impact of renegotiation of rasgas contract on indian gas market

7/21/2019 Impact of renegotiation of RasGas contract on Indian Gas Market

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Classification: EXTERNAL

CRISIL Impact Note 50% reduction in LNG price positive for consumers; however, lowalternate fuel prices to cap LNG imports

Background

On December 31, 2015, Petronet LNG (PLL) announced that it has renegotiated the terms of its long-termLNG supply contract with Rasgas, Qatar. Rasgas has agreed to modify the formula for calculating the LNG

price, which will lead to the reduction of the LNG price by half; it has also waived off the penalty for low

volume offtake in 2015. On the other hand, Petronet LNG has committed to increase the volume of LNG to be

purchased from Rasgas.

CRISIL Research believes that this renegotiation is a significant positive for players across the LNG

value chain, as lower prices increase offtake of contracted LNG as well as improve the profitability ofconsumers. In particular, players such as Petronet LNG, GAIL, Gujarat Gas and Indraprastha Gas are

likely to benefit. However, this is unlikely to meaningfully increase the total LNG demand from end-

users, as prices of alternate fuels such as coal and crude oil have also significantly declined in the

recent past; this will limit LNG offtake from end-users.

Key insightsNew pricing terms to cut LNG price (DES India) by ~50% to $6-6.5 /mmbtu, increase volatility

Exemption from take-or-pay obligation to remove $1.4 billion penalty uncertainty on Petronet LNG

Urea subsidy to fall Rs. 35 billion. GAIL's petchem business to witness savings upto Rs 20 billion.

Improved cost competitiveness to support LNG demand from refineries, industrial users of CGDDespite lower price, LNG demand from power capped by weak affordability and cheap alternatives

In the following sections, we have elaborated the key terms of the revised contract and their likely impact on

LNG price, as well as the impact of lower LNG price on various end-users.

January 2016



CRISIL Impact Note

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Key terms of the revised contract As per media reports, Rasgas has agreed to link the contracted LNG price to average crude oil price

(Dated Brent) for the preceding three months. There would also be a fixed component of $0.6 per mmbtu.

This is likely to halve LNG price in January 2016 to $6-6.5 per mmbtu from about $12 per mmbtu as perthe earlier formula.

On the other hand, PLL has agreed to increase LNG purchase from Rasgas by 1 million tonnes per

annum (mtpa), taking its annual purchase obligation to 8.5 mtpa. This incremental LNG will be supplied to

Indian Oil Corporation Ltd. (IOCL), Bharat Petroleum Corporation Ltd. (BPCL), GAIL (India) Ltd. and

Gujarat State Petroleum Corporation (GSPC).

In addition, Rasgas also agreed to waive off the penalty of about $1.4 billion due to lower-than-committed

offtake of LNG volumes during 2015. It has permitted PLL to make up the shortfall through higher

purchases over the remaining duration of the contract period.

Price of contracted LNG to halve to $6-6.5 per mmbtu in January 2016 As per the renegotiated contract, the basis for calculating the LNG price has been modified to make it more

responsive to recent crude oil price movements. Under the earlier contract, the cap and floor price for crude

oil was set based on the average price for the preceding 60 months. While this mechanism limited volatility in

the contracted LNG price, it also prevented a sharp correction in the contracted LNG price in 2015, despite

crude oil price declining by almost half.

From January 2016 onwards, the average crude oil price of only the previous three months would be

considered to calculate LNG price. While this will make LNG price much more volatile compared to the earlierformula, it will also lead to almost a 50% decline in LNG price in January 2016.

Comparison of estimated LNG price under the earlier and revised formulae

Source: Media reports, CRISIL Research estimates

(in $/mmbtu) Earlier formula Revised formula

Crude oil price

- 3 month average (Brent) - 43

- 12 month average (JCC) 54 -

- 60 month average (JCC) 99 -

- Cap (60 month average + 4) (JCC) 103 -

- Floor (60 month average + 4) (JCC) 95 -

Crude oil price considered 95 43

Slope 12.67% 12.67%

Fixed component - 0.6

LNG price (FoB Qatar) 12.0 6.0

Shipping cost (est.) 0.3 0.3

LNG price (DES India) 12.3 6.3

Decline in price -49%



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Impact analysis:Exemption from take-or-pay obligation to remove penalty uncertainty on Petronet LNG

The renegotiation of the contract is likely to benefit PLL given its exposure to penalty under the ‘take -or-pay’

provision. According to the contract, PLL is obligated to offtake 7.5 mtpa of LNG from Rasgas Qatar on anannual basis. During (January-December 2015), PLL is estimated to have purchased 35-40% less volumes

than committed, as end-users shifted to alternates such as spot LNG and furnace oil due to favorable cost

economics. Consequently, PLL would have been exposed to a penalty of ~$1.4 billion, as shown below.

