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India's GAIL swaps bulk of unsold U.S. LNG contracts amid fall in crude oil

Company had signed U.S. shale gas imports at the beginning of this decade

MUMBAI (NewsRise) -- GAIL (India) swapped more than 60% of its pricey U.S. liquefied natural gas (LNG) contracts with cheaper supplies, as the state-owned company stepped up efforts to stem potential losses from shale import contracts it had signed at the beginning of this decade.

GAIL has been grappling with unsold inventory of expensive U.S. natural gas it had bought from Cheniere Energy, which owns the Sabine Pass Liquefaction terminal, and Dominion Energy's Cove Point liquefaction plant. The U.S. natural gas exports are priced based on domestic rates, while global LNG sales are linked to the price of crude oil.

The Indian gas company had signed agreements with U.S. suppliers when global crude oil prices hit $100 a barrel and American gas prices slumped amid a boom in production from Shale fields. GAIL was set to take delivery of some of these contracts by the end of this year. However, amid a global glut and a slump in oil prices, GAIL struggled to find customers for the expensive gas.

The company expects to start receiving initial cargoes of LNG from the U.S. in March or April next year, Chairman and Managing Director B. C. Tripathi told reporters at the annual shareholders' meet in New Delhi on Tuesday. Gail has already started receiving LNG supplies from the U.S. under a time-swap deal, he said.

"We have already swapped 3.5 MMTPA (Million Metric Tons Per Annum) out of 5.8 MMTPA of U.S. LNG," Tripathi said. "We are working on more time, destination and physical swaps for the U.S. LNG."

According to Mumbai-based brokerage Edelweiss Securities, GAIL's U.S. LNG price appears "extremely expensive" following the global spot LNG price collapse.

A report published by the brokerage on Monday said GAIL has so far sold 0.5 MMTPA to Royal Dutch Shell and time-swapped some more with others. Edelweiss estimates potential loss of 30 billion rupees ($468 million) that is equivalent to 46% of GAIL's profit before tax in the fiscal year 2019, assuming U.S. LNG is $2.1 per million British thermal unit more expensive than spot rate.

GAIL was hit by a double-whammy as demand from local power producers, who were the major long-term buyers of LNG at the time of signing up the U.S. contracts, declined.

"The U.S. LNG contracts were entered with the primary objective of meeting the demand of a growing Indian economy," Tripathi said. However, electricity produced from LNG-powered plants is not being offered by distribution companies due to cheaper alternatives, including renewables. That has led to stranding of a significant capacity out of the 25,000 megawatts of installed gas-based power plants, he said.

India is shifting focus to cleaner energy in a bid to control the rising levels of pollution in its cities. New Delhi has set a target of meeting 15% of its energy needs from clean gases over the next three years, from 6.5% now.

Shares of GAIL surged as much as 4.3% in Mumbai trading on Tuesday, before paring the gains to close up 3.83%. The benchmark S&P BSE Sensex closed 0.9% higher.

--B. Sundaresan and Dhanya Ann Thoppil

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