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Market Watch
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Companies
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Press Release [FREE Access]
Petro Intelligence » Life Beyond COVID-19: Scout For Gas Assets

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.



To download the latest issue 'Volume 27 Issue 7 - July 10, 2020', click here
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