How to rip up a billion-dollar LNG contract

Author Kwok Wan

Imagine: Your long-term, oil-linked gas supply contract suddenly becomes totally out of the money and may bankrupt your company.

Imagine: Your long-term, oil-linked gas supply contract suddenly becomes totally out of the money and may bankrupt your company.

What do you do?

For European gas market observers, this may sound familiar. But we’re not talking about Gazprom’s gas pipeline exports and European utilities, but about LNG supplies between India’s Petronet and Qatar’s Rasgas.

State-controlled Petronet is India's biggest LNG importer. It reached an in-principle agreement with Rasgas to amend the pricing formula in its 25-year, 7.5mn t/yr LNG supply contract, as well as defer some cargoes.

Amendments to the pricing formula would be to change the current 60-month average of the Japanese Crude Cocktail price to less than 12 months under the tentative agreement, which would remove some of Petronet's exposure to higher-priced crude.

Overall, Petronet is seeking a 40pc price cut to bring long-term prices in line with spot values, oil minister Dharmendra Pradhan says. The company also plans to defer around 2mn-2.5mn t in the next few years.

Already, Petronet has bought only around 68pc of its term volumes from Rasgas in January-September this year because it is locked into buying the Qatari supply at prices around $5/mn Btu above current market levels.

India’s spot price for the third quarter was down by 34.8pc at $7.598/mn Btu compared with the same period in 2014.

But it’s not like India doesn’t want the LNG. LNG imports in April-October totalled 9.2mn t and were up by 35pc from a year earlier, according to the oil ministry. India is even buying LNG reloads from Europe, with the first ever Belgium re-export cargo expected on 1 December.

Increased imports in the past few months have been supported by government subsidies to restart gas-fired power plants. India wants the LNG, but only at the right price.

Other expensive long-term LNG contracts under pressure include India’s 1.44mn t/yr deal for Australian LNG from the 15.6mn t/yr Gorgon project and Poland’s 1mn t/yr deal with Qatar, with both about to start in the next few months.

Traders say you need oversupply to kick-start a true spot market, along with a move away from long-term contracts. We definitely see these things coming in LNG now.

For gas and LNG market information and prices: http://www.argusmedia.com/Natural-Gas-LNG

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