Petronet LNG breaks Qatar contract to gain from low spot prices
2 min read . Updated: 30 Sep 2015, 12:14 PM IST
PremiumThe company is saving so much money buying LNG from the spot market that it's willing to risk penalties for breaking long-term contracts with Qatar
London/New Delhi: Petronet LNG Ltd, India’s biggest importer of liquefied natural gas (LNG), is saving so much money buying the commodity from the spot market that it’s willing to risk penalties for breaking long-term contracts with Qatar.
The company is taking only 70% of the volumes it agreed to in 25-year contracts with the Persian Gulf state, potentially triggering a fine, finance director R.K. Garg said. It’s paying about $8 per million British thermal units of spot LNG, about 36% less than its fixed price with Qatar’s RasGas Co.
“The major issue has always been price, and since spot prices are down we continue to have the advantage of the spot prices over long-term," Garg said by phone, declining to say how much Petronet is saving buying more spot cargoes. The company is “trying to see what can be done about the penalty."
Petronet, which had agreed to take 7.5 million tonnes of LNG a year from RasGas, is among the first companies in Asia to break a long-term purchase deal as weaker demand, higher supply and oil’s slump push down spot prices. Elsewhere in the region, China is deferring Qatari cargoes, while Japanese and South Korean importers are renegotiating contracts.
Possible fine
Petronet is running a significant risk. Purchasing less than 90% of contracted volumes from Qatar could result in a penalty of as much as ₹ 9,000 crore, according to brokerage KR Choksey Shares and Securities Ltd. That’s equivalent to 10 years’ profit for Petronet.
The New Delhi-based company is taking its chances as the battle for market share forces sellers to be more flexible. Should a fine be levied at the end of the year, Petronet may pass it on to its customers, potentially including its state-run owners that buy most of the fuel, Garg said.
RasGas declined to comment.
Petronet has imported LNG from Qatar for 11 years. Long-term contracts traditionally serve both sides because they provide security of supply to buyers while allowing sellers to keep market share even when prices drop.
In the current circumstance, “both India and key LNG suppliers such as Qatar want to maintain a healthy trade relationship," said Abhishek Kumar, senior energy and modeling analyst at Interfax Energy’s Global Gas Analytics.
The price of spot LNG delivered to Northeast Asia, where the world’s biggest importers are located, has tumbled more than 50% in the past year to about $6.80 per million Btus, according to assessments by New York-based World Gas Intelligence. With new export terminals planned from Australia to the US, prices may well stay low amid a global oversupply.
“We see spot LNG remaining in the $7-to-$10 range for the foreseeable future," said Ashish Sethia, head of Asia-Pacific gas and power analysis at Bloomberg New Energy Finance. “A glut in the LNG market looks inevitable." Bloomberg
