by R. Sasankan
The incredible has happened: global gas prices have tumbled so
dramatically in recent times that it has now become imperative to
undertake a complete overhaul of the energy mix in a country like India
which ranks as the world’s third largest importer of fossil fuels.
An energy expert with considerable knowledge of the US oil and gas
scenario believes that “it is no longer unthinkable to sign a long-term
(20-year) deal for LNG with the US for a price between $5-5.50/MMBTU
including re-gasification cost at the Indian coast if negotiated
transparently and properly.” That is an astonishing price for gas
imports into India, especially when one recalls what an abysmal record
the country has had in negotiating long-term gas contracts.
I was taken aback when I heard this expert’s comment, which has enormous
significance for gas-starved India, and decided to immediately cross
check this fact with other pundits. I was surprised to learn that the US
has already reached the magical number for natural gas production of
under $1/MMBTU. Russia, Middle East, Bolivia and certain fields in
Canada have already produced gas at this price or below it.
On the very next day, there were reports that suggested that the US
would emerge as the world’s largest crude oil producer next year. The
shale revolution in the US has made this possible. Until now, Indian
energy experts had never believed that the US could be considered as a
source for crude oil. For the first time last year, Indian companies
imported 8 million barrels of crude from the US. The $ 8-10 per barrel
differential in the price between Brent and the West Texas Intermediate
(WTI) has suddenly made it attractive for Indian companies to start
importing crude oil from the US.
But there is one niggling problem: the amount of crude oil that can be
imported is limited by the fact that these are sweet crudes with low
sulphur content. The crude-mix in Indian refineries is heavily tilted in
favour of high sulphur crudes which account for 70 per cent.
There has been a great deal of speculation on whether the entry of
India’s state-owned oil companies into the US market last year was
motivated by commercial considerations or at the behest from certain
people at the helm of the administration. The political angle cannot be
ruled out totally as energy cooperation was a key topic in the
deliberations that Prime Minister Narendra Modi had with President
Donald Trump in February 2017.
President Trump was also reportedly keen to see India import American
LNG. Subsequently, US LNG landed in Europe but could not enter India as
the spot price for Asian LNG and the crude price were not favourable to
justify such a foray. US LNG became a lucrative proposition only when
the spot price for LNG rose above $ 10/mmBtu and crude price nudged
closer to $ 100 per barrel.
The situation has now changed. The spot LNG price is above $ 10 but the
crude price is unlikely to touch $ 100 per barrel except in the case of a
major geopolitical turmoil.
The significant reduction in the production cost of American LNG has
turned the US into a formidable competitor to Qatar, the world’s largest
gas producer. The cash cost of drilling, production and transport to
markets together will be approximately $ 2.25/MMBtu. It is this low cost
factor that can propel US LNG to distant markets like India.
True, gas-rich Qatar has a production cost that is below $ 1 per MMBtu.
Qatar will try to block the entry of US LNG and this can be done only by
lowering its price. India stands to benefit in the ensuing competition
provided India negotiates the deal “transparently and properly”.
Transparency is essential for any deal to succeed. Unfortunately, this
characteristic has been completely absent in the deals that India has
signed in the past. The 25-year deal that Petronet LNG Ltd signed with
Ras Gas of Qatar for the supply 7.5 million tons per annum of LNG was
murky from the very start.
The deal turned out to be a disaster for India in many ways. The
leadership of Petronet LNG Ltd (PLL) permitted blatant violation of the
terms of the contract which favoured Qatar while sacrificing India’s
interests, raising suspicions about massive kickbacks. PLL was able to
circumvent scrutiny from the vigilance authorities that it was
technically a private company outside the purview of enforcement
agencies. Net result: the senior executives of PLL, at least in its
initial years, acted and behaved as if they were employees of RasGas.
Permit me to digress a little. RasGas’ original offer had a floor price
of $ 16 and a 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 in the fine print of
the agreement: 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. RasGas reduced its LNG price after the
collapse of the crude price in 2014 but still charges a premium of 75
cents per MMBtu. The deal with Gorgon LNG of Australia was also
renegotiated successfully. But the irony of all this is the fact that
the LNG exporters are able to treat the entire exercise as a gesture of
magnanimity on their part.
The developments on the gas price front in the US changes the entire
ball game, unless India once again choose to mess things up by
negotiating similar “disaster deals” for the supply of US LNG. The US
does not encourage kickback-induced deals and that should not be a
disincentive for not buying US LNG. India has a powerful LNG lobby which
has been active since 1998. This lobby could try and scuttle moves to
import cheaper LNG from new supply sources.
LNG is fast becoming just another commodity, much like crude oil. In
another five to 10 years, the regional price differentials may vanish.
In a commoditised markets, low-cost suppliers should win.
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