Iran Offers Cheaper LNG Than RasGas

New Delhi, April 14 | Updated: Apr 15 2004, 05:30am hrs
Imports of liquified natural gas (LNG) from Iran will set a new benchmark for pricing of this imported fuel in India. In a major departure from the earlier pricing practices, the Iranian national gas company NIGEC has agreed in principle to a two-part pricing formula for LNG exports to India. The new pricing formula, suggested by Gail India Limited (governments nodal agency for importing 5 mtpa LNG from Iran), is expected to make LNG imports into India substantially cheaper than what was negotiated with RasGas of Qatar.

Gail chairman and managing director Proshanto Banerjee is shortly leaving for Iran where he is expected to finalise details for developing a sales and purchase agreement (SPA) with NIGEC for importing 5 million tonnes per annum (mtpa) of LNG into India.

While Mr Banerjee refused to give any numbers, sources said Gail is negotiating a price which will be at least 15-20 per cent cheaper that the imported LNG price from Qatar.

This means that as against the agreed FOB price of $2.53 per mmbtu between Petronet LNG Ltd (PLL) and RasGas, the Iranian LNG price would be close to $2 per mmbtu, which is a substantial reduction.

Under the new two-part pricing formula, all investments in Iran including the LNG liquifaction terminal and export facilities developed by NIGEC will form part of the fixed component. The variable component will be linked to the price of crude, which again will not be the Japanese Crude cocktail (average of some 40 varieties of crude) as in case of pricing formula with RasGas) but will be the Brent crude, widely accepted benchmark for crude. JCC on the otherhand is specific to Japanese economy and for Indian context Gail has proposed indexation with the Brent crude. Therefore the cost of LNG production will now be on cost plus basis and not on market determined practices being followed till now.

It is significant to note here that if LNG from Iran is imported at a cheaper price RasGas may be forced to revise its price. Petronet LNG Limited (PLL) has signed a side agreement with RasGas as per which the latter will review and renegotiate the LNG prices if the market situation warrants i.e., if any other entity brings in regassified LNG of significant quantities (specified as 2.5 mmtpa on a long term basis) at a cost lower than RasGas, the latter will match the price.

Gail has led the discussions on sourcing of LNG from Iran and so far three joint meetings have been held with the National Iran Gas Export Company (NIGEC) in Tehran. The last meeting was held in Tehran in February this year.

The Iranian side has indicated availability of 5MMT of LNG from 2008. Company officials said discussions were held to converge on the principles for commercial terms so that negotiation of sale purchase agreement (SPA) could be commenced at the earliest.

Although broad terms were finalised during the first two meetings, major commercial issues could not be resolved. Therefore, to take forward this initiative the third meeting was held at the directors level where it was agreed that the pricing formula will have a fixed & a variable component, the indexation of LNG price will be with Brent crude as against JCC, there will be a clause for price revision besides the take or pay obligations.