The die-hard critics of Prime Minister, Modi especially his political adversaries have dismissed his incessant foreign visits as mere “pleasure trips” bringing hardly any relief to the common man though some of them reluctantly acknowledge his role in raising India’s stature in the comity of world nations. They cannot see any other benefit as they are just not willing to see.
But, for someone who is not wearing colored glasses, the unprecedented economic benefits these have brought to India are pretty evident. One of the major gains of economic diplomacy unique to his style relates to re-negotiation of a long-term gas purchase deal with Qatar that was terribly dis-advantageous to India. To better understand what it means to us, let us capture a few facts.
In 1999, Petronet LNG Limited, a consortium of 4 public sector undertakings [PSUs] viz., Oil and Natural Gas Corporation [ONGC], Gas Authority of India Limited [GAIL], Indian Oil Corporation Limited [IOCL] and Bharat Petroleum Corporation Limited [BPCL] had entered in to a long-term 25 year contract with RasGas of Qatar for import of 7.5 million ton a year LNG [liquefied natural gas] or around 30 million standard cubic metre per day [mmscmd]. Three of these 4 partners viz., IOCL, BPCL and GAIL had committed to buy all of this gas. GAIL had a ‘take-or-pay’ agreement for 2/3rd of the gas imported by Petronet.
Initially, in an open tender floated by Petronet, RasGas had won a firm bid that would have translated to a floor or minimum price of $3 per million British thermal unit [mBtu] and a cap or maximum price of $4 per mBtu for supply of 7.5 million tons annually over the 25-year period [2004-2028]. Yet, in 2003 the price bid was re-negotiated exclusively with RasGas without approaching competing bidder [Petronas, Malaysia].
Under a unique formulation – unheard of in long-term contracts globally – Petronet agreed to buy LNG, on take-or-pay basis, at a fixed price at mid-point of quoted floor and cap for first five years; followed by an annual increase equal to 33 per cent of originally bid cap, for each of next five years. For balance 15 years, price was linked directly to average price of crude in immediately preceding five years without any floor or cap.
On this basis, during current fiscal [being 12th year of contract period, average of immediately preceding 5 years is applicable], LNG from RasGas costs about US$ 12-13 per mBtu even as the price in spot market is US$ 6-7 per mBtu. This has led IOCL/BPCL to source all their needs from spot market even as GAIL had no option but to lift from Petronet [under the take-or-pay agreement]. As a result, Petronet has not lifted 1/3rd of its committed off-take from RasGas.
Under the ‘take-or-pay’ clause, it has to pay even for the 1/3 rd quantity not received as off-take at 2/3rd is lower than the 90% level it must take to avoid penalty. @ US$12.5 per mBtu or US$ 50 per mKcl [1mKcl=4mBtu] and 1 mmscmd=10,000 mKcl, value of 30mmscmd works out to about Rs 100 crores per day or Rs 3000 crores per month. For 4 months [representing 1/3rd of yearly off-take], this would be Rs 12,000 crores.
That apart, on the quantity lifted, Petronet made excess payment of Rs 50 crores per day or Rs 1500 crores per month [based on difference between contract price and market price i.e. US$ 25 per mKcl, 1 mmscmd=10,000 mKcl and 30mmscmd]. For 8 months [representing 2/3rd of yearly off-take], this would be Rs 12,000 crores. Plus the penalty of Rs 12,000 crores on quantity not taken, the total loss for current year would have been Rs 24,000 crores.
In a full year [2016 onward], assuming that the existing price differential of US$ 25 per mKcl continues and the entire contracted quantity is lifted, the excess payment would be around Rs 18,000 crores [@ Rs 50 crores per day or Rs 1500 crores per month for 12 months]. The actual amount of excess payment would however, vary depending on prevailing spot price versus contract price.
Through deft negotiations and successful economic diplomacy including meeting of Modi with Emire of Qatar, Sheikh Tamim bin Hamad Al Thani [April, 2015] and subsequent meetings of petroleum minister, Dharmendra Pradhan [November, 2015] with his counter-part in Qatar, the government has re-negotiated the contract.
Under the revised sale purchase agreement [SPA], the price is linked to the price of Brent crude over immediately preceding 3 months for supplies during January 1, 2016 to December 31, 2028 for off-take of 8.5 million tons per annum [up from 7.5 million tons under existing contract]. With this, the price gets reduced by 50% to around US$ 6.25 per mBtu from US$ 12-13 per mBtu under extant contract. Qatar has also agreed to waive the penalty.
We will thus be spared a perpetual loss of about Rs 18,000 crores annually on future purchases besides savings of Rs 12,000 crores towards penalty during current year. In an environment of depressed global demand and declining gas price, normally any supplier/country which has a legally binding contract with the buyer would have resisted re-negotiation of the contract. But, if Qatar has done it, the credit for this goes entirely to Modi – government.
Nearly 40% of gas requirement of fertilizer industry or 20 mmscmd is met from imported LNG. This being 2/3rd of LNG sourced from Qatar/RasGas, out of the Rs 18,000 crores saving, Rs 12,000 crores will accrue to urea manufacturers. The balance saving of Rs 6000 crores will accrue to the power sector. In fertilizers, this will lead to corresponding reduction in subsidy whereas in power, this will give some leeway to state electricity boards [SEBs]/power distribution companies [PDCs] to rein in tariff.
This in turn, will give a fillip to government’s efforts in fiscal consolidation as increasing fertilizer subsidy is a major contributory factor to fiscal deficit. The multiplier effect on the economy by way help in reining in inflation, lower current account deficit [CAD] and lower interest rate will be huge. Likewise, reduction in power tariff will have an all pervading effect.
Given India’s high level of imports involving tens of billions of dollars and a major slice of it coming as purchases from state agencies, there exists enormous scope for bringing huge benefits to the economy through better negotiating skills and leveraging our strength as a major buyer. Modi should continue to pursue such efforts with greater vigor and it is incumbent on 1.25 billion people [more so the media] that they should keep their faith in him and his government.