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GAIL's 5.8 MMTPA US LNG offtake obligation-I: Uncertainty looms
Feb 22:   What is the latest on GAIL's 5.8 MMTPA of LNG that it has contracted from two US terminals, Sabine Pass and Cove Point?
8The gas major has made no progress beyond reselling 1 MMTPA of that allocation to Shell and a handful of other players.
8It still has another 4.8 MMTPA of LNG off take obligation to take care of.
8The gas major has issued a tender for swapping these volumes with LNG traders in Africa, the Middle East or Asia Pacific but the response is unknown.
8GAIL says it will be able to fully derisk its US LNG obligation but this website is not hopeful it will be able to do so.
8Clearly losses are going to be high.
8The agreement under pinning its 3.5 MMTPA offtake obligation from Sabine Pass terminal is what is most risky. Volumes from this train is mean to come in from end-2017. The pricing is at 115% of Henry Hub (HH) + US$ 3/mmbtu mark-up +US$ 1.7-2/mmbtu for transportation to India (if it does come to India). The price of that LNG in India could be anywhere between $ 1 to $3/mmbtu higher than spot prices.
8Originally, GAIL had thought that US LNG would be brought to India to India on the fond assumption that the big differential between oil indexed LNG coming to India and Henry Hub based LNG will persist, providing the gas major with a healthy margin. But clearly GAIL miscalculated the international pricing dynamics of LNG. Oil price crashed and the differential in fact turned from being positive to heavily negative.
8GAIL's 2.3 MMTPA offtake from the Cove Point terminal is differently structured from that of Sabine Pass and it is difficult to calculate the loss. Charges could be US$ 3/mmbtu for all services, including liquefaction and pipeline transportation but gas will be sourced by GAIL itself, whether at Henry Hub or at a discount or premium. Unlike Sabine Pass, GAIL's liability will be limited to the use-or-pay charge and not the entire gas price. If the terminal is not used and gas is not procured, the $3/mmbtu fixed charge will have to be incurred.
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