Fertiliser sector angry at 20-year R-LNG contracts

Vol 12, PW 16 (15 Jan 09) Midstream & Downstream

Fertiliser companies got a nasty New Year gift from state-owned GAIL, IOC and BPCL – re-sellers of R-LNG from the Dahej terminal owned by Petronet-LNG.

All six fertiliser companies on the HBJ pipeline route had to sign new and onerous contracts for R-LNG from Dahej for the remaining 20 years of Petronet-LNG’s sales contract with part ExxonMobil-owned RasGas. The earlier five-year contracts expired on December 31, 2008, and a new RasGas pricing formula for LNG came into effect on January 1 this year to replace the fixed FOB price of $2.53/mmbtu.

None of the fertiliser companies, whether state-owned IFFCO, KRIBHCO or NAFL or privately owned Chambal Fertilisers, Indo Gulf Fertilisers or Tata Chemicals, wanted to sign the new contract. All of them said LNG would become the costliest gas in India after 2014, when RasGas LNG will be linked to the floating â€کJapanese Crude Cocktail’ price - especially if global crude oil prices return to the highs of $147/barrel in July 2008.

Each company fought from September when the first drafts of the proposed 20-year contracts were received from GAIL, IOC and BPCL. But their individual efforts proved fruitless forcing them to seek help from industry lobby group, the Fertiliser Association of India, to pressure the government.

“Several meetings were held within our ministry as well as with the oil ministry in December,â€‌ says a fertiliser company source. “We suggested modifying the draft contract, but were rejected by GAIL, IOC and BPCL and left with no choice but to sign.

â€‌ Some of the companies, we hear, signed between Christmas and New Year’s Eve; the rest signed in the first week of January. GAIL, IOC and BPCL may have won this round, but an industry source says the ultimate loser is the taxpayer, who foots the bill for fertiliser subsidies in India, which currently stands at Rs1.2 lakh crore ($30bn) in 2007-08 and will grow if crude oil prices rise and push up the price of RasGas LNG to Dahej.

Fertiliser companies are furious, we are told. “Oil ministry-owned companies acted against the interests of the fertiliser ministry,â€‌ we hear.