by R. Sasankan
The
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.
Oil
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.
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