Gail India Ltd is in talks with Russia's Gazprom to delay and renegotiate a 20-year gas purchase deal undercut by low spot prices, sources familiar with the matter say, as weak demand at home forces it to stall some contracted supply.
Shipments under the deal, initially expected to start in 2018/2019, are linked to crude oil prices which are rising while gas prices are expected to stay subdued for longer as major new production plants in Australia and the United States start up.
The price mismatch is injecting tensions into long-term LNG agreements, driving a wedge between buyers and sellers such as Gail and Gazprom's Marketing & Trading, industry sources say.
Gail is also trying to juggle a rapidly expanded LNG book after embarking on a buying spree between 2011 and 2013 when the fuel was scarce and prices kept hitting new peaks.
Gail is seeking a meeting with Gazprom officials to discuss in greater detail delaying the deal and revising its oil-linked price, a source with knowledge of the matter said.
By exploiting what Gail sees as an inconsistency in its contract with Gazprom, the company hopes to revise key terms under the 2.5 million tonne/year deal, according to industry sources.
Under the 20-year accord, signed in 2012, Gazprom said it would source its supply from the now-cancelled Shtokman LNG export plant in the Barents Sea, the sources said.
The Gazprom subsidiary now aims to source supply from its global portfolio, including a share in the forthcoming Yamal LNG project in the Arctic peninsula, which Gail claims constitutes breach of contract, industry sources said.
A Gazprom source adds that Gail is not proposing scrapping the entire deal.
"The Indians are looking to postpone most deliveries and this is what talks are focusing on," the Gazprom source said adding that Gazprom gas is not the most expensive in GAIL's supply mix.
"They have over committed," the Gazprom source said.
At current oil prices, Gazprom's LNG will cost more than $7 per mmBtu while spot cargoes fetch around $5 per mmBtu, a big difference in a price-sensitive market like India, sources said.
Apart from a deal with Gazprom, GAIL is also saddled with about 5.8 million tonnes of LNG a year from the U.S. which is expected to begin ramping up within the next two years.
The cost of liquefying gas and exporting it as LNG from the United States to India currently turns out at $4.62 per mmBtu this winter, a still attractive level for Indian buyers, but analysts say the trade could be loss-making later this decade.
The Indian firm has thus far managed to sell 2 million tonnes annually from its U.S. portfolio, part of which went to Royal Dutch Shell, Gail Chairman B.C. Tripathi has said, as Indian customers struggle to absorb or afford LNG from the United States.
GAIL did not respond to a Reuters email seeking comment.
Gazprom declined immediate comment.
Cheap spot cargoes are streaming into India at an unprecedented rate - overall LNG imports are up 40 percent on last year, helping displace demand for inflexible long-term deals.
India wants to migrate gradually to a gas-based economy and lift share of the cleaner-burning fuel in its energy mix closer to the world average of 23.8 percent from a current 6.5 percent.
Last year India renegotiated a long-term LNG supply deal with Qatar's Rasgas, nearly halving the price and avoiding a $1.5 billion penalty fee for lifting less gas than agreed as customers preferred cheaper spot supplies.
It showed how tumbling oil prices and a global gas glut are compelling exporters to offer better deals to retain their share in global energy trade.
India's biggest LNG importer Petronet is also seeking to renegotiate its costliest import deal with ExxonMobil for 1.4 million tonnes annually from the Gorgon project in Australia, industry sources say.
That deal, which is due to start in the first quarter of 2017, is also oil-linked at an indexation level of 14.5 percent to a barrel of crude, or over $7 per mmBtu - a hefty premium to current spot prices.
Updated Date: Jul 25, 2016 15:04 PM