GAIL offers short-tenure contracts, eases rules for domestic customers
Natural gas sales contracts are becoming relatively easier for buyers as state-run GAIL, the key gas supplier in the country, is now offering shorter-tenure contracts and easier terms. Gas supply contracts are usually long term and contain take-or-pay provision that mandates a buyer to offtake pre-agreed quantity or pay for a minimum quantity even if it lifts less in a year. GAIL, the biggest gas marketer in the country, sources a significant share of its gas portfolio from overseas. For years, it entered into long-term, take-orpay liquefied natural gas (LNG) contracts with suppliers overseas and covered itself back-to-back by signing similar contracts with domestic gas users. But the nature of its domestic contracts is now altering. It is now offering contract for less than five years and has eased take-or pay obligations for customers, a GAIL executive said. In the past, a buyer had to pay for 90% of the contracted volume even if it lifted less in a year but now this is down to 80%, the executive said, adding that the new contracts offered more flexibility. But new terms also mean increased risk for GAIL. GAIL is offering customers the choice to have their gas prices half-linked to HenryHub and half to crude oil. It also offers to hedge prices so that customers escape volatility. “Nobody wants a long-term deal. We are also not insisting. We understand that it’s difficult for smaller customers to take a bet on price or even their own longterm business prospects,” the executive said. “If they default five years later, then it will be a problem for us as well.” Some of the GAIL’s smaller customers have in the past complained that the take-orpay provision tilted the scale in favour of supplier. Last year, the Competition Commission of India began an investigation into seven cases where small industrial customers had alleged abuse of dominance by GAIL especially with respect to the way the company imposed take-or-pay liability on them in 2015. The crude oil collapse of 2014, which brought down gas prices with it, also forced a new thinking at GAIL. “We have learnt our lessons from the 2014 crash,” said the executive. “In 2014, several customers, including big ones, defaulted. We realised we need a way to handle that.” The rates of natural gas, which are mostly linked to crude oil, had crashed in the spot market in 2014, prompting many customers to refuse expensive gas supplied under term deal by GAIL. Prices under a term deal were linked to trailing five-year average of crude oil and appeared far expensive than in the spot market. Since GAIL’s customers were refusing delivery, GAIL too couldn’t have in turn accepted supplies from the seller, Qatar’s Rasgas. The deal was finally renegotiated.