by R. Sasankan

Petronet LNG Ltd (PLL) has a new boss. And for the first time since its inception, it has a Gas Man who will call the shots as its chief executive. That in itself ought to change the working culture at PLL which has been trying to emerge from the terrible crisis in which it has wallowed for 15 years ago.

Prabhat Singh, who has succeeded A.K. Balyan as PLL’s M.D and CEO, has an unenviable task ahead of him because he finds himself trapped between the devil and the deep blue sea.

PLL’s problems are well known. It has been saddled with a disgraceful deal that requires it to buy costly LNG from RasGas of Qatar. At the same time, it is under pressure from its marketers such as GAIL, IOC and BPCL to bring down the price of regasified LNG to the prevailing market rate. PLL- supplied gas costs $ 12-13/mmbtu to the consumer against $ 7-8/ mmbtu in the market.

Several consumers have refused to lift the costly gas and their number is bound to increase in the coming days. GAIL, which markets 60 per cent of regasified LNG, has decided to reduce the off-take at least by 30 per cent. Others such as IOC and BPCL are also facing consumer resistance.

How will Prabhat Singh resolve the crisis? The entire gas business is based on a back-to-back agreement. PLL signed a take-or-pay agreement with RasGas of Qatar for 7.5 million tons of LNG per annum. The state-owned companies such as GAIL, IOC and BPCL who market the regasified LNG have signed a take-or-pay agreement with Petronet LNG and they, in turn, supply gas to the consumers on the basis of a similar take-or-pay agreement.

Initially, GAIL tried to frighten the consumers by saying that it would invoke the take-or-pay clause but eventually realised the futility of its strategy with LNG price internationally plummeting to $7-8/mmbtu. International crude price continues to slide, which implies a corresponding dip in the price of LNG. How long can RasGas hold the Indian consumers to ransom by refusing to lower its price? Its price is based on the moving average of the crude price of the past five years which rules out any relief for the Indian consumer in the foreseeable future.

Indian energy planners simply do not have the guts and gumption to negotiate deals with foreign suppliers –and are usually bullied into accepting terms whose deep implications they cannot comprehend. They invariably hire international consultants some of whom often take them for a ride. This is precisely what happened when the PLL leadership decided 15 years ago to opt for the present disastrous pricing formula. It sought the opinion of a London-based petroleum consultant about the likely price of crude in 2015. The consultant’s prediction was $ 15 per barrel.

Almost all LNG projects in the world have oil majors as their minority or majority partners and they deal with these consultants quite often and cannot be expected to give opinions that will affect their business adversely. Even if Prabhat Singh decides to hire an international consultant, he should have an Indian team of experts, mostly from GAIL, serving and retired, to ensure that PLL is not trapped again.

RasGas will not give in easily. So, how should PLL deal with the situation? We spoke with a cross-section of experts. According to them, PLL has only two sensible options before it. The best option is to establish that there was something malafide in the deal and cancel the contract. It can stop accepting deliveries even as it investigates the situation. The Government will have to formally tell RasGas that they suspect bad faith. In the meantime, they can start buying gas in the spot market to feed domestic consumers. A good law firm should be able to draft a formal notice to RasGas on these lines.

The second but less desirable option, which we had advocated earlier, would be to liquidate PLL or have a significant change of ownership. The first option has been actually used in international contracts to start renegotiation.

Prabhat Singh has some tough choices to make – and he cannot afford to fail.