By R. Sasankan
The price of liquefied natural gas (LNG) is on a very slippery course,
tumbling to around $ 2 per mmBtu today. It was $ 7 in October 2019 and $
14 in 2014. That ought to have been good news for Indian consumers of
gas but it wasn’t. They continue to pay $ 8/mmBtu for the gas they get
from Petronet LNG Ltd (PLL). Blame it all on the take-or-pay contracts
that they had signed with PLL which locked them to a price from which
they haven’t been able to wriggle out of.
PLL hasn’t been able to rake in the big bucks because it has also been
locked into similar take-or-pay contracts with LNG supplier RasGas of
Qatar. Pressure has been mounted on RasGas to renegotiate the price on
the contract but it has refused to relent, arguing that it had done so
barely five years ago. The obduracy of the Qatari firm has now raised
the prospect that the deal may collapse of its own accord unless the
political leadership on the two sides are able to persuade the Qatari
firm to see reason and reduce the price.
Meanwhile, COVID-19 continues to wreak as much havoc with the financials
of companies as with the lives and livelihoods of ordinary folk around
the world. The pandemic has guaranteed one thing: the oil and gas
business will never be the same again. It threatens to eliminate quite a
few independent oil and gas producers that do not have protective
shields to weather the looming economic crisis.
But this also throws up an opportunity for India’s state-owned companies
to snap up petroleum assets around the world at heavily discounted
prices. The Indian PSUs, which have all along concentrated on acquiring
oil assets, must now concentrate on striking deals for upstream gas
assets for captive consumption at home. Many may not be able to leverage
their own balance sheets to fund the acquisitions; they ought to team
up their resources and could even consider roping in large private
industrial houses like the Tatas as they scout for such deals.
They must not look for deals like the one that was proposed by US firm
Tellurian that was almost clinched during President Donald Trump’s
recent visit. India was lucky that the Tellurian deal was deferred – and
the credit for that should go entirely to the petroleum ministry and
the PLL management which baulked at the terms – and isn’t likely to come
up again. Tellurian was a paper company trying to build upstream and
downstream assets based on firm off-take commitments at prices that
remained opaque, or at best subject to price movements. India should
look to acquire companies with physical production and an existing
network of production and liquefaction facilities – that is best suited
for captive consumption in India.
There aren’t too many such projects nearby. Middle East producers,
however, weakened by COVID-19 haven’t reached a stage where they will
consider selling their assets. India should look further afield as
geographical proximity is not all that important and gas can be brought
to the Indian coast in the form of LNG.
The experts say that one sensible option will be to raise India’s stake
in the Mozambique gas block, Rovuma Area-1, where US firm Anadarko
Petroleum is the operator. This might be the opportunity to push for a
change in the operator since Indian companies hold the largest stake of
30 per cent. Andarko has only 26.5 per cent. The other stake holders are
Mistui (20%), Thailand’s PTT (8.5%) and Mozambique’s ENH (15%). The
block is being developed for LNG production and the Indian companies are
investing around $ 6 billion.
The Indian PSUs that have invested in Rovuma Area-I are Bharat
PetroResources Ltd (BPRL), the upstream subsidiary of BPCL, ONGC Videsh
Ltd (OVL) and Oil India Ltd (OIL). An estimated $18.4 billion is
required to bring the first set of discoveries in Rovuma Area-1 to
production and convert that gas into LNG before shipping it to consuming
nations like India. The project has the capacity to produce 20 million
tonnes of LNG annually and will become the world's largest export site
for the product after ExxonMobil-run Ras Laffan in Qatar.
There have been no adverse reports either about the reserves or the
production rate at Rovuma Area-1. But I have come across some petroleum
experts who have expressed misgivings about the claims that are being
made about this field. The companies will need to undertake a fresh due
diligence process before committing any additional investment. The
Indian PSUs, which have already invested $ 6 billion in the project,
must not flinch from pressing for another due diligence round to ensure
that they don’t have to suffer the nightmare that the acquisition of
Imperial Energy fields in Russia proved to be.
Indian PSUs have always been vulnerable to political pressure from the
top. BPCL was the first to invest in Rouvma Area-1 at the exploration
stage. Being a Mumbai-based company with a distinctly different
corporate culture, its leadership invariably shied away from political
lobbying in Delhi. Strangely, BPCL’s then CMD took unusual interest in
the Mozambique block even as ONGC Videsh and Oil India were negotiating
for a 20 per cent stake in the project including the 10 per cent
belonging to Videocon. He used the opportunity to lobby for an extension
of his tenure. The then petroleum minister, Veerappa Moily, initially
encouraged him as he wanted BPCL commit to building an LNG terminal at
Mangalore in his home state of Karnataka to re-gasify the LNG
transported from Mozambique. The project has since been dropped. This
sort of politics should be avoided if India is to benefit from the
business opportunities thrown up by COVID-19.
Investment in Russia is another possibility but the high transportation
cost for LNG could prove to be the dampener. But this could still pay
off if the negotiators are able to lock into some nifty swap options.
Putin’s Russia will certainly welcome investment from India. The only
worrying question is whether the Indian companies will get total control
over such projects. Post COVID-19, Russia will not play the game as it
did before. Oil and gas are Russia’s lifeline. Putin will definitely
prefer to deal with India rather than China.
India has almost consistently bungled its energy deals in the past
including long-term LNG contracts because, for some inexplicable reason,
it did not pick the right negotiators. Kickbacks have always been the
bane and seriously compromised the country’s interests.
Petroleum minister Dharmendra Pradhan may now want to gather around him a
small group of genuine oil and gas experts to identify business
opportunities in a post-COVID-19 market. He must, at all costs, keep out
the so-called consultants and instead pack his team with people with
considerable negotiating experience in the international oil and gas
markets. There are very few people who will make the cut if this
principle is scrupulously followed. Just a caveat here: such people do
not exist even in the government’s policy think tank, the Niti Aayog.
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