Who will bell the cat?

This is the question that hovers in the air as restive long-term LNG consumers resent having to fork out a delivered price of $ 12-13 per mmBtu when the spot market price for the gas is just $ 7-8 mmBtu.

The cat here – and one that seems to wear a broad grin like the Cheshire cat in Alice in Wonderland – is of course RasGas of Qatar, which has very cleverly reworked a pricing formula which is now paying off in spades.

Under the reworked formula, with effect from January 2014, the price of 7.5 million tons of LNG which RasGas supplies to India’s Petronet LNG Ltd (PLL) gets linked to a moving average of the last five years’ international crude price.

This formula had a moderating influence on prices in a rising market but can prove to be disastrous in a falling market – a situation that has developed today.

“Instead of calculating the moving average of the crude price over the last five years, why can’t it be a moving average of the last five months,” wondered a petroleum expert who is keen to bail Indian companies out of the sticky situation arising from the import of costly LNG from RasGas of Qatar.

But even this formula isn’t free from risks –and can prove to be a nightmare in a rising market. Already, a few OPEC members are suggesting that a fair value for crude oil is $ 80 per barrel ahead of this week’s meeting of the oil cartel. But to avert such a danger, this petroleum expert suggested that a ceiling on prices could be worked into the formula.

Pressure has started to build on RasGas to renegotiate the price in order to bail out not only PLL but also its marketers like GAIL, IOC and BPCL. But there has been virtually no political pressure so far from New Delhi on the government –owned RasGas to pare the price.

Market circles believe that RasGas cannot be so insensitive to the plight of Indian consumers. There is absolutely nothing wrong with renegotiating the price. Even the present pricing formula was renegotiated in favour of RasGas.

Originally, in response to PLL’s tender, RasGas had offered a price linked to crude with the floor set at $ 16 per barrel and the ceiling at $ 24 per barrel. This would work out to a price in the range of $ 2.04 -3.04 /mmBtu. This was to be applicable for the entire duration of the contract. The Ministry of Petroleum and Natural Gas accepted this condition.

However, another price option quietly emerged, linked to a crude price of $20 a barrel. Under this option, the price would remain fixed at $ 2.93/mmBtu for five years up to 2008. From January 2009, the formula was to be modified to ensure that there would be a $1 increase in price per annum for the next five years till the end of January 2013.

But from January 2014, the agreement provided that the pricing formula would once again change – this time to a direct link to the crude price in the form of a moving average over the preceding five years.

The problem with accepting this formula is the implication thrown up by the phrase “moving average of the last five years”.

RasGas has been cold to PLL’s demand to renegotiate the pricing formula. And that could be the reason why GAIL chairman B.C. Tripathi has threatened to reduce off-take of imported LNG. Tripathi’s company has no direct agreement with RasGas. So, was he being fielded to convey the feelings of Indian consumers and an indication of the shape of things to come?

The GAIL boss told a select audience of analysts in Mumbai that his company had decided to cut down its long term purchase by 30-35%. He hinted at the provision to exercise the option of downward flexibility of 10% built into contract and a further off-take by another 10-20 per cent. But he seems to have forgotten the fact that this downward flexibility has to be made up within a stipulated time-frame.

GAIL, IOC and BPCL bargained for, and got, the marketing rights for the imported LNG by virtue of their equity stake in PLL. The four PSUs, including Oil and Natural Gas Corporation (ONGC), hold a combined 50 per cent stake in PLL, which is technically a private company. GAIL markets 60 per cent of the imported gas, IOC 30 per cent and BPCL 10 per cent.

The biggest stumbling block in this business is the take-or-pay condition. RasGas has a take-or-pay agreement with PLL which, in turn, has a similar clause in the agreement with these PSUs. The take-or-pay clause also exists in the agreements that these PSUs have signed with their customers. This simply means that even if you refuse to lift the quantity, you are committed to pay for the contracted quantity.

With PLL’s CEO and MD due to retire shortly, PLL will not be able to prevail on RasGas to renegotiate the price. The petroleum secretary, who is the ex-officio chairman of PLL, needs time to grapple with the situation as he is new to the Ministry. Industry circles feel that in the prevailing situation, the only way to extract a concession from RasGas would be through an intervention by the Prime Minister’s Office. Will the PMO act?