January 2016

CRISIL Impact Note

50% reduction in LNG price positive for consumers; however, low
alternate fuel prices to cap LNG imports

Background
On December 31, 2015, Petronet LNG (PLL) announced that it has renegotiated the terms of its long-term
LNG supply contract with Rasgas, Qatar. Rasgas has agreed to modify the formula for calculating the LNG
price, which will lead to the reduction of the LNG price by half; it has also waived off the penalty for low
volume offtake in 2015. On the other hand, Petronet LNG has committed to increase the volume of LNG to be
purchased from Rasgas.
CRISIL Research believes that this renegotiation is a significant positive for players across the LNG
value chain, as lower prices increase offtake of contracted LNG as well as improve the profitability of
consumers. In particular, players such as Petronet LNG, GAIL, Gujarat Gas and Indraprastha Gas are
likely to benefit. However, this is unlikely to meaningfully increase the total LNG demand from endusers, as prices of alternate fuels such as coal and crude oil have also significantly declined in the
recent past; this will limit LNG offtake from end-users.

Key insights

New pricing terms to cut LNG price (DES India) by ~50% to $6-6.5 /mmbtu, increase volatility

Exemption from take-or-pay obligation to remove $1.4 billion penalty uncertainty on Petronet LNG

Urea subsidy to fall Rs. 35 billion. GAIL's petchem business to witness savings upto Rs 20 billion.

Improved cost competitiveness to support LNG demand from refineries, industrial users of CGD

Despite lower price, LNG demand from power capped by weak affordability and cheap alternatives

In the following sections, we have elaborated the key terms of the revised contract and their likely impact on
LNG price, as well as the impact of lower LNG price on various end-users.

Classification: EXTERNAL
1

CRISIL Impact Note

Key terms of the revised contract

As per media reports, Rasgas has agreed to link the contracted LNG price to average crude oil price
(Dated Brent) for the preceding three months. There would also be a fixed component of $0.6 per mmbtu.
This is likely to halve LNG price in January 2016 to $6-6.5 per mmbtu from about $12 per mmbtu as per
the earlier formula.

On the other hand, PLL has agreed to increase LNG purchase from Rasgas by 1 million tonnes per
annum (mtpa), taking its annual purchase obligation to 8.5 mtpa. This incremental LNG will be supplied to
Indian Oil Corporation Ltd. (IOCL), Bharat Petroleum Corporation Ltd. (BPCL), GAIL (India) Ltd. and
Gujarat State Petroleum Corporation (GSPC).

In addition, Rasgas also agreed to waive off the penalty of about $1.4 billion due to lower-than-committed
offtake of LNG volumes during 2015. It has permitted PLL to make up the shortfall through higher
purchases over the remaining duration of the contract period.

Price of contracted LNG to halve to $6-6.5 per mmbtu in January 2016

As per the renegotiated contract, the basis for calculating the LNG price has been modified to make it more
responsive to recent crude oil price movements. Under the earlier contract, the cap and floor price for crude
oil was set based on the average price for the preceding 60 months. While this mechanism limited volatility in
the contracted LNG price, it also prevented a sharp correction in the contracted LNG price in 2015, despite
crude oil price declining by almost half.
From January 2016 onwards, the average crude oil price of only the previous three months would be
considered to calculate LNG price. While this will make LNG price much more volatile compared to the earlier
formula, it will also lead to almost a 50% decline in LNG price in January 2016.
Comparison of estimated LNG price under the earlier and revised formulae
(in $/m m btu)

Earlier form ula

Revised form ula

Crude oil price

- 3 month average (Brent)

43

- 12 month average (JCC)

54

- 60 month average (JCC)

99

- Cap (60 month average + 4) (JCC)

103

- Floor (60 month average + 4) (JCC)

95

Crude oil price considered

95

43

Slope
Fixed component
LNG price (FoB Qatar)
Shipping cost (est.)
LNG price (DES India)
Decline in price
Source: Media reports, CRISIL Research estimates

