Global natural gas prices at their nadir have started hurting India’s liquefied natural gas (LNG) importers locked into higher long-term prices, as their committed customers discover it’s cheaper to shop in the spot market instead.

India’s biggest LNG importers—Petronet LNG Ltd and Gail (India) Ltd—buy from Qatar’s RasGas Co. Ltd mostly under long-term agreements. This price is linked to a global benchmark of five-year average crude oil price.

Even though crude oil has crashed in the last year—taking spot energy prices down with it—they were high for most of the last five years, keeping the benchmark high. This means that importers must continue to buy at these prices even as spot prices cool.

Apart from creating inventory losses at Petronet, expensive long-term LNG prevents stranded gas-based power plants from starting production and keeps the government’s subsidy bill elevated, as it compensates fertilizer producers that use costly gas.

“Our long-term imported LNG price will come down eventually," said A.K. Balyan, managing director and chief executive, Petronet. “But it will take a lot of time, as the prices are revised with a lag of several months. The formula incorporates an average of several months and that keeps the prices high in the near-term."

For Petronet, long-term LNG—which is almost 70% of its 7.5 million tonnes per annum (mtpa) requirement—costs $13-14 per million British thermal units (mmBtu). Power, fertilizer and refining companies typically sign long-term deals with Petronet to buy this gas. However, with the spot market offering gas at just around $7 per mmBtu, these buyers are feeling tempted.

Gail, which also buys LNG from Petronet, imports long-term LNG at $14 for its petrochemical operations.

There are indications that the two importers may try to renegotiate their long-term contracts to prevent customers from straying.

Spot LNG for April delivery to north-east Asia has fallen 59.8% year-on-year to average at $7.279 per mmBtu, according to energy information firm Platts. Its Japan Korea Marker, known as the Platts JKM, was $18.11 year ago.

The Platts JKM is the benchmark spot price for imported LNG into Japan and South Korea. Currently, Japan is Asia’s biggest LNG consumer and the price at which it consumes LNG defines the global imported spot LNG benchmark.

Shouldn’t the fall in JKM, then, reflect in correspondingly lower price for Indian importers as well? No. The reason: Their agreement with RasGas prevents the purchase price from falling below a floor level.

“For Indian market, the long-term price from Qatar has a floor that is based off a moving 60-month average of JCC (Japanese Crude Cocktail—the benchmark Japan crude price). As JCC has been quite high over the last five years, with oil prices only recently falling, they have been forced to buy at the floor price, which is well above contracts with shorter lags," said Max Gostelow, Platts associate editor for Asia LNG.

Petronet’s Balyan, however, said the firm does not lose much as most of the LNG is pass-through and the majority of its customers have take-or-pay contracts. But power and fertilizer companies, which buy in the spot market as well, are showing signs of concern, he noted.

Gail, Indian Oil Corp. Ltd and Bharat Petroleum Corp. Ltd are the three major customers, or assured off-takers, of Petronet.

“There is a high possibility that Petronet might see an inventory pile and hurt its cash flows due to low spot LNG prices," said Dhaval Joshi, analyst with Emkay Global Financial Services Ltd.

All companies in the chain—Petronet, its off-takers and the end-users—are tied up in take-or-pay agreements. However, when the end-users delay their offtake, either due to availability of low spot prices or low demand, Petronet has to either delay its offtake from Qatar or keep it in inventory. Both hurt cash flows and profitability.

Joshi explained that while Petronet can sell at least a million tonnes on spot prices, it makes sense when they are high. When prices are low, Petronet and its off-takers earn a lower marketing margin, which is directly proportional to price, as well. He said Petronet will be forced to pursue contract renegotiation if spot prices continue to stay low.

“We have heard some companies are trying to renegotiate the contractual terms with long-term suppliers, but nothing confirmed," said Gostelow from Platts. He added that some older contracts do not even have a price renegotiation clause but did not comment specifically on any Indian company.

However, a Petronet executive, who did not wish to be named, confirmed that there is pressure from customers. He said that while the company is working with Gail, Indian Oil and Bharat Petroleum to ensure continued offtake amid low spot prices, some short-term buyers, such as power and fertilizer companies, are wary.

During a conference call with analysts on 6 February, Prabhat Singh, director of marketing at Gail, explained that since spot prices are low, Gail is trying to use more spot gas for its internal consumption to reduce operating costs. It is also trying to offer its customers a mix of both LNGs to “keep them in good humour".

Gail sources close to 5 mtpa from RasGas, out of which 1 mtpa is consumed for its own petrochemical operations, with the remaining sold to power, fertilizer and refining companies.

Emkay’s Joshi said that it is difficult to put a number on the value of the impact on Petronet and Gail due to low spot prices, but that if customers turn away to using fuel oil or naphtha, whose prices are also coming down, it could lead to loss of both revenues and profits.

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