Cairnآ’s Ravva gas contract with GAIL expires

Vol 6, PW 4 (24 Apr 02) Midstream & Downstream

ANYONE INTERESTED in knowing how Cairn Energy prices its gas should watch this space.

Very soon Cairn will begin price negotiations with GAIL for the supply of gas from its Ravva field offshore Andhra Pradesh. An existing 5-year agreement between the two expired on 9th April and GAIL has approached the oil ministry for advice on what to do next, unsure about the much-touted, yet unimplemented, government promise to free domestic gas pricing, which in this deal at least, will work to Cairn's advantage.

Ministry officials instructed GAIL to start negotiations with Cairn at a meeting on 10th April. Under the PSC signed 24th October 1994, Cairn agreed to sell to GAIL between a floor price of $1.75 and a ceiling of $3.00 per mmbtu.

First supplies to the Surasaniyanam terminal in Andhra Pradesh began on 10th April 1997. Since then the price has been fixed every quarter at 100% import parity (Platts 12-month average basket of 3.5% fuel oil, Singapore FOB, Rotterdam Barge and MED FOB).

"Following the expiration of the said 5-year period the parties shall enter into good faith negotiations to renegotiate the basis for calculation of the purchase price," reads the PSC. "If the parties are unable to agree on a new purchase price for gas any party may refer the dispute for resolution by a sole expert in accordance with the provisions of Article 34.2." Cairn is clearly in a strong position.

In March it received an average $3.00 per mmbtu from Ravva, constrained by the cap. It's unlikely to accept any GAIL attempt to maintain the $3.00 ceiling - especially if the government keeps its promise and frees the price of domestic gas.