Amid western sanctions, Gazprom Singapore pays ‘meagre’ penalty for defaulted LNG deliveries to India
A former unit of Russia’s Gazprom is paying a ‘meagre’ penalty for the liquefied natural gas (LNG) cargoes it had failed to deliver to India since early June to absolve itself of all contractual liabilities, a top government official said. Gazprom Marketing and Trading Singapore (GMTS), under a long-term 20-year contract, was to supply 2.5 million tonne of LNG to state-owned GAIL (India) Ltd this year. But it has not supplied any cargo or shipload of LNG since early June. “The contract provides for a penalty of 20 per cent of the agreed price in case of a default by the supplier. GMTS is paying that penalty to absolve itself of all contractual liabilities,” the official, who wished not to be identified, said. The price of LNG under the long-term contract comes to USD 12-14 per million British thermal unit and GMTS is paying 20 per cent of this for the default, he said. “LNG in spot market is being sold at triple the long-term price and so anyone would be happy to pay the meagre penalty and yet make a huge profit,” the official said. PTI had first reported on the GMTS default on July 19. With alternative supplies costing at least three times the price of GMTS shipments, GAIL has reduced supply to users by about 10 per cent and is exploring options to advance some of the US supplies. GAIL had in 2012 signed a 20-year deal with Russia’s Gazprom to buy 2.85 million tonne of LNG. Supplies started in 2018 and the full volume was to reach in 2023. GMTS had signed the deal on behalf of Gazprom. GMTS was moved to Gazprom Germania and in early April, Gazprom gave up the ownership of the German unit without giving a reason and placed parts of it under Russian sanctions. As per the deal, GMTS was to supply LNG to GAIL from its portfolio of production. But the Russian sanctions mean it cannot source LNG from Russia. Under the long-term deal, GMTS was to supply 2.5 million tonne or a minimum of 36 cargoes of LNG to GAIL during the calendar year 2022. GAIL received one cargo of LNG in June and nothing after that. “They are stating that because they have to secure supply for Europe, they are not certain about supplying (LNG to us) under this contract,” the official said. To mitigate the situation, GAIL is looking to advance volumes due from its separate US contract in 2023. Also, unallocated volumes in the 5.8 million tonne a year contract with US entities are being shipped to India by hiring new ships, he said. Under the deal, GMTS was to progressively increase supplies to GAIL. It shipped 2 million tonne of LNG in 2021 and was to supply 2.5 million tonne in 2022. The full volume of 2.85 million tonne is to be reached in 2023. The US and European nations have imposed heavy sanctions on Russia since Moscow sent troops into Ukraine on February 24. Some western oil firms have announced exit from Russian projects and Indian firms are being considered a natural candidate to step in. India has raised oil imports from Russia after the Ukraine war despite criticism from the West and continues to engage with Moscow for business.
The G7’s price cap on Russian oil begins to take shape
The Group of Seven countries is working to cap the price of Russian oil in an attempt to limit Moscow’s ability to fund its invasion of Ukraine, a plan analysts say could work in the long term but might boost oil prices in coming months. Officials in G7 countries, including U.S. Treasury Secretary Janet Yellen, say the unprecedented measure, set to begin Dec. 5, will cut the price Russia receives for oil without reducing its petroleum exports to world consumers. Russian President Vladimir Putin could push back, causing stress in oil markets even as the plan comes together. Who’s in the price cap coalition? The G7 wealthy nations – the United States, Japan, Germany, Britain, France, Italy and Canada – and the EU are hammering out details of the plan. The G7 wants to enlist other countries, including India and China, which have been snapping up heavily-discounted oil from Russia since its Feb. 24 invasion of Ukraine. Moscow has managed to maintain its revenues through those increased crude sales to India and China. But even if India and China don’t join, a cap could help force down prices for Asia and other consumers. U.S. Treasury Assistant Secretary for Economic Policy Ben Harris said on Sept. 9 that if China negotiates a separate 30%-40% discount on Russian oil because of the price cap “we consider that a win.” The consensus on the price cap level will be reached with the aid of a “rotating lead coordinator,” the U.S. Treasury Department said on Friday, suggesting that countries in the coalition will have a temporary leadership role as the plan proceeds. What’s the level of the price cap? It will likely be weeks before the price of Russian crude oil and two oil products will be decided, Harris said. Washington-based ClearView Energy Partners has said officials have been talking about a $40-$60 per barrel range for crude. The