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Press Release [FREE Access]
Petro Intelligence » Driftwood Goes Adrift: PLL Asserts Its Independence

By R. Sasankan

A little over an year ago, in September 2019, Petronet concluded a memorandum of understanding (MoU) with Tellurian of the US with a great deal of fanfare. Under the terms of the MoU, Petronet proposed to invest $2.5 billion for an 18 per cent stake in Tellurian's proposed 27.6 MTPA Driftwood LNG facility. This was linked to an LNG offtake of 5 MTPA by Petronet from the Driftwood facility. However, the price of LNG under this arrangement was never revealed.

The company is now having second thoughts about the deal.

“Petronet LNG Ltd has no plans to invest in liquefied natural gas (LNG) developers as the market is awash with cheaper fuel. Right now, we get LNG at throwaway prices; so there is no need to go in for an investment... you should be more concerned with LNG than investment," said V.K. Mishra, director (finance) of Petronet LNG Ltd (PLL), while referring to the proposed Petronet-Tellurian deal.

These are strong words and very rarely have senior executives of PLL spoken so bluntly. This begs a question: what could have possibly prompted Mishra to make such a comment? Is it possible that this had something to do with the fact that the recent Presidential elections in the US has thrown up a change in leadership? Or, does it solely have something to do with the prevailing glut in LNG?

PLL is going through its own changes at the top; it has been rudderless since Prabhat Singh retired as its chief executive in September. A director of Indian Oil Corporation has been picked as his replacement but a formal announcement is awaited.

PLL has a history of bungling LNG deals and two long-term supply contracts that it struck are like albatrosses around its neck. The cost of these botched up LNG deals with Qatar and Australia have proved to be exorbitant for the country and the Indian consumers. RasGas has refused to renegotiate the deals despite repeated requests from PLL and the Ministry of Petroleum and Natural Gas. The country cannot afford to sign another disastrous LNG deal. This is why PLL has turned extremely cautious in dealing with Tellurian of the US. There has been tremendous pressure on PLL from the US. Obviously, PLL did not come under pressure from India’s political leadership which enabled it to stand up to the US lobby.

Gas experts in India have in the past have displayed shocking naïveté while concluding LNG supply deals by being oblivious to the simple fact that one can control the price of LNG only if one owns or controls the underlying upstream gas resource that supplies the natural gas for liquefaction. A token investment for a minority stake in an LNG facility can, at best, yield a financial return. Quite honestly, it makes no sense to tie up for a long-term LNG contract. Petronet obviously realised this and this is precisely why there has been virtually no movement on seizing this “golden investment opportunity” in the last 14 months.

“Driftwood is as adrift today as it was in September 2019,” quipped a gas expert.

In its pitch to potential investors in the Driftwood LNG facility, Tellurian projects a firm cost of $3.50/mmBtu for LNG produced at Driftwood by assuming that its captive Hayansville gas field and the associated gas transportation network will deliver natural gas to Driftwood at $2/mmBtu irrespective of the Henry Hub price of natural gas. The net selling prices assumed for Driftwood LNG ranges from $ 5/mmBtu to $ 11/mmBtu. Tellurian's captive Hayansville gas field has a 1.2 Tcf gas resource and is currently producing 46 mmscf/d. The pitch has obviously not worked: the Driftwood LNG facility is still scouting for investors.

Tellurian’s promoters are industry professionals venturing out on their own. They do not have deep pockets. They have a concession on a small reserve and need to grow the supply source to feed their LNG facility. According to analysts, what they have at this stage is a bunch of approvals and nothing more. India, with its huge demand base and willingness to invest, should be in the driver’s seat and not play second fiddle to these penniless first generation entrepreneurs who are smart and know the industry better than India’s government babus who have often negotiated disastrous LNG deals.

Observers who have been following the proposed Tellurian deal now discern a deep reluctance within PLL to go ahead with the agreement. Left to itself, PLL would have been able to stave off the pressure from the US. A report by PTI recently claimed that “the board of directors of Petronet LNG in May 2019 was not exactly gung ho about the deal. Three possible reasons have been cited for the reluctance of the board: one, LNG prices were falling since September 2018 ; two, there was the prospect of oversupply of LNG in the Indian market; and three, the company did not wish to get locked into long- term contracts.”

The Ministry of Petroleum and Natural Gas had played a crucial role in concluding the long-term LNG deals that PLL signed with RasGas and Exxon’s Australian project. But in the case of Tellurian, the ministry has stayed in the shadows and has not tried to force it to close the deal.

Understanding the compulsions of diplomacy, PLL has preferred to play it safe. The unusually strong words of PLL’s executive which I quoted earlier coincided with the outcome of the US presidential election. Could it be that President Trump or people close to him had shown an extraordinary interest in the deal? Normally, a US President does not directly interfere in such deals. Nor does the Indian Prime Minister. But they don’t have to. The industry lobby has a sophisticated mechanism to deal with such behind-the-scene machinations.

Petronet LNG Ltd has also undergone change during this evolutionary process. Its senior executives in the initial decade of its existence behaved as if they were employees of RasGas. It was a demeaning spectacle. They looked too weak to stop the blatant violations of contract provisions. From an attitude of subservience, the PLL management has now grown to a stage where it has started to assert itself. That in itself is a welcome development.



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