India to skip long-term gas pricing contract with Turkmenistan

NEW DELHI: India doesn’t plan to freeze a long-term price or formula for the gas it plans to buy from

Turkmenistan using TAPI pipeline following a bitter experience with Qatar recently when it had to forego

the benefits of commodity crash and pay double the spot rate for a long time before the 25-year

contract was reworked.

“The natural gas market is changing rapidly. No one knows how it would look like in the next few years.

So, it doesn’t make sense to lock-in a price or a formula for the next 20 years,” an oil ministry official

said. The price of liquefied natural gas (LNG) that is transported long distance using ships has collapsed

two-thirds in two years.

Global LNG supply is expected to rise by a third to about 330 million metric tonne annually by 2018,

likely to further depress prices. Amid this uncertainty that makes predicting long-term gas prices

extremely difficult, the government doesn’t want to get into a multi-year pricing contract. “A long-term

contract witnesses several cycles and ends up balancing the gains and losses.

Everyone likes it when we pay a price that is lower than the spot. But when we have to pay higher than

the spot rate, everyone starts complaining. It becomes impossible to defend it politically,” said another

official.

This is something the government learned recently from its experience with Qatar. Petronet LNG, which

had reaped the benefit of lower prices in previous years, had to pay an extremely high price in 2015 to

Qatar’s RasGas despite a commodity collapse. Petronet’s 25-year contract linked prices to 12-month

moving average of crude oil prices with a rolling ceiling and floor allied with 60-month average.

A sharp collapse of crude oil prices beginning in mid-2014 left a huge difference between the spot price

and the longterm rate Petronet had to pay. Three months ago, the formula was reworked bringing

prices closer to the spot market.

Another issue is the yawning expectation gap between the producers and consumers as gas producers

such as Turkmenistan expect prices to rebound in the years ahead and wouldn’t risk locking themselves

into a long-term price that reflects the current market imbalance.

NGS INDIA