasing a standard 3.4 TBtu cargo linked to Brent prices would be paying $9.15 million more for a cargo compared to purchasing against spot LNG prices in 2019. In 2018, a buyer would save about $0.99 million purchasing on Brent-linked contracts against procuring spot LNG cargoes.
The term prices are based on a lagged “3-0-1” pricing formula, which takes the average of the three months prior to the month of delivery. The average spot Brent slope — obtained by dividing the Brent crude oil price by the spot LNG price — dropped to 8.70% in 2019 from 13.70% in 2018, Platts data showed.
Limited bandwidth
Waddell said it’s tough for two types of firms to take oil-indexed LNG supply with a slope between 10% and 14% of Brent — those with a relatively smaller gas portfolio to absorb those volumes, and secondly those who face competition from firms who are able to source cheaper spot cargoes.
“These customers of oil-indexed LNG are then forced to sell their surplus cargoes on the spot market or pay penalties for not lifting them, both creating heavy financial losses.” he added.
Pradhan has repeatedly said that India is open to a review of LNG prices under its long-term contracts, reflecting market concerns about high prices.“This is a test of India’s buying power in the international market,” said Anupama Sen, Senior Research Fellow at the Oxford Institute for Energy Studies.
“The Indian government indicated that it was investing on expanding gas transmission and distribution infrastructure in the country in an attempt to scale up the market for gas. As gas cannot currently compete with cheaper substitutes in the domestic market in many uses, the price will be an important factor in determining how quickly this happens,” she added.
India currently has long-term LNG supply contracts with Qatar for about 8 million mt/year.
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