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] – India’s leading LNG [liquefied natural gas] importer – is shelling out Rs 400 crores every quarter in demurrage charges for ships idling because of its PSU buyers refusing to buy expensive imported gas.
At a time when Modi – government is imparting momentum to economic reforms and an important component is to make the PSUs cost competitive and improve their profitability, a loss of Rs 1600 crores annually by a joint venture [JV] of 4 PSUs is a matter of grave concern. This requires careful examination to understand the cause and find out if this is just the tip of iceberg. At the outset, let us capture a few facts.
Petronet LNG had entered in to a long-term 25 year contract with RasGas of Qatar for import of 7.5 million ton a year LNG or around 30 million standard cubic metre per day [mmscmd]. For transportation of this gas to its terminal at Dahej, it had entered in to a time-charter agreement also for 25 year period with a consortium of ship owners led by Mitsui OSK Lines Limited of Japan. Two LNG tankers [these are specialized cryogenic ships in which gas is transported in liquefied form at below zero temperatures] of 138,000 cubic metres capacity each at a day rate of US$ 68,900 and one tanker of 155,000 cubic metres capacity at a day rate of US$ 72,880 were hired to ferry the gas..
After re-gasification in processing plant at Dahej terminal, gas is transported to user industries through a pipeline network. GAIL, IOCL and BPCL – members of the consortium – had committed to buy all of the 7.5 million tons annually bought from RasGas for the whole of 25 year period. GAIL alone gave a commitment to pick up 60% of the gas under ‘take-or-pay’ agreement.
The most crucial aspect of the long-term agreement with RasGas was in regard to its price. Initially, in an open tender floated by Petronet LNG, 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 $4 per mBtu for supply of 7.5 million tons over a 25-year period. The offer was in sync with the standard industry practice of linking LNG prices with the price of crude oil- with a firm floor and a firm cap.
Yet, the price bid was re-negotiated exclusively with Ras Gas without approaching the competing bidder. Under a unique formulation – unheard of in long-term contracts globally – Petronet agreed to buy LNG, on take-or-pay basis, at a fixed price at the mid-point of the quoted floor and the cap for the first five years; followed by an annual increase equal to 33 per cent of the originally bid cap, for each of the next five years. For balance 15 years, LNG price was linked directly to the average price of crude in the immediately preceding five years without any floor or cap.
The adoption of this unique formula was without doubt, pregnant with a distinct possibility of Petronet LNG having to pay on a progressively increasing scale resulting in loss of billions of dollars in payments for gas imports especially during the 6th to 25th year of the contract. Linking LNG price to average of crude price in immediately preceding 5 years [for the 11th to 25th year] ensured that even when latter declines in any year, the benefit would not be available to Petronet LNG.
In this backdrop, even as price of imported LNG in the spot market has declined steeply to US$ 6.5-7 per mBtu [moving in tandem with plummeting crude price], imported LNG from RasGas is stuck at around US$ 13 per mBtu, courtesy linkage with 60 months average under the formula.
Prompted by lower price in the spot market, IOCL and BPCL have backed out from lifting supplies from Petronet LNG even as GAIL has no option but to continue buying the committed quantities in view of the ‘take-or-pay’ agreement. This in turn, has resulted in Petronet LNG reneging on nearly 1/3rd of its commitment under long-term deal with RasGas.
The demurrage @ Rs 1600 crores annually due to resultant idling of ships – as mentioned above – is peanuts when compared to the gargantuan loss on account of Petronet LNG having to pay much higher price under the long-term contract. To get an idea, let us look at following:-
1 metric standard cubic metre of gas contains 10,000 kilo calories [kcl]. 1million metric standard cubic metre per day [mmscmd] = 10,000 million kcl. @ US$ 1 per mBtu or US$ 4 per mkcl [1 mkcl = 4 mBtu], the value of 1mmscmd is US$ 40,000. On import of around 30 mmscmd [quantity under the contract], this will be US$ 1.2 million [40,000×30] per day. Annualized, this will be US$ 438 million [1.2×365]. In short, for every extra US$ 1 per mBtu, the excess payment will be US$ 438 million per annum.
In comparison with current spot market price of US$ 6.5 per mBtu, price difference of US$ 6.5 per mBtu would lead to excess payment of US$ 2.85 billion [438×6.5] or Rs 18,500 crores per annum. When, compared to US$ 3.5 per mBtu [mid-point of floor and cap in firm bid offered by RasGas], price difference would be US$ 9.5 per mBtu. This translates to excess payment of US$ 4.16 billion [438×9.5] or Rs 27,000 crores per annum.
Since, Petronet LNG is buying 2/3rd of committed quantity, excess payments will be somewhat lower but still huge i.e. Rs 12,400 crores /Rs 18,000 crores per annum respectively under 2 scenario above. Plus on balance 1/3rd quantity that it is not buying, RasGas will make it pay a huge sum invoking the ‘take-or-pay’ clause. That amount will depend on specifics of the agreement.
Since, GAIL is lifting all of 20 mmscmd [2/3rd of 30] @ US$ 13 per mBtu and in turn, recovering from fertilizer and power plants on supplies made to them, it is these industries who bear the brunt of excess payments. These plants are in dire need of fuel at lower price as this will help reduce fertilizer subsidy and power tariff. A steep decline in gas price offer an excellent opportunity and yet, they do not get relief, thanks to ‘extraneous’ forces/vested interest which pushed a flawed pricing formula in a surreptitious manner.
On April 27, 2015, the minister for petroleum and natural gas informed Parliament that Petronet LNG was being investigated for alleged irregularities in gas purchase contracts. Importantly, he noted that the findings of a government committee constituted for this enquiry “are under examination in consultation with Central Vigilance Commission” (CVC). This probe needs to be vigorously pursued to establish the irregularities and fix accountability. Establishing mala fides would provide government the legal basis for renegotiating the contract. But, that is a long drawn process and one is not certain as to how much of loss could be averted.
But, a big take away from the Petronet episode is the dire need to bring to the centre-stage the predominating role of large-scale irregularities involving quid pro quo [or corruption in plain words] in transactions by government departments and its undertakings/agencies which have the inevitable effect of imposing crippling burden on the exchequer. This must become part of the debate on ever increasing subsidy and losses of state undertakings such as state electricity boards [SEBs].
We need to ask as to why fertilizer subsidy during the current year is not coming down despite a massive reduction in price of imported LNG as also cut in domestic gas price? Why cost of power generation by gas based plants is not declining despite government giving subsidy under a special package given to them early this year? Why should we talk of increasing power tariff or urea MRP [maximum retail price] only in any package aimed at reducing losses of SEBs or fertilizer subsidy?
Modi who is known for his zero tolerance for corruption and any wrong doing should crack the whip to stem the rot.