India's biggest LNG importer state-controlled Petronet has reached an in-principle agreement with Qatari supplier Rasgas to amend the pricing formula in its 25-year LNG supply contract and defer some cargoes, in a move that could stave off a financial collapse of the Indian firm.
Discussions are continuing to reach a final deal to amend the 7.5mn t/yr contract, Petronet said. RasGas could not be reached. Petronet is seeking a 40pc price cut to bring long-term prices in line with spot values, oil minister Dharmendra Pradhan said.
Petronet 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. Indian consumers have switched to using spot LNG or fuel oil instead. Petronet plans to defer the import of the rest of its contracted volumes this year - equivalent to around 2mn-2.5mn t - in the next few years.
RasGas currently uses a 60-month average of Japanese Crude Cocktail (JCC) prices to set caps and floors in its contract. This will be changed to less than 12 months under the tentative agreement, removing some of Petronet's exposure to higher-priced crude. LNG contract buyers in northeast Asia typically use a 3-6 month rolling average of the JCC in contracts with Qatari suppliers.
Petronet's term contract prices regular LNG supplies at a 12.6pc slope to the 12-month JCC, but caps and floors are set using the 60-month JCC average. Crude prices have slumped since mid-2014 to around $45/bl, after peaking at over $100/bl in previous years. The 60-month clause in the existing Petronet-Rasgas contract led to a much higher floor price, forcing Petronet to pay around $12/mn Btu for its long-term supply. Spot LNG is currently selling at around $7.50/mn Btu for delivery to India in January and February.
Petronet has been looking to buy cheaper spot LNG or naphtha rather than take its long-term supply from Qatar. But the Indian firm is still required to meet its take-or-pay obligations, under the contract, which require it to compensate Rasgas if its supply fluctuates more than 10pc above or below beyond the agreed volumes.
India has applied pressure on Qatar at all levels, including from the prime minister's office, to cut the price of the term LNG to better reflect global spot values.
The contract is creating a growing financial burden for Petronet, with its losses this year potentially totalling around 100bn rupees ($1.5bn), according to analyst estimates. Petronet only made a profit of Rs2.5bn in July-September. The company will calculate the final payments due to Qatar in December.
At least one of the three LNG vessels contracted to ship RasGas cargoes to Petronet has been left idle because of fall in the Indian firm's offtake. But Petronet is still forced to pay charter rates of around $70,000/d to the ship operator.
