Petronet-RasGas Talks Defy Sanctity of Deals, Credit Suisse Says

  • An accord may set 'unseen precedent' in global LNG contracts
  • Agreeing to Petronet terms may stoke demand from other buyers

Petronet LNG Ltd.’s bid to seek a lower price from Qatar’s RasGas Co. for long-term purchases of liquefied natural gas appear to challenge the sanctity of global contracts and a deal may set an “unseen precedent,” Credit Suisse Group AG said.

Should India’s biggest importer of the fuel prevail, it may stoke similar demands from other buyers, including Korea Gas Corp. and CNOOC Ltd., Credit Suisse analysts David Hewitt and Badrinath Srinivasan wrote in a report dated Dec. 9. The New-Delhi-based company is in talks with RasGas to revise prices in an existing 25-year accord that may reduce by almost half the price it pays, according to Bloomberg calculations. 

Petronet has been procuring quantities lower than its annually contracted 7.5 million metric tons, citing a drop in spot-market LNG prices that has lured away its customers. Besides the new pricing formula, based on a three-month average price of oil instead of a five-year average, Petronet and RasGas are also discussing a possible waiver of penalties for under-procurement in 2015.

“It would seem that the best outcome for the seller would be no price change and a payment for the 2015 under-liftings,” the report stated. It highlighted the complexities of this outcome, including a possible arbitration and the impact of the take-or-pay payments on the entire chain of consumers of the gas.

A price accord based on the three-month average of Brent crude may result in savings of $2.5 billion for Petronet over three years, according to the report, while the value of the under-procured cargo in 2015 is $1.5 billion, it said. Petronet said on Oct. 19 it purchased 68 percent of the committed quantity from RasGas as of that day, resulting in a 32 percent default.

“We expect multiple requests for seller assistance around near-term flexibility but assume the core tenets of Take or Pay and price sanctity will broadly remain,” according to the report.

Before it's here, it's on the Bloomberg Terminal.