In this list
Natural Gas

India masters the art of renegotiating inflexible LNG deals

Commodities | Electric Power | Electricity | Energy | Nuclear | LNG | Natural Gas | Natural Gas (European) | Oil | Crude Oil | Refined Products | Fuel Oil | Gasoline | Jet Fuel | Petrochemicals | Olefins

Market Movers Europe, Jan 24-28: Commodities remain on knife edge despite reduced gas price driver

Energy | Natural Gas | LNG | NGL

Platts LNG Alert

Energy Transition | Renewables | LNG | Coronavirus

Asia Energy Transition Conference

Energy | Energy Transition | Electric Power | Oil | Natural Gas | Renewables | Electricity | Emissions | Crude Oil

Oman connects its largest utility-scale renewables project to grid

Energy | Electric Power | Energy Transition | Hydrogen | Natural Gas | Natural Gas (European)

Insight from Moscow: Russia aiming to take major role in global hydrogen markets

India masters the art of renegotiating inflexible LNG deals


Gail, Gazprom reduce initial supply volume by 80%

Switch from JCC to Brent, lower price slope

Allow diversions, start deliveries from May 2018

Singapore — The new deal between India's state-owned LNG importer Gail and Russian supplier Gazprom adds to a growing list of long-term contracts renegotiated by Indian buyers as they seek to take advantage of a structurally long global market and India's growing bargaining power as the world's fourth-biggest LNG consumer.

Not registered?

Receive daily email alerts, subscriber notes & personalize your experience.

Register Now

This time, Gail has managed to renegotiate the timeline, volume, cost and price indexation of its 20-year LNG contract with Gazprom, including an 80% reduction in the volume to be delivered in the first year, according to senior Gail officials.

India's LNG contracts by exporting country vs total demandThe start of supply has been agreed for May 2018, and the contracted volume lowered from 2.5 million mt to 0.5 million mt in the first year 2018-2019, 0.75 million mt in 2019-2020, and 1.5 million mt in the third year 2020-2021.

The deferral will allow Gail more time to grow India's domestic market for gas, which has so far constrained by a lack of storage, limited downstream access owing to infrastructure limitations, and the absence of a clear policy directive in the power sector amid cheap coal and declining costs of renewables.

Gail committed to importing the full 2.5 million mt/year by the fourth year -- 2021-2022 -- and make up for the initial volume reduction over the remaining length of the contract.

"The gap in the contracted volumes during the initial three years will be offset over the subsequent years, without changing the overall volume to be imported over the 20-year period," a company official said Wednesday.

Under the new terms, Gazprom also agreed to change the price indexation of the contract from the Japan Customs-cleared Crude to Brent, and lower the oil-linked slope of the contract formula, and therefore the final price.

"The pricing of this deal will always be linked to crude," said the official, who declined to provide further details on the contract formula citing confidentiality.

The renegotiated contract provides additional flexibility by allowing the diversion of part of the volume, originally contracted on a delivered ex-ship basis, to other markets.

The initial contract, signed in 2012, was for the delivery of 2.5 million mt/year of LNG starting from the second quarter of 2018.


Long-term contracts signed on an oil-linked or gas-hub-linked basis create a disparity between expected delivered prices when the contracts are originally signed, and LNG market-based pricing when deliveries begin.

The S&P Global Platts daily JKM price assessment averaged $7.12/MMBtu in 2017, down from $15.10/MMBtu in 2012 when the Gail-Gazprom contract was signed, although the benchmark rose above the $11/MMBtu mark in December on strong North Asian winter demand.

The inherent risk of pricing long-term LNG against a different commodity is exacerbated by India's acutely price-sensitive gas market, due to heavily regulated domestic prices and the financial weakness of its power distribution companies.

The emergence of new importers unrestricted by long-term contracts, and increased third-party access to import terminals are also encouraging more competition in India's downstream markets, presenting new risks for traditional importers and forcing them to prioritize price competitiveness and risk management over long-term supply security.

This is part of a wider trend, where enhanced flexibility and interconnectivity are promoting a more liquid, competitive and transparent global LNG marketplace, where the traditional LNG supply model --long-term, oil-indexed, take-or-pay contracts with destination restrictions --is no longer fit for purpose.

The larger Indian importers -- GAIL, Indian Oil Corporation and Gujarat State Petroleum Corporation -- are already buying more LNG on a short-term basis, mainly via spot purchases or through prompt tenders where a cargo is delivered within three months of the tender's issue date.

With growing exposure to the spot market, Indian buyers have also become more aware of the need for robust market-based LNG pricing, and have been supportive of the development of hedging instruments, like the JKM derivatives, to mitigate market risk.


In 2015, following the rapid fall in oil prices, Petronet imported significantly less than the contractually agreed volume from its 7.5 million mt/year contract with Qatar's RasGas.

This was in part due to the inability of the downstream market to absorb this high-priced contracted LNG, imported at a 60- day moving average oil-linked floor price.

Consequently, the contract was renegotiated outside the contractually specified renegotiation period, with the eventual removal in 2016 of the 60-day moving average ceiling and floor price and waiver of $1.5 billion in penalties under the take-or-pay clause for volumes that Petronet had not imported.

As a concession, Petronet agreed to buy an additional 1 million mt/year and import all the volumes not taken during that time over the remainder of the contract, which runs until 2028.

Petronet has also successfully renegotiated down the price of its 1.5 million mt/year contract from Australia's Gorgon LNG with US -based ExxonMobil.

At the time of signing, in 2009, the price agreed upon was at 14.5%

JCC-linked price on an FOB basis, which become problematic for the buyer after the drop in LNG spot prices in 2014-2015.

However, it remains unclear whether Petronet will also increase its 1.5 million mt/year contract volumes with ExxonMobil, like it did with Rasgas.

Most recently, the US Sabine Pass contract terms have also come into focus, with Gail heard attempting to renegotiate the price and terms of its 3.5 million mt/year deal with Cheniere Energy.

The contract was signed on an FOB basis in 2011, with the price formula set at 115% of the Henry Hub gas price plus a fixed $3/MMBtu terminal usage charge.

This was an attempt by Gail to break away from the problems of oil indexation and take advantage of the US' more flexible delivery terms.

However, growing LNG availability in Asia Pacific has increased the risk of US volumes becoming uncompetitive once supplies begin in 2018.

--Abache Abreu,
--Ratnajyoti Dutta,