By R. Sasankan

Voltaire said history never repeats itself. He added a rider: “But Man always does.”

India’s ministry of petroleum and natural gas is in a piquant situation where it can test the truth of that aphorism.

Petronet LNG Ltd, which comes under the administrative control of the petroleum ministry, has already initiated talks with RasGas of Qatar to renew its long-term LNG import contract. Although the existing contract expires only in 2028, its renewal has to be concluded before the end of 2023. Both India and Qatar are keen to renew that deal as per the deadline.

The RasGas deal has had a chequered history – and has earned a besmirched reputation for being one agreement that Indian negotiators botched up completely when they negotiated the terms of the contract.

Under the original terms of the deal, it involved the supply of rich gas worth 7.5 million tonnes per annum. For some strange reason, Qatar supplied only 5 million tonnes per annum as rich gas and the remaining 2.5 million tonnes as lean gas resulting from the extraction of higher hydrocarbons.

The Indian negotiators of the original deal appeared to be making great progress in the initial rounds of talks. But when talks reached the final stage, certain corrupt elements from the Indian side dominated the scene, tilting certain crucial provisions of the contract against India’s interests. Thus, what started as a beneficial contract degenerated into a virtual disaster but partially bailed out through a re-negotiated deal at the end of 2015.

The quality of the new contract, now under negotiation, too depends on the integrity of the negotiators who will have to be fielded with the approval of petroleum minister Hardeep Singh Puri, who is acknowledged to be honest and professional. If something goes wrong with the new contract, Puri will have to own responsibility. Prime Minister Narendra Modi also seems to have evinced interest in getting a periodic update on the course of the negotiations.

I am not imputing that the Indian negotiators of the existing contract were incompetent. True, they may not have been very familiar with the intricacies of the LNG business but, like in other deals, they seem to have been influenced more by the kickback orientation than the interests of the country. LNG business is quite generous in kickbacks.

I do not intend to go deep into the controversial provisions of the existing contract as readers of www.indianoilandgas.com are not unfamiliar with the issue. Suffice it to say that had India accepted RasGas original offer in response to the tender floated by PLL, then the disaster could 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 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 had obtained advice through IOC 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. In fact, the 7.5 million tonnes of LNG contracted by PLL is Exxon Mobil’s share in RasGas’ LNG. Most of these international consultants are closely connected with the oil majors and they, in fact, survive on their largesse.

According to experts, the most damaging aspect of the contract for India was the decision to price the gas at a 60-month average. When the deal was struck, the price of crude oil – which in itself is a questionable barometer for gas pricing – hovered at around $ 25 per barrel. When crude oil prices rocketed, the recklessness of India’s negotiation position stood cruelly exposed and started to raise suspicions about the integrity of India’s negotiators.

The renegotiated LNG deal with RasGas of Qatar has been hailed as big victory. It came into operation in January 2016.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.

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.

The renewed contract is unlikely to have a 25-year duration. Today, the norm for long-term contracts is around ten years; yet, buyers' preferences range between three to five years. The International Energy Agency, an energy forecaster, suggests that the problem isn’t long-term contacts but rather the terms. In several cases, the terms favour sellers while buyers get the short end of the stick.

For Asian countries, as buyers of natural gas, locking into long-term contracts can be precarious. First, the world is actively trying to move away from fossil fuels. Second, clean energy sources will become cheaper than natural gas in most Asian countries in the next five years. There are, however, other market-specific concerns and market dynamics.

India’s negotiators will have to be extremely careful as they first identify and then skirt around the probable perils in the terms that they agree on future gas import deals.