However, Rasgas has agreed to exempt PLL from paying this penalty, provided that PLL makes up the deficit(~2.8 mtpa) through higher purchases over the life of the contract. Thus, this exemption will remove

uncertainty regarding the payment of penalty by PLL to Rasgas. PLL can offtake these volumes over the next

14 years, since the contract will expire only in 2029.

Estimation of penalty due to low offtake of contracted LNG

Source: CRISIL Research estimates

PLL’s regas volumes to see limited upside; Spot LNG demand to take a hit

PLL has increased the volume of long-term contracted LNG with Rasgas by 1 mtpa to 8.5 mtpa from 2016.

Further, PLL has also entered into back-to-back agreements with IOCL, BPCL, GAIL and GSPC formarketing this LNG, which will improve revenue visibility.

While we expect the demand for contracted LNG to be healthy, given the steep reduction in price, we do not

expect overall LNG volumes to witness a significant growth. This is because the increase in demand for

contracted LNG is likely to be driven by users who had switched to spot LNG, to take advantage of its lower

prices. Since these players are likely to switch back to contracted LNG, we expect higher contracted LNG use

to result in lower spot LNG demand, providing only marginal upside to total LNG demand. However, spot

LNG demand is likely to reduce significantly, which will hit LNG suppliers as well as LNG regasification

terminals operating on a spot/short-term basis, given an over-supplied market.

For instance, despite a sharp fall in contracted LNG volumes, PLL’s 10 mtpa Dahej terminal continued to

operate at an utilisation of over 100% in 2015 due to higher spot volumes. Moreover, while PLL is expanding

the terminal’s capacity to 15 mtpa, it has already tied up almost the entire capacity under use-or-pay

contracts with LNG marketers. Consequently, we do not expect the renegotiation of the Rasgas contract to

materially boost total regasification volumes at PLL’s Dahej terminal.

Item Unit

Contracted quantity MTPA 7.5

Dow nw ard flexibility @10% MTPA 0.75

Minimum quantity MTPA 6.75

Quantity purchased in 2015 MTPA 4.65

Shortfall MTPA 2.1

Price of LNG $/mmbtu 12.6

Penalty $ billion 1.4



CRISIL Impact Note

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Trend in imports of contracted and spot/third-party LNG by Petronet LNG

Source: Company reports, CRISIL Research estimates

Fall in contracted LNG prices to boost profitability of end-users in non-powersectors:End-users in non-power sectors, who rely on contracted LNG, will witness sharp reduction in their fuel and

feedstock costs, leading to lower subsidy bill for urea companies and improved profitability for other sectors.

Halving of LNG price to reduce urea subsidy burden by about Rs. 35 billion

The government regulates the selling price of urea, which is way below the cost of production. It also

provides a subsidy to reimburse urea manufacturers the difference between the selling price and the cost of

production, assuming a normative profit. Thus, the decline in contracted LNG price would lead to reduction inthe government’s subsidy burden. As per our estimates, with the average delivered cost expected to come

down by ~$5 per mmbtu, ~Rs. 35 billion savings on urea subsidy will ensue.

However, the reduction in LNG price is unlikely to increase demand from urea plants, since LNG cost is apass-through for computing subsidy payment.

