How Will LNG Re-Negotiations With India Impact Exxon Mobil And Other LNG Suppliers?

by Trefis Team
Exxon Mobil
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Having discussed the changing dynamics of the LNG markets in our previous article – The Changing Face Of The LNG Industry – we now talk about the details of the recent re-negotiation of the terms of an LNG contract pricing between Exxon Mobil and India’s Petronet, and how this will impact the LNG suppliers in the long term.

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India’s Strong Bargaining Power As An LNG Importer

With an aim to shift to a cleaner environment, India has been gradually moving towards becoming a gas-based economy as opposed to a coal-dependent economy. For this, the country aims to double the share of natural gas in its energy mix to around 15% in the next few years. At present, India is the world’s fourth largest and Asia’s third largest LNG buyer, with an annual gas consumption of roughly 50 billion cubic meters (bcm). Of this, about 30 bcm is produced domestically, while the remaining amount is imported from other countries. Given the declining domestic gas production and lack of new gas projects within the country, it is expected that any incremental demand for gas in India will be met through imports. Thus, India is a key LNG buyer in the global markets, and consequently, possesses a fair degree of bargaining power.

Given the drop in crude oil prices over the last couple of years, countries, such as India, were obligated to pay a higher price for their pre-contracted LNG volumes since these were linked to previously higher oil prices. However, since India is among the fastest growing LNG buyers, it managed to use its bargaining power as a strong buyer to rework its 25-year LNG agreement with Qatar’s RasGas Co. in December 2015, making it the first Asian country to renegotiate a long-term LNG contract. Under the contract, Petronet, a state-controlled natural gas importer, had agreed to purchase an extra one million tons of LNG from RasGas in return for a change in the pricing formula that brought down the gas prices to almost half.

Source: Royal Dutch Shell, LNG Outlook 2017

Exxon Mobil-Petronet Renegotiation 

With the success of the Qatar renegotiation, India gained confidence in its bargaining power, and recently renegotiated the prices of one of its LNG contracts with Exxon Mobil. Under the revised contract, Petronet will purchase additional LNG volumes of one million tons per annum (MTPA) from Exxon’s Gorgon Project in Australia, taking its total purchase commitment to 2.5 MTPA, for a period of 20 years. In return, Exxon Mobil has agreed to cut down the prices of these volumes going forward, as well as to bear the transportation costs associated with the delivery of these volumes. The original supplies (1.5 MTPA) will now be priced at 13.9% of the Brent oil price, down from 14.5% agreed in 2009, while the incremental supplies (1 MTPA) will come in at a price of 12.5% of Brent.

Apart from the lower LNG prices, Exxon Mobil has agreed to bear the transportation charges for the delivery of these volumes. In addition to selling its LNG volumes to Petronet at reduced prices going forward, the world’s largest publicly traded oil company will be obligated to take care of the transportation and logistic expenses related to the delivery of these LNG volumes. Unlike previously when Petronet had to bear the shipping costs, the LNG volumes will now be delivered ex-ship (DES), which means that Exxon will be responsible for delivering LNG volumes to Petronet at the agreed port of arrival.

Impact Of Renegotiation On Exxon Mobil & Other LNG Buyers

Keeping in mind the changed terms of the Petronet LNG contract, the market largely views the move as a big negative for Exxon Mobil. Considering the combined effect of lower prices and higher transportation costs, it is expected that Exxon Mobil will realize around $1.00 to $1.30 per unit lower on its LNG price to Petronet. This is likely to have a direct impact on Exxon’s top line as well as bottom line in the coming years. However, on the brighter side, the company has been able to sell one million extra LNG volumes from its Gorgon Project. This implies that the company will have a higher LNG sales commitment, which will enable it to survive in the current low price environment.
While India’s renegotiation with Qatar was seen more as a geo-political gimmick, the revised terms with Exxon Mobil, a global oil and gas giant, is indicative of the shift in the fundamentals of the LNG markets globally. The market fears that India’s renegotiation will prompt other major buyers, such as Japan, South Korea, and China, to seek favorable terms under their existing LNG contracts. If these buyers, who account for more than half of the global LNG demand, plan to renegotiate their deals, the LNG suppliers will be forced to provide flexible terms to them in order protect their market share. In a market which is perceived to remain oversupplied for the next few years, this pricing pressure will be a huge negative for LNG suppliers, such as Exxon Mobil and Royal Dutch Shell.
In our opinion, it will be rational for these LNG suppliers to provide flexible terms to the major LNG buyers, as long as the gap between the current spot prices and previously contracted prices does not converge. This will not only allow them to sustain their earnings in the current commodity slump, but will also enable them to retain their share in the LNG markets. Once the supply-demand dynamics reverse and turn favorable for the suppliers post 2020 (as expected), it would become easier for these suppliers to exercise their bargaining power and charge higher prices from the LNG buyers.

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