Natural Gas Import: Why GAIL Should Be Seeking Bail

Natural Gas Import: Why GAIL Should Be Seeking Bail

On March 6, the first consignment of gas from Louisiana, US, was flagged off for the Indian port of Dabhol, in the presence of Gail chairman B C Tripathi and Cheniere president Jack Fusco, who said, “India remains an important market for LNG (liquefied natural gas).” Tripathi responded by stating, “Gail is one of the foundation customers of Cheniere having signed the contract in 2011, and will also make for portfolio diversification.” But in October 2017, after the precipitous fall in gas prices, Gail tried to renegotiate with Cheniere — as it did successfully with Qatar — only to be rebuffed.

As per the sale and purchase agreement (SPA), from March 2018 onwards, Gail has to take the delivery of 182.5 trillion BTU (British thermal units) of LNG, amounting to 3.5 million tonnes a year, for 20 years from the US. This costs about $4 a MMBTU (metric million BTU) higher than if it bought on spot from nearby Asian markets that avoid liquefaction and long-distance transport. This translates to about .`4,750 crore a year, or.`40,000 crore additional payment in present value terms, with an interest rate of 10%.

Gail will, no doubt, pass this on to its client-cum-subsidiaries like Gail Gas and Indraprastha Gas (IGL). But, ultimately, it’ll be the nation that will be paying the bill.

Gail has entered into a ‘take or pay’ contract with Chenierie’s arm, SabinePass (SPL). This essentially means that whether one takes delivery or not, one will have to pay for the contractedamount. Firms typically enter into long-term contracts to hedge price fluctuations. But in this case, this is ahedge against quantity, not price. Read More

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