In what can be seen as a positive move for Petronet LNG, the company may not have to pay penalty to the tune of Rs 3,500 crore to Qatar’s RasGas Company for not lifting contracted gas volumes. The news not only led the shares of the company to close higher on Friday but also lifted the shares of the firms to which it supplies gas like GAIL (India), Indraprastha Gas and Gujarat State Petronet. This is because of the back-to-back agreement Petronet has with these firms and if it had to pay any fine it would have had an impact on the other firms as well.
GAIL closed up 10%, Petronet LNG 4.6%, IGL 5.16% and Gujarat State Petronet 2.2% on the BSE on Friday.
“Previously also we have seen various media articles on RasGas volume deferment issue and news on expected change in formula,” Emkay Global Financial Services said in a report.
* To tweak pricing formula based on 60-month crude oil average
* If changed to 3-month average, price may fall to $7/mBtu from $12-13/mBtu
* In 2015, Petronet bought 68% of total 7.5 mt of agreed volumes
“But till date, the exact change/tweak is not yet known and we await clarity on the same from the management. As per reports, the ToP (take or pay) money is likely to be adjusted from the long term LNG price over 13 years. It means ToP obligation will remain on buyers,” the report added.
Petroleum minister Dharmendra Pradhan visited Doha early this month to participate in the 6th Asian Ministerial Energy Roundtable where he is believed to have discussed tweaking the long-term contract with Mohammed Saleh Al Sada, the minister of energy and industry of Qatar.
If the pricing formula changes, it would benefit Petronet LNG, as it would be able to cut down shipping costs by about Rs 180 crore. Also, it is sentimentally positive for city gas distribution and transmission companies like GSPL, IGL and GujGas as it would mean a volume pick-up and margin expansion in industrial volumes, feel analysts.
Given the 32% reduction in volumes shipped against contract, the investor community is concerned about the impact of any potential liability on both parties, in the event of RasGas implementing ToP. “As of now, our base case does not factor implementation of ToP by RasGas. However, given the surge in global LNG supply and India’s status as a key buyer, there need to be some kind of a settlement, which would not entail any financial payout by the Indian buyers,” said a Mumbai-based analyst.
On October 19, Prabhat Singh, managing director and CEO of Petronet LNG, said that the two firms were working out a solution. He, however, did not disclose whether India is renegotiating the volumes or the price. “Let the nation win,” Singh added.
In the first nine months (January-September), Petronet procured 68% of the gas available under the deal from RasGas. “We do not take 33 out of 120 cargoes,” Singh had said.
Industry watchers also cite the recent deal between Qatar and China, where the West Asian supplier agreed with PetroChina to skew deliveries under an existing long-term LNG supply deal towards the peak demand winter period. This is seen as a shift likely to weigh on global spot prices, reported Reuters.
“The concession to PetroChina fits Qatar’s recent pattern of adapting to long-term buyers needs, as it becomes more commercially savvy and active on spot markets, to hold onto its share of the prized Asian market,” said Reuters.
Even in the event of RasGas implementing ToP, the liability for Petronet comes to Rs 3,500 crore, assuming $7 per million British thermal units difference between long-term and spot LNG price. For the first year, this will be 50% of the existing balance sheet size. Looking at the formula and prevailing LNG prices, this penalty will remain till FY19, by when long-term LNG prices should match spot LNG prices. And if crude oil prices bounce back, then the deferment would get repeated every year. Thus, this will be an ongoing issue from next year onwards.
Nearly 16 years ago, the Doha-based RasGas and New Delhi-based Petronet LNG had signed the first sale and purchase agreement (SPA) to import 7.5 million tonnes per annum of LNG on ToP basis and a price linked to the 60-month average of crude oil. At present, the LNG through this route costs around $12.67 per mBtu at India’s west coast, excluding other charges such as re-gasification, transportation, marketing margin and state levies. On the other hand, spot cargoes are available at nearly half the price at $7-7.50 per mBtu. Since gas procured from Qatar is expensive, GAIL is not finding buyers for it and forced to utilise it at its petrochemical plant further hurting its revenues.