Crude oil slump makes Petronet LNG's Qatar contract most expensive gas source

Petronet LNG’s 7.5-million-tonne long-term contract with Qatar, which provides it the bulk of steady regassified earnings, has come under a shadow of doubt as the Japanese Crude Cocktail-linked pricing formula implies lesser sensitivity to a fall in Brent prices, said Antique stock broking in its report.

“Due to the 60 months averaging in fixing the cap, Rasgas term LNG prices theoretically would fall to $10 per million British thermal unit (mBtu) only by mid-2017, even if Brent remains between $50 a barrel and $70 a barrel until then. In fact, against $14 per mmbtu currently, term LNG prices would stay above $12 per mBtu till around September 2016,” said Amit Rustagi of Antique, in his report dated January 12.

Term LNG prices would be 40-50 per cent above the current delivered spot LNG price of $8-9 per mmbtu, implying an unviable 22 per cent slope to Brent, making it the most expensive gas source and, thus unviable for the industry.

Long-term gas volumes for power sector were diverted in the last few years to spot market, making further volumes available. Hence, 8mmcmd, or 30 per cent, of total volumes is at risk for GAIL (India) and other offtakers.

Spot LNG prices stands at $8-9 per mmbtu, while alternate liquid fuels like naphtha and fuel oil trade at $10 per mmbtu and $8 per mmbtu, respectively.

“About 30 per cent term volumes remain uncontracted and pose a risk to the system. The 7.5 mmtpa, or 26.9 mmcmd, contract is distributed customer-wise as 9.8 mmcmd for fertiliser, 5.2 mmcmd for power, 1.7mmcmd for sponge iron,and 4mmcmd for petchem, city gas, and industrial, while 6.2mmcmd gas is not yet tied-up,” Rustagi said.

Long-term gas volumes for power sector were diverted in the last few years to spot market, making further volumes available. Hence, 8mmcmd, or 30 per cent, of total volumes is at risk for GAIL (India) and other offtakers.

Spot LNG prices stands at $8-9 per mmbtu, while alternate liquid fuels like naphtha and fuel oil trade at $10 per mmbtu and $8 per mmbtu, respectively.

“This could lead to some contract risk, with weakly positioned customers even defaulting. While being back-to-back in nature means the offtakers — GAIL, Indian Oil Corporation, and Bharat Petroleum Corporation — would be hit first, we believe the impact on PLNG would be higher tank inventory, which could affect operational flexibility and spot cargo sourcing,” Rustagi said.