US LNG contracts swap to help GAIL avoid a big hit

US LNG contracts swap to help GAIL avoid a big hit

GAIL’s time swap deal with Swiss LNG trader Gunvor has reduced fears of possible slippage in earnings.

The Street felt that India’s largest gas marketing company may suffer losses as the price of gas it sourced was linked to the US natural gas price; the landed price would be commercially unviable in India with the availability of cheaper options following a fall in global LNG prices.

But, GAIL may be able to swap nearly one-third of the total US gas contracts. The balance would be sold in the local spot market, which generates a marketing profit. The swap deal could prompt analysts to remove the negative bias on the stock arising out of the US contract.

Of the 5.8 MTPA of LNG GAIL plans to buy in the next few years, almost 2 MTPA will be swapped with Gunvor, Shell and Denmark-based Deng Energy -deals that would let GAIL sell gas in India at a small profit.

The combined impact of swap arrangements with Gunvor and Deng, and 1-million tonne long-term contract with Shell and some portfolio investors may lower cost for GAIL.

Credit Suisse in a note released last August said that GAIL might have to bear an annual loss of $300 million due to the US LNG contracts. The brokerage may have to take a relook at its estimates.

GAIL has been supplying nearly 4.5-4.8 million tonnes of LNG on spot or short-term in the local market. The demand for LNG in the domestic market grew 24% in FY16 and 20% in the first nine months of FY17.

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Besides existing LNG demand, GAIL may gain from incremental demand from its petrochemical facility which is being ramped up and a new plant of ONGCBSE 0.60 % Petro Addition (OPAL), which is expected to start soon. According to estimates, GAIL has been earning nearly $1 per mmBtu of marketing margins from gas sold on the spot and short-term contracts. Read More…


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