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Press Release [FREE Access]
Petro Intelligence » Why GAIL Wants Crude Prices To Surge Again

by R. Sasankan

B.C. TripathiThe world oil industry has seen crude prices go through a number of roller-coaster rides since 1980 – crashing to as low as $ 10 per barrel and then cresting at $ 140. The volatility in prices has been sharp, sudden, and stomach churning.

But this time, the industry has been agonising about future trends, wondering when (and if at all) it will scale back to $ 100 after languishing interminably in the low to mid 40s. If it doesn’t rise to those distant peaks, then the industry’s pangs will exacerbate.

While the E&P industry the world over has been rattled by these developments, India must count itself as one of the biggest beneficiaries as its crude import bill has shrunk to an unimaginable level.

But its own upstream companies like ONGC, Oil India and Cairn India are finding the going extremely tough. However, ONGC and OIL have not been as devastated as other E&P companies around the world as they have been relieved of the burden of sharing a part of the subsidy that the government has been funnelling to downstream oil companies to supply sensitive products – mostly diesel, kerosene and LPG – below cost.

India’s downstream companies such as IOC, HPCL and BPCL have never had it so good. The crash in the crude prices has pushed up their gross refining margins (GRMs). Normally, the state-owned gas transportation and distribution major, GAIL, too should have benefitted as the gas price has fallen in tandem. But the GAIL management is keeping its fingers crossed with a fervent prayer that oil prices will scale back to previous highs. This may sound unbelievable but that is the reality.

GAIL has a dynamic leadership under B.C. Tripathi. GAIL always wanted to control the country’s LNG business. However, circumstances beyond its control led to the creation of Petronet LNG Ltd (PLL) to deal exclusively with LNG business. As a result, GAIL had to be content with being one of PLL’s four public sector promoters. GAIL was the first one to propose an LNG terminal on the West Coast but that idea was snatched by Enron.

The LNG business has been booming. Tripathi has set out to realise GAIL’s dream of doing LNG business directly. GAIL, the largest marketer of PLL’s imported LNG, started importing a few LNG cargoes on its own to supply to its customers.

Prabhat SinghOil and gas experts are like economists who invariably fail to predict an imminent collapse. Excited by the business opportunities in LNG, the GAIL management entered into a deal with two US energy groups, Cheniere Energy Partners and WGL Midstream, for the purchase of a combined 5.8 million tons per annum (3.5 mt for Cheniere and 2.3 mt for WGL). Under the terms of the deal, supplies will start only in 2017-18 though GAIL is entitled to a couple of complimentary cargoes at a concessional price. The deals were hailed as imaginative and were seen as testimony to Tripathi’s business acumen. GAIL is in the process of placing orders for LNG carriers to transport the US LNG to India.

The attraction of the deal was that unlike in the case of the crude-linked price contract that PLL signed with RasGas of Qatar which pushed up the cost of LNG to $ 14/mmbtu, GAIL’s deals with US companies were indexed to the Henry Hub price, which turned out to be cheaper. Henry Hub is essentially a hub for suppliers and not sellers. The present Henry Hub price is in the range of $ 1.5 to 2.5 plus 15 per cent. Add to this is a tolling charge of $ 3 and a transportation charge of $ 2.5, which will take the total to $ 8.5 /mmbtu. Against this, the latest LNG cargo India got was for an ex-ship price of $ 4.5/mmbtu — a difference of $ 4 /mmbtu.

GAIL has the option of swapping the LNG, which it has done for the complimentary cargoes. But if the glut in the LNG market deepens even swapping may become difficult. The situation will change in favour of GAIL if the crude price rises to a level around $ 100 a barrel. This could push up the price of crude- linked LNG which, in turn, will make GAIL’s Henry Hub-indexed LNG attractive.

But the question remains: Will crude prices ever go back to the earlier level of $ 100 a barrel? Even if it does, how long will it take to reach that level? Can the LNG price climb back to the earlier level of $ 18-20/mmbtu even if the crude price touches $ 100?

The market scenario for LNG looks bleak because of an unprecedented glut with Qatar and Australia commissioning fresh capacities.

The problem with GAIL’s US deals is that promoters of these companies do not hold any LNG capacity for themselves. The capacities are exclusively created for the buyers on the basis of back-to-back agreements from which there is no exit route. There is no government in the picture. RasGas agreed to lower the price of its LNG supplied to PLL because it is basically a state-owned company. The Indian government intervened to persuade its counterpart in Qatar. RasGas knows the importance of the Indian market. There was absolutely no legal compulsion on the part of RasGas to reduce the price. GAIL does not have that backstop option with respect to its US deals.



To download the latest issue 'Volume 30 Issue 24 - March 25, 2024', click here
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