With promises of cheap LNG at $2.92 per mmbtu

Vol 6, PW 7 (05 Jun 02) Midstream & Downstream

RELIANCE HAS NOT yet won the LNG market in India but it is supremely confident that it can.

First, it reckons it can use up to 2m t/y of LNG on its own. Second, Reliance and BP reckon they have an unbeatable formula to sell LNG to a price sensitive domestic Indian market.

Industry sources in Gujarat tell us Reliance is offering Jamnagar LNG at $2.92 per mmbtu, almost equal to the $2.50 per mmbtu for Iranian gas promised by the BHP Billiton promoted overland pipeline, and much more competitive than the $3.50-$3.80 per mmbtu for Cairn's Lakshmi gas or Petronet-LNG's price of LNG from Dahej at between $3.80-$4.80 mmbtu. What is the secret of Reliance's pricing formula Our source tells us the most important element is the complete de-linking of the LNG price from crude oil.

Instead, LNG for Jamnagar will be priced on a 'cost plus' formula, familiar to many in India where until recently this was the norm. How does 'cost plus' work "You put together the cost at each stage of production to the burner tip and then have a fixed mark-up," reveals a source.

"This way you are totally insulated from any volatility in crude oil prices and everybody gets a guaranteed return." With cost-plus Reliance reckons it can do without a 25-year take-or-pay agreement on the RasGas-Petronet-LNG model. Luckily for BP-Reliance, the upstream price of Iran gas is low, at between $0.50 and $0.70 per mmbtu.

Still hazy are other details, yet both Reliance and BP exude confidence that their LNG price is "sustainable" under the formula they are fine-tuning.