12.67%

12.67%

0.6

12.0

6.0

0.3

0.3

12.3

6.3
-49%

Impact analysis:
Exemption from take-or-pay obligation to remove penalty uncertainty on Petronet LNG
The renegotiation of the contract is likely to benefit PLL given its exposure to penalty under the take-or-pay
provision. According to the contract, PLL is obligated to offtake 7.5 mtpa of LNG from Rasgas Qatar on an
annual basis. During (January-December 2015), PLL is estimated to have purchased 35-40% less volumes
than committed, as end-users shifted to alternates such as spot LNG and furnace oil due to favorable cost
economics. Consequently, PLL would have been exposed to a penalty of ~$1.4 billion, as shown below.
However, Rasgas has agreed to exempt PLL from paying this penalty, provided that PLL makes up the deficit
(~2.8 mtpa) through higher purchases over the life of the contract. Thus, this exemption will remove
uncertainty regarding the payment of penalty by PLL to Rasgas. PLL can offtake these volumes over the next
14 years, since the contract will expire only in 2029.
Estimation of penalty due to low offtake of contracted LNG
Item

Unit

Contracted quantity

MTPA

7.5

Dow nw ard flexibility @10%

MTPA

0.75

Minimum quantity

MTPA

6.75

Quantity purchased in 2015

MTPA

4.65

Shortfall

MTPA

2.1

Price of LNG

$/mmbtu

12.6

Penalty

$ billion

1.4

Source: CRISIL Research estimates

PLLs regas volumes to see limited upside; Spot LNG demand to take a hit
PLL has increased the volume of long-term contracted LNG with Rasgas by 1 mtpa to 8.5 mtpa from 2016.
Further, PLL has also entered into back-to-back agreements with IOCL, BPCL, GAIL and GSPC for
marketing this LNG, which will improve revenue visibility.
While we expect the demand for contracted LNG to be healthy, given the steep reduction in price, we do not
expect overall LNG volumes to witness a significant growth. This is because the increase in demand for
contracted LNG is likely to be driven by users who had switched to spot LNG, to take advantage of its lower
prices. Since these players are likely to switch back to contracted LNG, we expect higher contracted LNG use
to result in lower spot LNG demand, providing only marginal upside to total LNG demand. However, spot
LNG demand is likely to reduce significantly, which will hit LNG suppliers as well as LNG regasification
terminals operating on a spot/short-term basis, given an over-supplied market.
For instance, despite a sharp fall in contracted LNG volumes, PLLs 10 mtpa Dahej terminal continued to
operate at an utilisation of over 100% in 2015 due to higher spot volumes. Moreover, while PLL is expanding
the terminals capacity to 15 mtpa, it has already tied up almost the entire capacity under use-or-pay
contracts with LNG marketers. Consequently, we do not expect the renegotiation of the Rasgas contract to
materially boost total regasification volumes at PLLs Dahej terminal.

CRISIL Impact Note

Trend in imports of contracted and spot/third-party LNG by Petronet LNG

5.0

Million tonnes

Fall in contracted LNG volumes

and surge in spot volumes

4.0

3.0

2.0

1.0

2013-14

2014-15

Long-term

Spot/Third-party

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

2015-16

Total

Source: Company reports, CRISIL Research estimates

Fall in contracted LNG prices to boost profitability of end-users in non-power

sectors:
End-users in non-power sectors, who rely on contracted LNG, will witness sharp reduction in their fuel and
feedstock costs, leading to lower subsidy bill for urea companies and improved profitability for other sectors.

Halving of LNG price to reduce urea subsidy burden by about Rs. 35 billion
The government regulates the selling price of urea, which is way below the cost of production. It also
provides a subsidy to reimburse urea manufacturers the difference between the selling price and the cost of
production, assuming a normative profit. Thus, the decline in contracted LNG price would lead to reduction in
the governments subsidy burden. As per our estimates, with the average delivered cost expected to come
down by ~$5 per mmbtu, ~Rs. 35 billion savings on urea subsidy will ensue.
However, the reduction in LNG price is unlikely to increase demand from urea plants, since LNG cost is a
pass-through for computing subsidy payment.
Estimation of reduction in urea subsidy due to reduction in LNG price
Item

