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Press Release [FREE Access]
Petro Intelligence Ľ Qatar Gas: Time To Re-Work The Crooked Deal

By R. Sasankan

The 25-year-long, 7.5 million tonne per annum Liquefied Natural Gas (LNG) supply contract between RasGas of Qatar and Petronet LNG Ltd (PLL) can be described as the most crooked deal that India has ever signed. The provisions of the contract were violated repeatedly without any resistance from the Indian side. It wasn’t as though the Indian officials who were associated with the deal were not aware of the monetary value that each violation involved. They knew – but they chose not to protest; and there was no documentary evidence to identify who the beneficiaries really were or even the sums that they might have received.

The deal is once again back in focus. It was renegotiated in 2015 and the quantity raised from 7.5 million tonnes to 8.5 million tonnes. RasGas is now refusing to renegotiate the terms once again even as the Asian LNG price continues its hurtle downwards. “We don’t renegotiate existing contracts. Contracts are contracts for the duration we sign them for. We as businesses understand that the sanctity of contract is important for both sides. And for the credibility of both sides, both parties must respect that. We are looking forward to adding more volumes in India and negotiating additional volumes,” said Saad Sherida al-Kabbi, chief executive of Qatar Petroleum in Delhi.

RasGas’ refusal to renegotiate the contract comes against the background of the steadily plummeting price of LNG in the spot market. Last week, deals were struck at prices below $4.00 per million British thermal units (mmBtu) -- the lowest level in more than 10 years. The average LNG price for March delivery into northeast Asia was estimated at around $4.00 per mmBtu, down $0.60 per mmBtu from the previous week. The delivered spot prices of LNG to Indian ports are about half of those under the long-term LNG deals, reducing the appeal of the Qatar supply contracts for price-sensitive Indian consumers.

PLL is facing the heat from its consumers, just as it did in 2015 when RasGas’ price touched $ 14/mmBtu. True, PLL has a take-or-pay deal with its consumers just as RasGas has with PLL. But when prices plunge, such provisions will not work. India’s petroleum minister Dharmendra Pradhan has been asking RasGas to renegotiate. Pradhan has the image of a tough minister. Will he act or give into pressure from Qatar and its powerful India lobby which is led by a former cabinet secretary?

Prime Minister Narendra Modi has set a target to raise the share of natural gas in the energy mix from the current level of 6.2 per cent to 15 per cent by 2030. The target can be achieved only if the gas price remains affordable. India simply cannot afford costly LNG and the future of the share of gas in the energy mix and the survival of the regasification terminals and the gas pipelines being built with budgetary support depends on the affordability of imported gas. Domestic gas production may witness a temporary jump in the next couple of years after RIL-BP and ONGC start producing from their new fields which are not large by any reckoning. The new pricing formula for domestic gas, endorsed by the government, will make the gas produced from difficult areas expensive and the domestic producers will have a difficult time selling their gas if the price of LNG continues to slide.

The most sensible option for the government is to unscramble some parts of the existing contracts, especially the RasGas-PLL deal. The negotiated contracts cannot be scrapped easily but the government has several options before it from which even RasGas can benefit. I will come to that later.

I started the column by describing the RasGas-PLL deal as crooked. Let me substantiate this point. I do not blame RasGas for this disastrous deal. Had we accepted its original offer in response to the tender floated by PLL, then this tragedy might have been averted. The original offer provided for a floor price of $ 16 per barrel and a ceiling of $ 24 per barrel of crude. This would have translated into a floor price of $ 2.4/mBtu and a ceiling of $ 3.1/mBtu. The cost of LNG at Dahej terminal would not have exceeded $ 4.5/mBtu. Japan signed a similar deal almost at the same time. Why wasn’t this offer accepted? Who influenced whom?

True, the alternative crude-linked offer made by RasGas looked highly attractive since it offered a fixed rate for the first five years. The Indian negotiators failed to see the pitfall that that had been so craftily laid: after the initial five years, the price of LNG would be directly linked to crude price behaviour. It now turns out that the Ministry of Petroleum and Natural Gas obtained through IOC advice from a London-based consultant who predicted that the price of crude in 2015 would be $ 17 per barrel. RasGas has minority foreign partners who are really the brains behind any deal that the company signs. Most of these consultants are intimately known to the oil majors and they, in fact, survive on their largesse. At the official level, there was a very senior bureaucrat, known for his legendary PR who has been acting as RasGas’ Indian ambassador and he still occupies that role. It is no secret that a couple of petroleum secretaries associated with PLL during the first decade of its existence were corrupt.

The renegotiated LNG deal with RasGas of Qatar has been hailed as big victory. The deal exposed the naïveté of Indians who originally negotiated the contract. Prime Minister Narendra Modi’s intervention hastened the process and RasGas applied its common sense. The fact, however, remains that RasGas has been able to ring fence its business interests better than Petronet LNG Ltd (PLL) while agreeing to a three-month average of the crude price. What happens if the crude price rises to the previous level? In the absence of a floor and ceiling in the price of crude, the revised formula can be disastrous in a rising market.

I do not want to go into specific violations of the provisions of the contract which RasGas did with the connivance of the crooks from the Indian side. The initial leadership of PLL acted as if they were employees of RasGas.

 India should have recognized the corruption in the deal long back and reneged on it by launching an inquiry and holding those involved responsible. Now, renegotiating a deal that has already been renegotiated inappropriately does not make sense to me. The most sensible option for the government would now be to increase off-take and seek a completely new single deal for the larger quantity going forward. The new deal can subsume the quantity under the earlier deal. RasGas cannot baulk at such an offer at a time when the market is facing an LNG glut.

Hopefully, this time around negotiations will be done transparently and honestly and we can bury the ghosts of the original deal that had actually offered gas at a maximum price of $4.50/MMBTU at Dahej terminal.



To download the latest issue 'Volume 26 Issue 21 - February 10, 2020', click here
Petro Intelligence [FREE Access]
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Fallout Of A Falling Out
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Comparative Performance Of LNG Regasification Terminals In India & Europe
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Global and Domestic Natural Gas Price Trends
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Natural Gas - Import Dependency
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Evolution of natural gas consumption in India
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Gas Demand: Potential & Actual*
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Data Section
Monthly Upstream Data
Monthly Downstream Data
Historical database
Data Archives
Special Database
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World Oil Demand & Supply Projections
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Update: Status of Distillate Yield in PSU refineries
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Tenders [FREE Access]
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