by R. Sasankan.

Petronet LNG Ltd(PLL), the private company floated by four state-owned oil and gas companies, needs to rediscover the noble objectives that underpinned its creation at a time when it has messed up the opportunity to source cheap LNG.

It is completely unacceptable that India should have to pay a price of $ 1-1.5/mmbtu above the spot rate when the world is facing an LNG glut. The troubling fact is that LNG from RasGas carries a premium of 60 cents/mmbtu after PLL claims to have “successfully renegotiated” the price.

PLL is the brainchild of Dr Vijay L. Kelkar who, in his capacity as secretary in the ministry of petroleum and natural gas, conceived the idea of creating an organisation that would blend the transparency of the public sector with the efficiency of the private sector. He even identified people who could head it. But Kelkar was forced out of the ministry soon after and his grand plan started to go haywire.

PLL’s basic function is commercial: it aims to buy LNG at the cheapest price, regassify it at a reasonable cost, and sell it through the marketing network of PSU oil and gas companies. Any commercial organisation ought to make profits but it should not be allowed to profiteer. PLL has, of late, been making huge profits at a time when LNG companies all over the world are in deep distress. PLL does not market its products, which is done by PSUs such as GAIL, IOC and BPCL. Its simple function is to regassify the imported LNG. Obviously, its huge profits emanate from the high regassification rate it charges. By importing LNG at a high cost and tacking on a regassification charge, PLL makes big bucks but forces the hapless Indian consumer to pay a high price for the delivered LNG.

It is clear that the objectives that led to the creation of PLL have been badly vitiated and it is time to ask why things went horribly wrong. Under the original scheme, PLL was not supposed to mimic the management structure in PSUs. Accordingly, it was to have a CMD and two directors -- director (commercial) and director (projects) -- and the layer below them would consist of only vice presidents. For the first two years, this structure was followed.

As the basic function of PLL is to buy and sell LNG, the post of director (commercial) is critical in the company. Surprisingly, this very post was scrapped by creating a post of director (finance) and merging the functions of director (commercial) with it. It is not clear why the change was made but it introduced a virus that started to play havoc with all major decisions within PLL.

The first director(finance) Mr P. Dasgupta was from the private sector but had no idea whatsoever about LNG. The first CMD, Mr Suresh Mathur, was at least familiar with the naphtha business as he was director (finance) at IOC. Initially, he mistook LNG to be a commodity like naphtha and conducted the business on that assumption. As the CMD himself was a former director(finance), he could have looked after any marginal role required of a finance man. The decision to scrap the post of director (commercial) occurred at a time when PLL was weighing offers for the supply of LNG from Petronas of Malaysia and RasGas of Qatar that were submitted in response to a tender floated by GAIL on behalf of PLL.

RasGas’ original offer had a floor of $ 16 and ceiling of $ 24 per barrel of crude. This was accepted even by ministry of petroleum and natural gas. Had this formula been accepted, India would have got LNG at a price of $ 3.04/mmbtu. But that was not to be. RasGas followed it up with a fuel-linkage price which looked attractive initially but carried a time-bomb since the price would eventually be linked to the moving average of the past five years. PLL opted for this disastrous deal and ended up paying $ 14/mmbtu. If a commercial (director) had been in place, he might have been able to see through the sinister design of Rasgas’ offer. Unfortunately, the original director (commercial)

Mr R.P. Sharma had already left PLL by then.

Since then, it has been an appalling story of consistent bungling. The contract with RasGas provided for the supply of 7.5 million tonnes of LNG “without extracting higher hydrocarbons.” RasGas honoured this commitment only for the first tranche of 5 million tonnes and not for the remaining 2.5 million tonne which comes as lean LNG. ONGC, one of the four PSU promoters of PLL, had already set up a petrochemical plant at Dahej to extract C2/C3 from LNG imported from RasGas. The plant is now starved of the right quality LNG. There is no evidence that PLL has been compensated by RasGas for this change in product specifications.

As per the original contract, PLL was to get a 5 per cent equity stake in the RasGas’ upstream project. This would have enabled PLL to have a member on the board. Apart from a share in profits, it would have helped PLL to influence certain policy decisions of RasGas. This right was not exercised for some mysterious reason. Every sacrifice has a price whose beneficiary cannot be identified easily.

The contract with RasGas was on the verge of collapse but saved through renegotiations. The deal with Australia’s Gorgon LNG for 1.4 million tonne for Kochi terminal is considered costlier than RasGas’ and remains to be re-negotiated.

PLL’s problems begin and end with executives who have a background in finance. The first CMD, who was later reverted to MD and CEO, had a finance background. He was succeeded by the first director (finance) of PLL. As there was no eligible finance man to succeed the second director (finance) who had left in a huff when A.K. Balyan came in as MD and CEO, a company secretary was elevated to the post. This incumbent will attain the age of superannuation in a month or two. Balyan’s background was neither finance nor commercial.

The present MD and CEO, Prabhat Singh, has the advantage of having a commercial background as he was director (marketing) in GAIL. This commercial background would have helped him in renegotiating the deal with RasGas. Yet, the renegotiated deal saw India having to pay a premium of 60 cents per mmbtu.

PLL should now be recast to turn it into a commercial organisation – which was the original intent -- by abandoning its present PSU structure. It should be packed with people who have a proven track record in striking commercial deals. PLL should remember that it will be in trouble if the government withdraws the subsidy for the pooled LNG supplied to the fertilizer sector. A commercial organisation cannot and should not depend on subsidies, direct or indirect The power sector is shying away from gas. If a private player like Torrent, which imports LNG through PLL’s Dahej terminal facility, brings in cheaper LNG, there is no reason why PLL can’t do the same. After all, PLL has the chromosomes of a private entity in its DNA.