upper end of that range is consistent with historical prices for Russian crude, while the lower end is closer to Russia’s marginal production cost, analysts say. Coalition members with long economic and military relations with Russia could push for a higher cap, while a limit too low could take market share away from Saudi Arabia and other oil producers. “The level will be determined by both quantitative and qualitative reasons,” said Bob McNally, president of Rapidan Energy Group. Russian crude is priced at a discount to the international Brent benchmark and the G7 wants to keep that spread wide, to keep down Russian oil revenue. However, achieving a widespread could mean higher prices for Western consumers as Russia is the world’s second-largest crude exporter, after Saudi Arabia. What does the G7 expect from maritime services? The plan agreed by the G7 calls for participating countries to deny Western-dominated services including insurance, finance, brokering and navigation to oil cargoes priced above the cap. To secure those services, petroleum buyers would make “attestations” to providers saying they bought Russian petroleum at or below the cap. Maritime services providers will not be held liable for false pricing information provided by buyers and sellers of Russian petroleum, the U.S. Treasury said. G7 officials believe the plan will work because the London-based International Group of Protection & Indemnity Clubs provides marine liability cover for about 95% of the global oil shipping fleet. Traders point to parallel fleets that can handle Russian oil using Russian and other non-Western insurance that could be used to sidestep enforcement efforts. It remains uncertain how many ports around the world will accept Russian-insured ships. Craig Kennedy, an associate at Harvard University’s Davis Center for Eurasian and Russian Studies, said the G7 has long term leverage because Moscow is constrained by a small tanker fleet versus the vast scale of exports it needs to get out. If Russia doesn’t want to sell at the cap, it may have to shut in production, which could impose long-term costs on its oilfields. How could Russia fight back? Putin has said Russia will withhold exports to countries that enforce the cap, and fears about the threat could cause petroleum markets to rise before December. Higher prices could also be risky for U.S. President Joe Biden ahead of midterm elections in November when his fellow Democrats hope to keep control of Congress. Some analysts worry Moscow could respond by taking actions beyond Russia’s borders before the cap takes effect. “My biggest concern is I think Putin is going to make it very, very painful on the way to Dec. 5,” Helima Croft, head of global commodity strategy at RBC Capital Markets, told a Brookings Institution event on Sept. 9. “They also have assets in other producing countries, whether it be Libya, whether it be Iraq, and they have an ability to cause some problems in other producer states.” How will the price cap be enforced? The U.S. Treasury warned service companies to be vigilant about red flags indicating potential evasion or fraud by Russian oil buyers. Those could include evidence of deceptive shipping practices, refusal to provide requested price information, or excessively high services costs. Deputy U.S. Treasury Secretary Wally Adeyemo said on Friday that those who falsify documentation or otherwise hide the true origin or price of Russian oil would face consequences under the domestic law of jurisdictions implementing the price cap.
Russia is now offering even more discounts to India on oil
The G7 countries are seeking India’s support to enforce a price cap on Russian oil. But Moscow seems to be a step ahead. Russia is now willing to provide petroleum to India at even lower rates than before, The Business Standard reported today. “In principle, the ask in return is that India should not support the G7 proposal. A decision on this issue will be taken later following talks with all the partners,” the newspaper quoted a foreign ministry official as saying. Canada, France, Germany, Italy, Japan, the UK, and the US constitute the G7. They are looking to choke Russia’s crude oil revenue streams used to fund the Ukraine war. In June, Russia became India’s second-largest crude oil supplier after Iraq. India depends on imports to meet 85% of its petroleum needs. Russia’s share in India’s oil imports bucket rose from a mere 1% in February—before the Ukraine war—to 18% by June 2022. India snapped up Russian oil as many countries stopped trading with that country and its oil prices fell. Russia’s discount bonanza for India In May, supplies from Russia were priced at $16 cheaper than the average Indian imported crude oil barrel of $110. In all, Russia has so far reduced $30 on every barrel of oil it sells to India. This eventually compelled Iraq to cut its rate to $9 lower than a Russian oil barrel. Yet, in August, Russian crude oil cost $6 less than India’s average barrel of imported crude oil, Business Standard reported.