Units
mmscmd

Contracted LNG consumption*

mmbtu

104,285,714

Earlier delivered gas price

$/mmbtu

14

Revised delivered gas price

$/mmbtu

LNG cost savings

$/mmbtu

LNG cost savings

$ Mn

526

Exchange rate

Rs/$

66

Rs Bn

35

LNG cost savings

Note: *Contracted LNG consumption as of 2013-14

Source: Fertiliser ministry, CRISIL Research estimates

Quantity

Contracted LNG consumption*

GAILs petchem segment to witness upto Rs. 20 billion saving due to lower feedstock price
GAILs profitability will increase sharply due to reduction in feedstock cost of its petrochemical segment. Due
to dwindling domestic gas supply, GAIL has increasingly resorted to the use of LNG in their petrochemical
plant at Pata, Uttar Pradesh. Given the fall in petrochemical prices and high contracted LNG price, the
segments PBIT margins turned negative January 2015 onwards compared to the over 30% recorded prior to
2014-15. Consequently, assuming the entire capacity operates on contracted LNG, the reduction in LNG
price is estimated to result in upto Rs 20 billion saving in the petrochemical segment in 2016-17.
Trend in PBIT of GAILs petrochemical business
Rs. Billion
5

60%

40%

3
20%

2
1

0%

-20%

-1

-40%

-2
-60%

-3

2013-14

2014-15
PBIT

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

-80%
Q1

-4
2015-16
PBIT Margin

Source: Company reports, CRISIL Research

Cost competitiveness of LNG to improve vs liquid fuels for refineries, industrial customers
LNG demand from refineries and other industrial users, where it competes with liquid fuels, is likely to be
supported by the reduction in contracted LNG price. Post the correction, contracted LNG price is likely to be
almost at par with that of liquid fuels, compared to the earlier premium of almost 50%. This is likely to
encourage refiners, who have shifted to liquid fuels and spot LNG, to increase purchase of contracted LNG.
Similarly, smaller industrial users catered by city gas distributers such as Indraprastha Gas and Gujarat Gas
are also likely to increase their LNG consumption. This will support volume growth of city gas distributers
from the industrial segment, which is estimated to have declined by ~12% in 2014-15. Further, while the price
reduction is likely to be largely passed on to end-users, it is also expected to aid profitability of CGD
operators.

CRISIL Impact Note

Cost comparison of various industrial fuels
($/ mmbtu)

18.0
16.0

15.0-16.0

14.0-15.0

14.0
12.0
9.0-10.0

10.0

9.0-10.0
7.0-8.0

8.0
6.0
4.0
2.0
0.0
FY 2017E

LNG (Earlier price)

LNG (Revised price)

FO

LSHS

Commerical LPG

Note: All price estimates are based on delivery in Gujarat and include taxes.
Source: CRISIL Research estimates

Despite lower price, LNG demand from power plants to be subdued given weak affordability
and cheaper alternatives
Reduction in the price of contracted LNG will sharply pull down the cost of power generation using natural
gas. Despite this, we do not expect LNG consumption by power plants to increase significantly, at least in the
short term. This is primarily on account of poor affordability of high-cost power by distribution companies
(discoms) as well as availability of lower-cost power from coal-based power plants and short-term markets.
For instance, the variable cost of power generation from contracted LNG (~Rs. 5 per kWh) is likely to be more
than double the cost from even imported coal (~Rs. 2 per kWh).
Therefore, we expect only limited upswing in LNG usage by the power sector on account of the price
reduction. This will be driven by Southern states such as Andhra Pradesh, which have relatively high power
deficits and where short-term power prices exceed Rs. 4 per unit. On the other hand, demand for contracted
LNG is likely to be limited in power-surplus states such as Gujarat and Maharashtra.
Comparison of variable cost of power generation across fuels
(Rs./kwh)
10.0

