Shell in talks to buy domestic Cairn gas from Gauri
CONTRARY TO GENERAL impression, Shell is not relying solely on its upcoming 5m t/y LNG import terminal at Hazira to enter the domestic gas business.
Market sources in Gujarat tell us Shell is in talks with Cairn Energy to buy 2m cm/d gas from its Gauri gasfield (See: 12-Cairn to sell Gauri gas at $3.42-$3.25 per mmbtu). A Cairn source confirms this.
"We are in talks with Shell as well as others to sell 40m cm/d gas from Gauri. No gas sales agreements have yet been concluded." Shell's decision to sell domestic gas as well as regassified LNG to Indian customers follows a June 2001 commerce ministry letter permitting it to buy natural gas from domestic sources and sell it alongside regassified LNG.
The commerce ministry note allows Shell to sell gas to any gas consumer in India, not just to power consumers in Gujarat. "Shell's move makes smart market sense," reveals a source.
"Its strategy is to use cheaper domestic gas as a carrot to attract customers to relatively expensive LNG. The idea is to begin with domestic gas as a supplement to LNG and then build up demand and a market for LNG." Another consideration is that a LNG contract typically involves a take-or-pay agreement for 97% of the contracted quantity.
"No Indian buyer is willing to sign a take-or-pay for LNG at these levels,We are told. "But if you have a domestic 'string' producer behind you, customers can be offered take-or-pay agreements for between 70 and 75% of the contracted gas quantity." Given the slow pace of construction at the Hazira LNG terminal, Shell can use domestic gas to, "service initial demand" that it meets.
