by R. Sasankan
India has a peculiar habit of being unable to negotiate commercial deals
to its advantage when prices soften on the international markets.
Nowhere is this trait more evident than in the case of LNG where prices
have hit new lows with India unable to negotiate a contract for cheap
supplies. One reason for this is that the country is unable to take the
right decisions at the right time. The world is now facing an LNG glut.
The spot price (ex-ship) is in the range $ 5/mmbtu and deals can be
concluded at this price even for supplies lasting for one to two years.
Petronet LNG Ltd (PLL) is forking out a renegotiated price of
$13.2/mmbtu for contracted LNG supplies from Qatar on the basis of a
crude price of $ 100 per barrel while the spot price is in the range of $
11/mmbtu. With crude prices dipping to $ 52 a barrel, the spot price of
LNG is in the range of $ 5-5.5/mmbtu.
Indian companies are unable to strike deals in the absence of
regasification capacity. The Dahej terminal capacity is exclusively
earmarked for Petronet LNG plus public sector companies such as IOC and
GAIL, which are its promoters. The capacity of Shell’s Hazira terminal
remains limited. The piquant situation is exacerbated by the fact that
Petronet LNG’s Kochi terminal is rusting for lack of infrastructure to
transport gas. Kochi was to receive LNG from the Gorgon project in
Australia. This was the costliest LNG which PLL contracted in 2009. The
outcome of the renegotiation process to bring down the price is still
not known.
What should the Indian companies do now to access cheap gas from
overseas suppliers? With the Iran-Pakistan-India gas pipeline project
practically dead on security considerations, the
Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline slated to meet
the same fate and the offshore pipeline from Iran to India still in the
realm of an idea, Indian companies will have to opt for LNG.
But there is no realistic study as such about the market potential for
LNG. True, India is a large country with a geographically large market.
But does it really have a large market for LNG? International energy
major Shell recently pulled out of the proposed floating terminal on the
Andhra coast citing insufficient demand. Shell should know India better
than others. Remember, Shell acquired the licence to open retail
outlets for petrol and diesel almost simultaneously as RIL and Essar
did. While Shell restricted its number of retail outlets to below a
dozen in the initial few years, the domestic giants went ahead and
opened close to 4500 outlets, all of which remained shut down for long
after the re-introduction of subsidy through PSU retail outlets. BP and
RIL floated a joint venture for the LNG business a few years ago. Nobody
talks about it these days and one would need the help of an astrologer
to determine its present status. Obviously, BP must have advised RIL
about the market realities.
The Indian public sector units are different. They have a knack of
investing in ventures without making deep business calculations.
Remember, Gas Authority of India Ltd (GAIL) in early 1980s built the
1400 km-long HBJ gas pipeline at a cost of Rs 14 billion which was a
huge amount in those days. (Just a random figure will throw this into
perspective: the annual increase in the salary of a Government of India
secretary at that time was only Rs 125). The pipeline capacity remained
grossly underutilized for many years. In fact, the construction of
fertilizer plants along the pipeline started only after the pipeline was
completed. In such circumstances, a private company would have gone
bankrupt. The HBJ pipeline is still an asset and is the backbone of the
proposed National Gas Grid.
With the PSUs entering the scene, the country is expected to have at
least two new LNG regasification terminals commissioned in the
not-too-distant future. IOC is setting up one at Ennore on the East
coast and IOC and GAIL have picked up equity stakes in two Adani group
projects. The floating terminal of Swan LNG is going to be a reality
with almost the entire corporate sector willing to book capacity with
it.
The Indian market may be unpredictable. But there are quite a few
companies that need gas at a reasonable price and LNG is the only option
for them. Experts say these companies should look for cheaper options.
Australian gas is not going to be cheap. Malaysia’s hydrocarbon reserves
are limited. These companies, acting either alone or as a group, should
look for equity stake in liquefaction facilities overseas. Canadian gas
is cheap. Qatar is certainly a better option. RasGas of Qatar will not
be interested as such an arrangement will force it to re-open the deal
with Petronet LNG. So, why not invest in Qatar Gas? It may not entertain
Petronet LNG but will certainly welcome others. The added advantage of
equity investment is the profit from such investments will minimise the
price of LNG. In the case of Canada, it will neutralise the cost of
transportation. GAIL could have opted for an equity stake in the US
liquefaction terminals, but instead booked capacity which cannot reach
India on account of the prohibitive transportation costs.
This is the right time to strike. The iron is hot. LNG companies all over the world are in deep distress. Seize the advantage!
