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GAIL in trouble over US LNG commitments-I: There is no safe cover
Jun 06: Finally, the chickens are coming home to roost for GAIL on its US LNG bet.
8The gas major is now going to play an extremely risky game for which it does not have either the stomach or the expertise.
8To begin with, news reports have been falsely claiming that of the committed offtake of 5.8 MMTPA of US LNG, 1.5 MMTPA has been placed by GAIL in safe long term contracts.
8In fact the only "safe" contract is for 0.6 MMTPA of LNG with Shell for 25 years.
8The other two contracts -- for 0.6 MMTPA with Gunvor and another 0.3 MMTPA with a third party -- are negotiable within one year.
8And they are complicated contracts, with one that is a risky swap between Henry Hub-indexed and oil indexed supplies. The swap is at a steep 12% slope to oil prices.
8Clearly this is a risky transaction. The arbitrage risk is on GAIL in this one, and while Gunvor is an experienced player who knows how to hedge its risks, does GAIL have the tools and the information to know where it is headed?
8The answer is a clear "no".
8GAIL has been furiously looking at placing the rest of its US offtake into safe contractual commitments for the past couple of years but in the prevailing uncertain times, no one is willing to simply take on someone else's risk portfolio.
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