By R. Sasankan
A little over an year ago, in September 2019, Petronet concluded a
memorandum of understanding (MoU) with Tellurian of the US with a great
deal of fanfare. Under the terms of the MoU, Petronet proposed to invest
$2.5 billion for an 18 per cent stake in Tellurian's proposed 27.6 MTPA
Driftwood LNG facility. This was linked to an LNG offtake of 5 MTPA by
Petronet from the Driftwood facility. However, the price of LNG under
this arrangement was never revealed.
The company is now having second thoughts about the deal.
“Petronet LNG Ltd has no plans to invest in liquefied natural gas (LNG)
developers as the market is awash with cheaper fuel. Right now, we get
LNG at throwaway prices; so there is no need to go in for an
investment... you should be more concerned with LNG than investment,"
said V.K. Mishra, director (finance) of Petronet LNG Ltd (PLL), while
referring to the proposed Petronet-Tellurian deal.
These are strong words and very rarely have senior executives of PLL
spoken so bluntly. This begs a question: what could have possibly
prompted Mishra to make such a comment? Is it possible that this had
something to do with the fact that the recent Presidential elections in
the US has thrown up a change in leadership? Or, does it solely have
something to do with the prevailing glut in LNG?
PLL is going through its own changes at the top; it has been rudderless
since Prabhat Singh retired as its chief executive in September. A
director of Indian Oil Corporation has been picked as his replacement
but a formal announcement is awaited.
PLL has a history of bungling LNG deals and two long-term supply
contracts that it struck are like albatrosses around its neck. The cost
of these botched up LNG deals with Qatar and Australia have proved to be
exorbitant for the country and the Indian consumers. RasGas has refused
to renegotiate the deals despite repeated requests from PLL and the
Ministry of Petroleum and Natural Gas. The country cannot afford to sign
another disastrous LNG deal. This is why PLL has turned extremely
cautious in dealing with Tellurian of the US. There has been tremendous
pressure on PLL from the US. Obviously, PLL did not come under pressure
from India’s political leadership which enabled it to stand up to the US
lobby.
Gas experts in India have in the past have displayed shocking naïveté
while concluding LNG supply deals by being oblivious to the simple fact
that one can control the price of LNG only if one owns or controls the
underlying upstream gas resource that supplies the natural gas for
liquefaction. A token investment for a minority stake in an LNG facility
can, at best, yield a financial return. Quite honestly, it makes no
sense to tie up for a long-term LNG contract. Petronet obviously
realised this and this is precisely why there has been virtually no
movement on seizing this “golden investment opportunity” in the last 14
months.
“Driftwood is as adrift today as it was in September 2019,” quipped a gas expert.
In its pitch to potential investors in the Driftwood LNG facility,
Tellurian projects a firm cost of $3.50/mmBtu for LNG produced at
Driftwood by assuming that its captive Hayansville gas field and the
associated gas transportation network will deliver natural gas to
Driftwood at $2/mmBtu irrespective of the Henry Hub price of natural
gas. The net selling prices assumed for Driftwood LNG ranges from $
5/mmBtu to $ 11/mmBtu. Tellurian's captive Hayansville gas field has a
1.2 Tcf gas resource and is currently producing 46 mmscf/d. The pitch
has obviously not worked: the Driftwood LNG facility is still scouting
for investors.
Tellurian’s promoters are industry professionals venturing out on their
own. They do not have deep pockets. They have a concession on a small
reserve and need to grow the supply source to feed their LNG facility.
According to analysts, what they have at this stage is a bunch of
approvals and nothing more. India, with its huge demand base and
willingness to invest, should be in the driver’s seat and not play
second fiddle to these penniless first generation entrepreneurs who are
smart and know the industry better than India’s government babus who
have often negotiated disastrous LNG deals.
Observers who have been following the proposed Tellurian deal now
discern a deep reluctance within PLL to go ahead with the agreement.
Left to itself, PLL would have been able to stave off the pressure from
the US. A report by PTI recently claimed that “the board of directors of
Petronet LNG in May 2019 was not exactly gung ho about the deal. Three
possible reasons have been cited for the reluctance of the board: one,
LNG prices were falling since September 2018 ; two, there was the
prospect of oversupply of LNG in the Indian market; and three, the
company did not wish to get locked into long- term contracts.”
The Ministry of Petroleum and Natural Gas had played a crucial role in
concluding the long-term LNG deals that PLL signed with RasGas and
Exxon’s Australian project. But in the case of Tellurian, the ministry
has stayed in the shadows and has not tried to force it to close the
deal.
Understanding the compulsions of diplomacy, PLL has preferred to play it
safe. The unusually strong words of PLL’s executive which I quoted
earlier coincided with the outcome of the US presidential election.
Could it be that President Trump or people close to him had shown an
extraordinary interest in the deal? Normally, a US President does not
directly interfere in such deals. Nor does the Indian Prime Minister.
But they don’t have to. The industry lobby has a sophisticated mechanism
to deal with such behind-the-scene machinations.
Petronet LNG Ltd has also undergone change during this evolutionary
process. Its senior executives in the initial decade of its existence
behaved as if they were employees of RasGas. It was a demeaning
spectacle. They looked too weak to stop the blatant violations of
contract provisions. From an attitude of subservience, the PLL
management has now grown to a stage where it has started to assert
itself. That in itself is a welcome development.
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