Qatar to reduce long-term gas price to $7 a unit

Petronet LNG avoids Rs 12,000 cr hit on offtake slippage from RasGas

In a major relief for Petronet LNG Ltd (PLL), India's largest natural gas importer, its LNG supplier RasGas of Qatar today signed a modified long-term agreement helping PLL avoid a Rs 12,000 crore penalty for the shortfall in gas offtake.

The agreement signing here saw the shares of PLL gain 2.99 per cent to close at Rs 254.85 on the Bombay Stock Exchange (BSE) while shares of other gas suppliers GAIL (India) and Indian Oil Corporation (IOC) jumped 2.18 per cent and 0.74 per cent respectively.

The development comes after multiple rounds of bilateral negotiations, including more than 50 meetings between the two companies, held over months to thrash out the terms of the deal related to pricing and volume of gas trade under a new formula and the sticky issue of penalty.

 

India has a long-term contract with Qatar to buy 7.5 million tonnes of LNG a year at an indexation to a moving average of crude oil price. Under the renegotiated deal, Qatar will lower the price of gas it sells to India on a long-term contract ending 2028 to around $7 per unit from the existing $12 per unit to reflect the slump in global energy rates apart from waiving off the Rs 12,000-crore penalty.

Petroleum minister Dharmendra Pradhan hailed the new agreement as a major diplomatic success in India's bilateral engagements aimed at energy security. "In addition to the waiving off of the penalty of Rs 12,000 crore as per the take-or-pay clause, the deal also means Rs 4,000 crore benefit to the downstream sectors like fertilizer and power by way of reduced gas rates," Pradhan said speaking on the occasion.

The revised formula will link the gas price to a three-month average figure of Brent crude oil, replacing a five-year average of a basket of crude imported by Japan. The trailing three-month average Brent price is around $44 a barrel while the average of Japan Crude Cocktail for the 5-year period ended September 30 was $94 per barrel. The deal comes with the condition PLL buys an additional 1 million tonne of LNG annually. Pradhan said this additional gas would also be sourced at the same rate of $7 per unit.

RasGas Chief Executive Hamad Mubarak Al-Muhannadi called the signing of the Sale and Purchase Agreement (SPA) a positive development that demonstrates the commitment to growing sales into India." RasGas, a Qatari joint stock company, has been supplying Petronet since 2004.

The ongoing slump in the gas prices had led to users preferring to buy spot LNG (at $6-7 per unit) rather than long-term gas from RasGas of Qatar (at $12 per unit). Petronet LNG had, therefore, bought 32 per cent less than contracted quantity from RasGas in the first nine months of 2015. As per the contract, Petronet can defer taking deliveries of only 10 per cent of the contracted volumes in a year and has to pay for the rest of it even if it does not take any supplies.

Petronet LNG Managing Director Prabhat Kumar refused to indicate whether the renegotiation has opened the window for future price corrections under the long term deal between India and Qatar. "Thanks to the fixed price, we have taken an advantage of more than $15 billion over the past 11 years through this deal. In the past, it did not impact much even if spot prices declined as the overall trend of increasing prices remained. But the current price slump has been historic," he said.

Analysts estimate the change in the pricing formula from five-year average crude oil price to three-month average would translate into 24 per cent jump in GAIL's earnings next fiscal. "The development will also benefit Petronet LNG and is a positive for CGD and transmission companies like GSPL, IGL and GujGas as it could mean volume pickup and margin expansion in industrial volumes," said Dhananjay Sinha, head of research at equity research firm Emkay Global.