Fresh from renegotiating a long-term LNG contract with Qatar’s RasGas, India’s Petronet is reportedly lobbying ExxonMobil to revise the price of its 20-year supply contract with Gorgon before the project’s scheduled startup later this quarter.
If successful, it could open the floodgates for a host of renegotiation requests from Gorgon’s other buyers, which have seen the Western Australian venture face delays and cost blowouts since lead developer Chevron took an FID in September 2009.
A senior LNG analyst, who asked to remain anonymous, told Interfax the move shows the robustness of long-term take-or-pay contracts is “now being tested”.
“Contract details, such as averaging designed to damp out volatility in a market that has gone through a sudden change in the oil price regime, are now inappropriate. This may be exacerbated by the supply surplus and the emergence of a significant, competitive spot market,” the analyst added.
According to Indian media sources, Petronet has requested a lower price for the 1.5 mtpa of LNG it is committed to buy from Exxon’s portion of Gorgon’s output given continuing low prices for oil-indexed gas. Petronet signed a sales and purchase agreement (SPA) for the LNG in 2009 and is due to start importing it into the Kochi LNG terminal in the state of Kerala later this year.
When contacted by Interfax, a spokeswoman for Exxon would only say that “ExxonMobil has a commercial agreement with Petronet LNG Ltd. to supply liquefied natural gas from the Gorgon project in Australia. The terms of the agreement are confidential.” Petronet could not be reached for comment.
Petronet was due to start receiving gas last year. However, ongoing delays and the halving of oil prices since mid-2004 – with little expectation they will recover to levels seen before the crash – will provide extra leverage for contract renegotiation, analysts say.
Facts Global Energy believes the “sanctity” of price formulas in long-term LNG contracts could begin to unravel as buyers, sellers and financiers question their value.
LNG is crucial to the economic prosperity of India, which is considered the next-largest growth market for the fuel after China. Ratings agency Moody’s says India’s LNG imports will increase from 10.4 mt in 2014 to 24 mtpa by 2020 as industrial demand rises and domestic gas production falls.
Petronet announced on 31 December that it had revised the price of its 25-year SPA with Qatar’s RasGas, under which India has been contracted to import 7.5 mtpa of LNG since 2004. Petronet had been paying $12-13/MMBtu for Qatari LNG, but has cut this to $6-7/MMBtu. Qatar has also waived Petronet’s $1.5 billion take-or-pay penalty for taking less gas than contracted.
Although the RasGas contract made no provision for price renegotiations, the Qatari company agreed to adjust “some aspects” of the contract.
“LNG volumes not taken by Petronet from RasGas during 2015 will be taken and paid for by Petronet during the remaining term of the SPA and will maintain its current level of oil indexation with the oil index more closely reflecting the prevailing oil prices,” Petronet said in a statement. This would “protect and preserve the overall value of the contract”, the company added.
Qatar’s willingness to renegotiate shows it recognises the importance of retaining Petronet as a long-term client and sets both a precedent and a benchmark low for long-term supply into Asia Pacific. The move will have serious cost implications for Australian producers, who are only now completing construction of their high-cost export facilities and may need to be as flexible as RasGas to retain key customers.
Exxon under pressure
With Australia’s traditional LNG buyers, such as China, requiring fewer cargoes than originally expected, coupled with the fact India is set to become a major growth market for Aussie LNG in the future, Exxon is under pressure to agree to Petronet’s request.
India’s largest LNG importer, Petronet was established by the Indian government as a joint venture between four of the country’s state-owned energy companies: Oil and Natural Gas Corp., Indian Oil Corp., Bharat Petroleum and Gail.
Gorgon is a joint venture of the Australian subsidiaries of Chevron (operator, 47.3%), Exxon (25%), Shell (25%), Osaka Gas (1.25%), Tokyo Gas (1%) and Chubu Electric (0.417%). Chevron, Exxon and Shell have sold most of their shares of the output to buyers such as JX Nippon, Kyushu Electric, GS Caltex and SK LNG Trading.
Chevron recently signed a non-binding heads of agreement for LNG with China Huadian Green Energy for up to 1 mtpa of LNG over 10 years from 2020.