Lessons from Shell, PetroChina deal

NEW DELHI: While government departments squabble over the pricing of natural gas from Reliance Industries Ltd’s (RIL) Krishna Godavri block, a gas deal inked Down Under last week has far-reaching impact on the nascent domestic gas market.

On September 4, Shell Eastern LNG agreed to sell 1 million tonnes (mt) of liquefied natural gas (LNG) to PetroChina for 20 years out of its stake in Gorgon, Australia. While the heads of agreement, according to a Shell statement, constitutes a milestone in the development of LNG supplies to China, it throws a challenge to India — in supply as well as price.

Petronet LNG Ltd (PLL) has also been negotiating a 25-year supply contract for 2.5 mtpa LNG from the same fields for its Kochi regassification terminal, though with ExxonMobil.

The US-based Chevron is the operator of the Gorgon project with 50% interest. ExxonMobil and Shell hold 25% each in it.

There are speculations that, at the current level of oil prices, the China deal has been concluded at a price of $10 per million British thermal unit (mBtu), which translates to about 14% linkage to oil prices.

An industry overview of Merrill Lynch says: “This has negative implications for Indian LNG importer Petronet LNG and positive implications for emerging large gas producer RIL”.

This conclusion is based on the ground that any future long-term contract, like that being negotiated by PLL, would be on similar terms to those of PetroChina’s, but the Indian market’s appetite might not be ready for a $10 tag (that too without regassification, marketing and transportation charges).

There is, however, another side to the story. According to the ministry of power, NTPC Ltd, the country’s principal power producer, purchased 1,146.96 million standard cubic metre (mscm) regassified LNG (RLNG) during 2006-07 for $10.39-$13.14 a mBtu at its plant.

This is a reflection of high price absorption even in a subsidised sector like power.  In the case of RIL, the consultants say the Shell-PetroChina agreement indicates that even if RIL has to resort to gas or LNG exports (in the event of a surplus domestic market), its price realisation could be good.

The consulting firm said PLL would need to reduce its $0.73 regassification charges, which, it thinks, is highest in the world and almost 40% of ONGC gas price, in order to sell RLNG, bought at high rates.

“The changing domestic gas and the tight global LNG scenario threaten its volume growth as well as margin prospects,” said the Merrill Lynch overview.

Till December 2008, PLL would get LNG from Qatar’s RasGas at a landed price of $2.53, since it is linked to a fixed oil price of $20 a barrel. After that, it would be linked to oil price and it is here where Merrill Lynch sees a problem.