Gail renegotiating LNG deal with Gazprom: report

GAIL India Ltd which only last year had to renegotiate a costly gas deal with the State of Qatar, has now found it has again contracted gas at a price much above the prevailing market rates and is now reported to be in talks with Russia's Gazprom to delay and renegotiate a 20-year gas purchase deal.

The move comes amidst low spot prices of gas and a weak demand at home that forced Gail to delay some contracted supplies.

Gail has contracted LNG from Gazprom at prices linked to the prices of crude oil. While gas prices remain subdued, oil prices are seen rising. This has pushed up the effective rates for gas that Gazprom will supply to Gail under the contract.

Shipments under the deal, initially expected to start in 2018-19, would be at a higher rate compared to prevailing market rates, especially since new production plants in Australia and the United States start up.

At current oil prices, Gazprom's LNG will cost more than $7 per mmBtu while spot cargoes fetch around $5 per mmBtu

GAIL is seeking a meeting with Gazprom officials to revisit the oil-linked price and delay a deal until the two sides agree on a new pricing formula, reports quoting Gail sources said.

The price mismatch is driving a wedge between the buyer and seller, industry sources say.
GAIL entered the deal at a time when prices looked climbing further amidst rising demand for the commodity.

The inconsistency in its deal with Gazprom is forcing GAIL to seek a revision of the key terms of the 2.5 million tonne/year deal, according to industry sources.

"The Indians are looking to postpone most deliveries and this is what talks are focusing on," reports quoting a Gazprom source said, adding that Gazprom gas is not the most expensive in GAIL's supply mix. "They have over committed," the Gazprom source said.

Under the 20-year accord, signed in 2012, Gazprom was to source its supply from the now-cancelled Shtokman LNG export plant in the Barents Sea.

The Gazprom subsidiary now aims to source supply from its global portfolio, including a share in the forthcoming Yamal LNG project in the Arctic peninsula, which GAIL claims constitutes breach of contract, industry sources said.

Apart from the Gazprom deal, GAIL is also saddled with about 5.8 million tonnes of LNG a year from the US which is expected to begin ramping up within the next two years.

India wants to increasingly shift to cleaner-burning gas as fuel and increase its share in its energy mix closer to the world average of 23.8 per cent from the current 6.5 per cent.

Last year India renegotiated a long-term LNG supply deal with Qatar's Rasgas, nearly halving the price and avoiding a $1.5 billion penalty fee for lifting less gas than agreed as customers preferred cheaper spot supplies.

India's biggest LNG importer Petronet is also seeking to renegotiate its costly import deal with ExxonMobil for 1.4 million tonnes annually from the Gorgon project in Australia, industry sources say.

That deal, which is due to start in the first quarter of 2017, is also oil-linked at an indexation level of 14.5 per cent to a barrel of crude, or over $7 per mmBtu - a hefty premium to current spot prices.