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Press Release [FREE Access]
Petro Intelligence Ľ Rash Of Scandals: When Negotiators Scupper Indiaís Interests

By R. Sasankan

The Narendra Modi government is preparing to renegotiate the long-term contracts for the supply of gas from Qatar and other countries – and hopefully it will be mindful of the ham-handed approach that India’s negotiators have adopted in the past that raised very deep concerns about the motivations they had for closing deals that were clearly inimical to India’s interests.

Petroleum minister Dharmendra Pradhan has raised the issue of gas price renegotiation with Qatar but has not indicated when these discussions will start. There is no doubt that a gas price renegotiation has become essential, especially at a time when the spot LNG price in Asia has slipped below $ 4/mmBtu from $ 12.25/mmBtu a year ago. Moreover, the US Henry Hub price is hovering around $ 2.30/mmBtu. In comparison, Indians pay $ 9/mmBtu to Qatar which supplies 8.5 million tonnes of LNG per annum on the basis of a long-term contract and up to $ 9.32/mmBtu for domestically produced gas from difficult areas. The only relieving factor is the domestically produced gas from nomination blocks priced $ 3.69 mm/Btu which essentially goes to the government-identified priority sectors.

No one can deny that a renegotiation of prices under an existing gas supply contract has very severe limitations. The government will not have the elbow room to extract the best possible price because any discussion will have to be confined within the boundaries of the basic structure of the originally signed contract. This presents problems and that is why the petroleum experts do not expect any attempt at renegotiating gas pricing to yield a good outcome.

Indians have been consistently ‘unlucky’ when it comes to negotiating a long-term natural gas price. The LNG price from Qatar touched a high of $ 14/mmBtu four years ago when the rest of the world was getting it below $ 7/mmBtu. The contract was on the verge of collapse and it was bailed out through re-negotiations. The world is once again facing a glut-like situation which makes it unlikely that it will go up in the near future, making it expedient to renegotiate the price quickly.

In 2015, the renegotiations had started almost a year after the LNG price had slid to a new low. Some energy pundits in India had said at that time that Qatar was being magnanimous in agreeing to a price renegotiation. But that comment masked the real truth. RasGas and its foreign partners were intelligent enough to realise that a renegotiated price was the only way to save the contract. As a token of gratitude, Petronet LNG Ltd increased the quantum of LNG import from Qatar by 1 million tonne per annum, taking the total to 8.5 million tonnes. Other suppliers also lowered their prices.

One must admit that one cannot go out and renegotiate a long-term contract in a jiffy. But equally, one cannot wait interminably to do so either. The present slide in LNG price is not a sudden development and the country’s energy experts ought to have awoken to the emergent situation when there was clear evidence of a demand-supply mismatch.

Normally, LNG supply from Qatar should be advantageous to India because of geographical proximity. Its original offer had been made on the best possible terms. But for some inexplicable reason, the country’s negotiators messed things by accepting a pricing formula that was clearly loaded against India’s interests. What precisely went wrong? I asked a renowned energy expert who said: “Deeply vested interests use their clout to put incompetent and corrupt individuals to lead our negotiations.”

That India lacked a negotiating strategy was clear right from the start of the discussions with RasGas. The original offer of RasGas, in response to a tender floated by GAIL on behalf of Petronet LNG, was very attractive. This was accepted by Petronet LNG and later endorsed by ministry of petroleum and natural gas. Petronas of Malaysia had also made a very attractive offer but it seemed to have lacked the clout to stay in the race.

The original offer price of RasGas would have ensured LNG at $ 4.2/mmBtu. Suddenly, however, RasGas came up with a pricing formula linked to crude oil. For the first five years, the price was kept relatively stable and, subsequently, yoked to a moving average of the last five years. This formula played havoc and raised the price of RasGas supplied-LNG to $ 14/mmBtu in 2014-15.

To top it all, the Indian side settled for a new condition that violated the crucial provisions of the contract. The contract provided for the supply of 7.5 million tonnes per annum of rich LNG. The exact term used was “LNG without extracting higher hydrocarbons”. The first tranche of 5 million tonnes still remains rich gas. But this specification was violated for the second tranche involving the supply of 2.5 million tonnes per annum which came as lean gas. The Indian side did not protest even though ONGC, one of the four promoters of Petronet LNG Ltd, had already established a plant to extract C2, C3 components from the imported LNG. Surprisingly, even the ONGC leadership did not register a formal protest as the “LNG ambassador” in India happened to be a senior bureaucrat who rose to higher levels in subsequent years. (His identity is expected to be revealed in an upcoming book by a Singapore-based energy expert).

One of the biggest attractions of the contract with RasGas was the offer of a 5 per cent equity stake in the upstream LNG project in Qatar. A similar facility was granted to the South Korean company which is also a major importer of LNG from RasGas. But the shocking fact is after the Indian side worked this clause into the contract, it surprisingly chose not to act on it even though it was desperately scouting for overseas assets that it could acquire.

This was a deliberate attempt to sabotage the country’s interests and it points to a huge scandal. What is even more surprising is the fact that the NDA government has not shown any interest in unravelling the mystery.

A senior official within the earlier UPA government had investigated this affair and had submitted a report that was treated as confidential even by the NDA administration even though it had promised at one stage to place it before parliament.

This is not the first scandal in the petroleum sector. There was the Kuo Oil deal in the early 1980s and many people still remember the details. But for those who don’t, here are the details. In January 1980, Indian Oil Corporation had floated a tender for 500,000 tonnes of high speed diesel (HSD). It received 14 offers and only four had submitted fixed offers. Faced with an acute shortage, IOC struck a deal with Kuo Oil of Hong Kong for the purchase of just over 412,155 tonnes at $ 350.65 per metric tonne on a fixed price basis for the whole year even though Singapore spot prices had fallen to $ 333.16 by February 1980 – and the trend had been visible for some time. The accusation was that the then petroleum minister P.C. Sethi had approved a fixed price purchase under pressure from some people who chose to remain “behind the curtains”.

The other one was the disastrous $ 2.1 billion deal that Oil and Natural Gas Corporation (ONGC) struck with Imperial Energy for its Siberian oilfield asset in 2009, its most expensive overseas buyout. Two years later, the comptroller and auditor general criticised the acquisition, estimating that the ONGC’s overseas unit had suffered a loss of Rs 11.821 billion between January 2009 and March 2010 due to its inability to achieve the estimated oil production of 35,000 barrels per day.



To download the latest issue 'Volume 26 Issue 11 - September 10, 2019', click here
Petro Intelligence [FREE Access]
Rash Of Scandals: When Negotiators Scupper Indiaís Interests
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A Flurry Of Deals: Who Will Come Out On Top?
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ONGC-HPCL: A Marriage On The Rocks?
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Brakes On One Merger; Now Break The Grand Plan
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NCLT Bars SBI From Selling Overseas Oil And Gas Assets Of Videocon Group
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Sector-wise Demand And Comsumption Of Natural Gas
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LPG Market Profile In Brief As On April 1, 2019
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Indiaís Sectoral Consumption of Natural Gas (FY 2018, FY 2023 & FY 2030)
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Data Section
Monthly Upstream Data
Monthly Downstream Data
Historical database
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Declining Share Of Domestic Crude In Production Of Petroleum Products
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IOC - Upstream Portfolio & Recent Acquisitions
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