Estimation of reduction in urea subsidy due to reduction in LNG price

Note: *Contracted LNG consumption as of 2013-14

Source: Fertiliser ministry, CRISIL Research estimates

-

1.0

2.0

3.0

4.0

5.0

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

2013-14 2014-15 2015-16

Long-term Spot/Third-party Total

Million tonnesFall in contracted LNG volumes

and surge in spot volumes

Item Units QuantityContracted LNG consumption* mmscmd 8

Contracted LNG consumption* mmbtu 104,285,714

Earlier delivered gas price $/mmbtu 14

Revised delivered gas price $/mmbtu 9

LNG cost savings $/mmbtu 5

LNG cost savings $ Mn 526

Exchange rate Rs/$ 66

LNG cost savings Rs Bn 35



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GAIL’s pet chem segment to witness upto Rs. 20 billion saving due to lower feedstock priceGAIL’s profitability will increase sharply due to reduction in feedstock cost of its petrochemical segment. Due

to dwindling domestic gas supply, GAIL has increasingly resorted to the use of LNG in their petrochemical

plant at Pata, Uttar Pradesh. Given the fall in petrochemical prices and high contracted LNG price, the

segment’s PBIT mar gins turned negative January 2015 onwards compared to the over 30% recorded prior to

2014-15. Consequently, assuming the entire capacity operates on contracted LNG, the reduction in LNG

price is estimated to result in upto Rs 20 billion saving in the petrochemical segment in 2016-17.

Trend in PBIT of GAIL’s petrochemical business

Source: Company reports, CRISIL Research

Cost competitiveness of LNG to improve vs liquid fuels for refineries, industrial customers

LNG demand from refineries and other industrial users, where it competes with liquid fuels, is likely to be

supported by the reduction in contracted LNG price. Post the correction, contracted LNG price is likely to be

almost at par with that of liquid fuels, compared to the earlier premium of almost 50%. This is likely to

encourage refiners, who have shifted to liquid fuels and spot LNG, to increase purchase of contracted LNG.Similarly, smaller industrial users catered by city gas distributers such as Indraprastha Gas and Gujarat Gas

are also likely to increase their LNG consumption. This will support volume growth of city gas distributers

from the industrial segment, which is estimated to have declined by ~12% in 2014-15. Further, while the price

reduction is likely to be largely passed on to end-users, it is also expected to aid profitability of CGD

operators.

-80%

-60%

-40%

-20%

0%

20%

40%

60%

-4

-3

-2

-1

0

1

2

3

4

5

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

2013-14 2014-15 2015-16

PBIT PBIT Margin

Rs. Billion



CRISIL Impact Note

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Cost comparison of various industrial fuels

Note: All price estimates are based on delivery in Gujarat and include taxes.Source: CRISIL Research estimates

Despite lower price, LNG demand from power plants to be subdued given weak affordabilityand cheaper alternatives

Reduction in the price of contracted LNG will sharply pull down the cost of power generation using natural

gas. Despite this, we do not expect LNG consumption by power plants to increase significantly, at least in the

short term. This is primarily on account of poor affordability of high-cost power by distribution companies

(discoms) as well as availability of lower-cost power from coal-based power plants and short-term markets.

For instance, the variable cost of power generation from contracted LNG (~Rs. 5 per kWh) is likely to be more

than double the cost from even imported coal (~Rs. 2 per kWh).

Therefore, we expect only limited upswing in LNG usage by the power sector on account of the price

reduction. This will be driven by Southern states such as Andhra Pradesh, which have relatively high power

deficits and where short-term power prices exceed Rs. 4 per unit. On the other hand, demand for contracted

LNG is likely to be limited in power-surplus states such as Gujarat and Maharashtra.

Comparison of variable cost of power generation across fuels

Source: CRISIL Research estimates

15.0-16.0

9.0-10.07.0-8.0

9.0-10.0

14.0-15.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

FY 2017E

LNG (Earlier price) LNG (Revised price) FO LSHS Commerical LPG

($/ mmbtu)

0.9

1.9

3.3

5.2

9.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Domestic coal Imported coal Domestic gas @$4.2/mmbtu

Contracted LNG(Revised)

@$6.3/mmbtu

Contracted LNG(Earlier)

@$12.3/mmbtu

(Rs./kwh )



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Analytical Contacts:Rahul PrithianiDirector, Industry Research, CRISIL LimitedEmail: [email protected] Phone: +91 22 334 23574

Mayur Patil Associate Director, Industry Research, CRISIL LimitedEmail: [email protected] Phone: +91 22 3342 3532

mailto:[email protected]










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impact of renegotiation of rasgas contract on indian gas market

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