GAIL olive branch for RasGas LNG defaulters

Vol 19, PW 2 (24 Sep 15) Midstream & Downstream

Legal battles in Indian courts are as pleasant as getting one’s teeth extracted.

To avoid this GAIL is wisely offering to settle out of court with customers who have defaulted on its ‘take or pay’ contracts for long-term LNG from RasGas between January 1, 2014 and December 31, 2014. Under such contracts customers must take the gas or pay a penalty.

But because long-term LNG supply prices are now around $5 higher than spot prices, customers are defaulting on the RasGas contract in droves. RasGas term R-LNG sales have dropped from 18m cm/d to 10m cm/d – and the total take or pay penalty owed to GAIL for 2014 is a staggering Rs1900cr ($287m).

But instead of meekly paying the penalty, GAIL's customers are going to court, prompting it to try a different approach: allowing end-users to exit expensive long-term contracts as long as they pay the difference between the contracted long-term LNG price and the spot LNG price. If the long-term price in 2014 averaged around $14/mmbtu and the spot price averaged around $9/mmbtu, customers will pay GAIL the $5/mmbtu difference.

But there's a caveat: customers must forego the right to take this gas later. At present GAIL is contractually bound to supply any quantities of gas pending under the long-term contract to customers if they decide to take it at a later date.