GAIL gets a fresh trigger with Gorgon negotiation

The contract raises optimism on firm's high-priced deals with US players

In a positive development for Indian gas players, including GAIL, the 20-year deal for supply of liquefied natural gas (LNG) from Australia’s Gorgon project has been renegotiated. The Gorgon LNG contract with Exxon Mobil’s Australian subsidiary and Petronet was signed in 2009, but natural gas prices have come down significantly thereafter. The new price is lower by about $1.25 per British thermal unit (btu), over the old price. Petroleum Minister Dharmendra Pradhan said Indian consumers would receive LNG volumes at amicable prices soon, and this was done in way similar to the Qatar deal.
 
The renegotiated Gorgon contract is directly beneficial for Petronet LNG, which has been receiving supplies for this 1.44-million tonne (mt) contract since January. Petronet has back-to-back agreements with GAIL, Bharat Petroleum and Indian Oil, and hence these players also benefit. The renegotiation also increases optimism on GAIL’s high-priced supply contracts with US players. With supply expected to commence from November, the Street’s concerns remain elevated. According to analysts, there is a gap of $2.5 per mbtu (million btu) between GAIL’s landed prices for US contracts and spot gas prices of $5.5 per mbtu.
 
Analysts at Ambit Capital say while the contract with Qatar’s RasGas was renegotiated at the government-to-government-level, doing so with a private player like Exxon (known to take a tough stand on such contract renegotiations) sets a strong precedent. Gorgon forms just 10 per cent of Petronet’s volumes, but the renegotiation is a more positive read through for GAIL, dealing with more expensive US Henry Hub-linked contracts, says Ambit. The brokerage says the Gorgon deal should reduce some fears on US LNG contracts.
 

 
GAIL’s share price jumped four per cent to Rs 394.35 on Monday, adding to the gradual increase it has seen after the sharp correction after the June quarter results.
 
Notably, the confidence on the US LNG contracts, too, has been rising as GAIL has placed over half of the 11-mt take-or-pay supplies with customers. In a take-or-pay basis, a company either takes the delivery or pays a penalty. Analysts at Antique Stock Broking say of the remaining 5.2 mt, GAIL is in the process of marketing this in CY18. Nomura, too, said GAIL sounds more confident on the contracts with more volumes tied up. Analysts at Elara Securities say US LNG viability concerns would dissipate with completion of the Jagdishpur-Haldia and Bokaro-Dhamra pipelines by 2020, which would connect five fertiliser plants.
 
Meanwhile, GAIL has also restarted pending pipeline work for its Kochi-Mangaluru-Bengaluru pipeline to be completed in a year. Benefits on volumes and margins will also flow from this pipeline.