Why falling imported gas price brings no relief

As per reports, Petronet LNG Limited, a consortium of four PSUs (ONGC, GAIL, IOCL and BPCL) is shelling out Rs 400 crore every quarter in demurrage charges for ships idling because of its PSU buyers are refusing to purchase expensive imported gas. This is just the tip of iceberg. At the outset, let us capture a few facts.  

Petronet had entered in to a long-term 25 year contract with RasGas of Qatar
for import of 7.5 million tonnes a year LNG or around 30 million standard cubic metre per day (mmscmd). For transportation to its terminal at Dahej, it had entered in to a time-charter agreement with Mitsui OSK Lines et al. The PSUs (sans ONGC) had committed to buy all of this gas. The GAIL had a ‘take-or-pay’ agreement for 2/3rd of the gas.

Initially, in an open tender floated by Petronet, RasGas had won a firm bid that would have translated to a floor or minimum price of $3 per million British thermal unit (mBtu) and a cap or maximum price of $4 per mBtu for supply of 7.5 mt annually over the 25-year period.  Yet, the price bid was re-negotiated exclusively with RasGas without approaching the competing bidder (Petronas, Malaysia).

Under a unique formulation – unheard of in long-term contracts globally –Petronet agreed to buy LNG, on take-or-pay basis, at a fixed price at the mid-point of the quoted floor and cap for first five years; followed by an annual increase equal to 33 per cent of originally bid cap, for each of the next five years. For balance 15 years, price was linked directly to the average price of crude in immediately preceding five years without any floor or cap.

We are now running in 12th year when average of crude price in immediately preceding 60 months is applicable. On this basis, imported LNG from RasGas is costing around US$ 13 per mBtu even as price in spot market has declined steeply to US$ 6.5-7 per mBtu.
This has led IOCL and BPCL to back out even as GAIL has no option but to continue buying in view of ‘take-or-pay’ clause. In turn, Petronet is reneging on nearly 1/3rd of its commitment under long-term deal with RasGas.

The demurrage at Rs 1600 crore annually due to resultant idling of ships is peanuts when compared to gargantuan loss on account of Petronet having to pay much higher price under long-term contract.

Back of the envelope calculations show that for every extra US$ 1 per mBtu, import of around 30 mmscmd [quantity under the contract] will lead to excess payment of US$ 438 million per annum.

For extra $ 6.5 per mBtu over current spot price, this would be $ 2.85 billion or Rs 18,500 crore per annum. When compared to $ 3.5 per mBtu (mid-point of floor and cap in firm bid offered by RasGas), the excess price of $ 9.5 per mBtu would imply still higher excess payment of $ 4.16 billion or Rs 27,000 crore per annum.

Since Petronet is buying 2/3rd of committed quantity, excess payments, though somewhat lower, will still be huge at Rs 12,400 crore-Rs 18,000 crore per annum. This burden will be passed on to GAIL which pays full price $ 13 per mBtu on entire quantity it buys from Petronet.

However, the latter will also end up denting its balance sheet on account of penalty payable to RasGas for not lifting balance 1/3rd [according to a report, this could be close to Rs 10,000 crore] plus demurrage charge of Rs 1600 crore.

Golden opportunity

The suffrage is not limited to Petronet/ GAIL. The contagion effect will spread to user industries especially fertiliser and power even as GAIL recovers the higher price on supplies made to them. These industries are in dire need of gas at lower price as this will help reduce fertiliser subsidy and power tariff. A steep decline in price of imported LNG offers a golden opportunity and yet, they do not get relief, courtesy a flawed pricing formula forced on Petronet by vested interest in a ‘surreptitious’ manner.  

On April 27, 2015, Minister for Petroleum and Natural Gas Dharmendra
Pradhan informed Parliament that Petronet was being investigated for alleged irregularities in gas purchase contracts. He noted that findings of a government committee constituted for this enquiry “are under examination in consultation with CVC”.
This probe needs to be vigorously pursued to fix accountability. Establishing mala fides would provide government legal basis for renegotiating the contract. One can only wait for the outcome.  

But, a big take away from the Petronet episode is the dire need to bring to the centre-stage the predominating role of large-scale irregularities involving quid pro quo (or corruption in plain words) in transactions/ purchases by government departments and its undertakings/ agencies which have the inevitable effect of imposing crippling burden on the exchequer and user industries. This must become part of the debate on ever increasing subsidy and losses of state undertakings such as state electricity boards (SEBs).

For instance, we need to ask as to why fertiliser subsidy during the current year is not coming down despite a massive reduction in price of imported LNG as also cut in domestic gas price? Why cost of power generation by gas based plants is not declining despite government giving subsidy under a special package given to them early this year?

Why should we talk ‘only’ of increasing power tariff or urea MRP (maximum retail price) in any reforms package aimed at reducing losses of electricity boards or fertiliser subsidy?
Prime Minister Narendra Modi who is known for his zero tolerance for corruption and any wrong doing should crack the whip to stem the rot.   

(The writer is a policy analyst)