Dahej long-term LNG to cost 23% more in January

Vol 12, PW 15 (18 Dec 08) People & Policy

One big nasty shock awaits gas users in India accustomed to paying the unbelievably low fixed FOB price of $2.53/mmbtu since January 2004 for long-term LNG from RasGas.

At the end of this year, on December 31 to be precise, the old formula agreed between Petronet-LNG and RasGas, where LNG for Dahej was priced at FOB $2.53/mmbtu, even when global rates would soar to $22/mmbtu, comes to an end. In its place comes a new formula beginning January 1, 2009, that over time will link the price of long-term LNG imported at Dahej to a 60-month JCC (â€کJapanese Crude Cocktail’) floating average.

Initially the shock will be mild, with the price of Dahej LNG rising only 23% from $2.53/mmbtu to $3.1/mmbtu in January. But by 2014 the shock will be near catastrophic for the Indian economy if crude prices return to the all-time highs we saw over the summer.

Because in 2014, RasGas will charge Petronet-LNG a price completely linked to the JCC, whatever it is at the time - with no â€کcap’. Signed in July 1999, Petronet-LNG’s 25-year SPA with RasGas is one of two contracts in place with the part-ExxonMobil owned Qatari exporter.

In early 2007, the two signed a second, medium-term contract for LNG at $8.3/mmbtu, destined for Dabhol. Under government orders, this new $8.3/mmbtu price is â€کpooled’ with the old RasGas price of $2.53/mmbtu so Dabhol can enjoy cheap fuel; from January 1, RasGas will be hiking the Dabhol LNG price from $8.3 to around $12/mmbtu.

Despite vehement protests from consumers accustomed to paying $2.53/mmbtu, the â€کpooled’ average is still cheaper than gas from the Panna, Mukta, Tapti, Ravva and other domestic gasfields. But after January 1, 2009, this will no longer be the case.

“Petronet-LNG made a major error of judgment in accepting a â€کfloating cap’ instead of a â€کfixed cap’ to JCC crude,â€‌ we hear. “A floating cap can protect against momentary spikes in crude prices but it is useless having a floating cap if crude prices rise in the long term.