9.0

9.0
8.0
7.0
6.0

5.2

5.0

3.3

4.0
3.0
2.0

1.9
0.9

1.0

Domestic coal

Imported coal

Domestic gas @ Contracted LNG Contracted LNG

$4.2/mmbtu
(Revised)
(Earlier)
@$6.3/mmbtu @$12.3/mmbtu

Source: CRISIL Research estimates

Analytical Contacts:
Rahul Prithiani

Mayur Patil

Director, Industry Research, CRISIL Limited

Associate Director, Industry Research, CRISIL Limited

Email: rahul.prithiani@crisil.com

Email: mayur.patil@crisil.com

Phone: +91 22 334 23574

Phone: +91 22 3342 3532

Our Capabilities
Making Markets Function Better
Economy and Industry Research

Largest team of economy and industry research analysts in India

Acknowledged premium, high quality research provider with track record spanning two decades
95% of Indias commercial banking industry by asset base uses our industry research for credit
decisions

Coverage on 86 industries: We provide analysis and forecast on key industry parameters including
demand, supply, prices, investments and profitability, along with insightful opinions on emerging
trends and impact of key events

Research on sectors and clusters dominated by small and medium enterprises covering analysis of
relative attractiveness, growth prospects and financial performance

High-end customised research for many leading Indian and global corporates in areas such as
market sizing, demand forecasting, project feasibility and entry strategy

Funds and Fixed Income Research

Largest and most comprehensive database on Indias debt market, covering more than 18,000
securities

Largest provider of fixed income valuations in India

Ranking of Indian mutual fund schemes covering 73% of assets under management and Rs.7.2
trillion (USD 120 billion) by value

Business review consultants to The Employees Provident Fund Organisation (EPFO) and The
National Pension System (NPS) Trust in monitoring performance of their fund managers

Provide valuation for more than Rs.70 trillion (USD 1,167billion) of Indian debt securities
Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we
maintain 38 standard indices and over 100 customised indices

Equity and Company Research

Largest independent equity research house in India,; coverage exceeds 140 companies

Assigned the first IPO grade in India; graded more than 100 IPOs till date

First research house to release exchange-commissioned equity research reports in India; covered
1,488 firms listed and traded on the National Stock Exchange

Executive Training

Conducted 1000+ training programs on a wide spectrum of topics including credit, risk, retail
finance, treasury, and corporate advisory; trained 20,000 more than professionals till date

Training programs being conducted in India, Sri Lanka and Bangladesh through an extensive
network of well-qualified financial professionals

About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We
are India's leading ratings agency. We are also the foremost provider of high-end research to the world's
largest banks and leading corporations.

About CRISIL Research

CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and
analysis on the Indian economy, industry, capital markets and companies. We also conduct training programs
to financial sector professionals on a wide array of technical issues. We are India's most credible provider of
economy and industry research. Our industry research covers 86 sectors and is known for its rich insights
and perspectives. Our analysis is supported by inputs from our network of more than 5,000 primary sources,
including industry experts, industry associations and trade channels. We play a key role in India's fixed
income markets. We are the largest provider of valuation of fixed income securities to the mutual fund,
insurance and banking industries in the country. We are also the sole provider of debt and hybrid indices to
India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are
today the country's largest independent equity research house. Our defining trait is the ability to convert
information and data into expert judgements and forecasts with complete objectivity. We leverage our deep
understanding of the macro-economy and our extensive sector coverage to provide unique insights on micromacro and cross-sectoral linkages. Our talent pool comprises economists, sector experts, company analysts
and information management specialists.
Disclaimer
CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it
considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not
responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial
liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (CCER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular
operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published /
reproduced in any form without CRISIL's prior written approval.

CRISIL Privacy Notice

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and
service your account and to provide you with additional information from CRISIL and other parts of McGraw Hill Financial you may find of
interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit
www.crisil.com/privacy. You can view McGraw Hill Financials Customer Privacy at http://www.mhfi.com/privacy.
Last updated: August, 2014

CRISIL Limited
CRISIL House, Central Avenue, Hiranandani Business Park,
Powai, Mumbai 400076. India
Phone: +91 22 3342 3000 | Fax: +91 22 3342 8088
www.crisil.com
CRISIL Ltd is a Standard & Poor's company