Many years ago, Qatar put a moratorium on gas production after production levels of liquefied natural gas (LNG) reached 77 million tons per annum (mtpa). This, despite the fact Qatar has the third largest reserves of non-associated natural gas in the world, which even if explored at the current rate, can last hundreds of years. Non-associated gas is natural gas that exists independent of oil, and that’s why it is called non-associated. When oil is explored, gas is also present with it and it is separated from crude.
The moratorium was introduced on further exploration of gas when H.E. Abdullah bin Hamad Al Attiyah was the minister of energy and industry of Qatar. As is known, when Qatar’s LNG production reached 77 mtpa, the country emerged as the world’s top LNG producer and exporter leaving older giants like Algeria behind. The moratorium on gas exploration still remains as, understandably, that’s the optimum level for Qatar, perhaps considering environment and related issues.
Qatar’s oldest trade partners and LNG importers are Japan and South Korea and they have been receiving Qatari gas since the 1990s when Qatar actually began exporting LNG. The idea to make Qatar a global hub of LNG production was mooted a long time ago – in the middle of the 1980s – that is, some 30 years ago. However, exports began only in 1997.
India number three importer
India has, of late, emerged as one of Qatar’s major trade partners and has been ranking for many years as number three importer of mainly Qatari energy products, including crude, LNG, fertiliser and petrochemicals like polyethylene and other products that find massive use, particularly in the country’s fast-expanding plastics industry. The industry has been expanding mainly because of increasing automobile manufacture in the country whose dashboards and inside decors are plastics-based.
India has been importing 7.5 million tonnes per annum of Qatari LNG for over 10 years now (since 2004) and has been, for almost a decade, wanting the import to reach 10 mtpa due to its increasing need for the cleaner fuel to fire its power plants and for use in its industries. Qatar was not able to increase LNG exports to India because of the moratorium on its production and also because of its long-term export commitments to other importers.
India imports Qatari LNG through Petronet, a company floated mostly by state-owned energy corporations like Oil and Natural Gas Corporation (ONGC), Gas Authority of India Limited (GAIL), Bharat Petroleum and Indian Oil Corporation (IOC). RasGas was, on the other hand, floated as a joint stock company in Qatar in 2001 by Qatar’s state energy arm, Qatar Petroleum, and the US energy giant, ExxonMobil RasGas Inc.
State-owned GAIL, Indian Oil Corp and Bharat Petroleum Corp Ltd had committed to buy all of the 7.5 million tonne a year of LNG that Petronet was to import from Qatar. But with slump in global prices, they opted to buy gas from the spot market rather than use the long-term LNG. The price of spot LNG tumbled more than 50 percent in 2015 to about USD 6.80 per million Btus. The price of benchmark natural gas futures in the US tumbled 38 percent, falling to the lowest in over three years.
The reduced offtake by the buyers forced Petronet to cut its purchase from RasGas. This resulted in idling of three cryogenic ships it had chartered for ferrying gas in its liquid form at sub-zero temperatures from Qatar to its import terminal at Dahej in Gujarat. And as per charter conditions, Petronet continues to pay the day rates. The demurrage charges amount to about USD 60 million per quarter according to sources.
LNG is exported in a frozen state so when it is transported in a special vessel to an importing country, there it must necessarily be brought back into the gaseous form and that’s why regasification terminals are needed at points of import. These terminals are expensive to build and depending on their size, a terminal can involve an investment of no less than 500 to 700 million US dollars or even more and that’s why importing LNG can be an expensive proposition for a country.
Petronet signed the latest sale and purchase agreement (SPA) with RasGas, one of Qatar’s two LNG producing giants (the other producer is Qatargas). The SPA is for supply of an additional one million ton per annum of LNG to Petronet starting in 2016 for onward sale to four Indian entities, i.e. Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd., GAIL (India) Ltd. and Gujarat State Petroleum Corporation. This will take the total LNG import by India’s top gas importer to 8.5 million tons per annum, a little below the 10 mtpa level Petronet was earlier insisting on to access from Qatar.
RasGas exports LNG across Asia, America and Europe and its production capacity is 37 million tons a year. That’s only marginally less than Qatar’s total annual LNG production. After inking the fresh LNG deal with Petronet, RasGas CEO, Hamad Mubarak Al Mohannadi said the company was committed to growing sales in India as demand for the cleaner fuel was increasing there. Petronet’s CEO, Prabhat Singh, said in a joint statement issued after the signing ceremony that India was relying more on this efficient source of energy.
International news wire agency Bloomberg reported from New Delhi that RasGas, the main LNG supplier to India, had agreed to cut the price of gas it supplies to Petronet by almost half under an existing 25-year contract with the Indian importer. The supply contract for an additional 1 mtpa of LNG signed between RasGas and Petronet is for the remainder period of 25 years which ends in 2028.
The new pricing formula is linked to an oil index that reflects prevailing oil prices. The earlier contract with RasGas did not allow any change in pricing, resulting in the buyers paying higher than the prevailing market price. Under the new contract, RasGas has agreed to changing the current pricing formula based on a 60-month average of a basket of Japanese crude oil prices to a 3-month average of Brent crude, a move that will lower cost of LNG to USD 7-8 per million British thermal unit as compared to USD 12-13 currently.
This will help gas consumers in India save something like USD 600 million, or INR 40 billion, annually, Bloomberg said quoting India’s oil minister, Dharmendra Pradhan. The deal between Petronet and RasGas will not only bring down the overall cost of gas for India, but also benefit gas utility companies. According to a power analyst, LNG prices are going to remain weak for the next three to four years. Since gas has been one of the weakest links in the Indian power sector, the cheap Administered Pricing Mechanism (APM) gas supplies have fallen down, leading to a higher reliance on LNG. The analyst looks at a short term window here, wherein gas based power plants can operate at more than 60-65 percent plant load factors, due to weak global LNG prices.
Petronet has LNG regasification terminals in Dahej in the western Indian state of Gujarat, and in Kochi in southern part of the country. The capacity of the Dahej terminal is now being expanded to 15 million tonnes. The deal also means an improvement in the overall utilisation of the Dahej terminal, which has been facing issues over the last three years.
Additionally, RasGas has also agreed to waive the ‘take or pay’ penalty of USD 1 billion on Petronet for the lower offtake during 2015. During the year, Petronet’s offtake was only 68 percent of the contracted 7.5 mtpa capacity. Under the ‘take or pay’ clause, Petronet would have had to pay for the entire contracted amount as the off-take was less than 90 percent.
While LNG in the spot market is available at USD 7-8 per million British thermal unit, the price of gas under the long-term contract with RasGas was close to USD 13 per mmBtu. Pricing of LNG under the long-term deal was linked to the previous 12-month Japan Crude Cocktail (JCC), including caps and floors based on average JCC prices of the past 60 months.