GAIL wants RasGas to rework LNG pricing

Vol 6, PW 20 (04 Dec 02) Midstream & Downstream

FACED WITH strong resistance to the price of gas from Dahej, GAIL is getting jittery and wants the oil ministry to ask RasGas to rework the LNG pricing formula in the Sale & Purchase Agreement.

We understand GAIL circulated an internal note early October voicing concern over the "super profits" that RasGas will earn under the present formula. GAIL argues that elsewhere in the world a "reasonable rate of return" on capital for LNG terminals (including natural gas production and pipeline cost) is around 12%.

In contrast, GAIL claims that the RasGas rate of return works out to 24% at a crude oil price of $16 per barrel and 37% at $24 per barrel. Given the "magnitude of cushion" so available to RasGas, says GAIL, an "appropriate discussion at the highest level could be fruitful." Clearly, GAIL is unhappy with the RasGas pricing formula.

As a model, GAIL points to Indonesian LNG projects where the cost of liquefaction facilities is separately "compensated on cost recovery or fixed return basis" and only the price of natural gas is linked to the crude oil price. If this formula is replicated in the Dahej SPA with RasGas, we are told, there would be substantial savings, even if the LNG price is linked to the current crude oil floor and ceiling prices of $16 and $24 per barrel.

"This mechanism would help to counter the strong reaction from the power and fertiliser sectors." Luckily for RasGas, the oil ministry is unimpressed by GAIL's arguments. "Globally, prices for petroleum products, crude oil and LNG are not based on cost of production with a fixed rate of return," GAIL is told.

Instead, they are based on "market trends". More, GAIL is reminded that Petronet-LNG selected RasGas, and by implication the Dahej LNG price formula, through an international competitive bid.