Tellurian’s $2.5 bn Petronet deal expires, co fails to qualify for LNG supply
US energy upstart Tellurian has failed to qualify in a tender for supply of competitively priced gas to India just as its USD 2.5 billion tentative stake sale deal with Petronet LNG Ltd expired, officials said. Petronet, India’s biggest gas importer, had on September 21, 2019, signed a Memorandum of Understanding (MoU) for purchase of up to 5 million tonnes per annum of liquefied natural gas (LNG) from Tellurian Inc’s proposed Driftwood LNG terminal for 40 years. The deal was concurrent with Petronet making an equity investment of USD 2.5 billion for an 18 per cent stake in Driftwood. The September MoU contemplated conclusion of the transaction by March 31, 2020, but the timeline was extended to May 31, 2020 after Petronet promoters questioned the rationale of making an equity investment at a time when gas was so abundantly available the world over, three officials involved in the negotiations said. They also questioned locking in such large volumes from one supplier for a 40-year period at a time when global rates were falling due to glut in the market. To satisfy promoters as well as test if LNG from Tellurian would be competitive, Petronet invited bids to buy 1 million tonnes per annum of LNG for 10 years. Suppliers were asked to quote a price lower than 30 cents minus Japan/Korea Marker (JKM) LNG price, which effectively brought the rate close to spot or current prices. Tellurian was among the 13 suppliers that quoted in the Petronet tender but was not shortlisted, officials said. “Only two companies have been qualified for the tender. Tellurian is not one of them,” an official said. In the meanwhile, the USD 2.5 billion deal MoU, which was non-binding, expired on May 31. “There was a talk of extending it but it hasn’t been extended so far,” another official said. Petronet’s head of finance Vinod Kumar Mishra had in an investor call post announcing FY20 earnings on June 30 stated that the Tellurian deal has expired. Its CEO Prabhat Singh on the same day in a media call had stated that the company was close to finalising a deal to import at least 1 million tonnes per annum (mtpa) of LNG with prices near the spot market levels. LNG prices under Petronet’s current long-term deals with Qatar and Australia stand at about USD 3.5-4.5 per million British thermal unit (mmBtu) compared to a spot price of about USD 2/mmBtu, Singh had said, adding discussions with Tellurian were continuing. “Non-binding MoUs are like immortals,” he had said. “Have you watched (Hindi movie) ‘Anand’? There is a dialogue (in the movie) that Anand never dies. Non-binding MoUs too are like that. And in today’s date, we also have to explore possibilities. So we are continuing to explore the possibilities of getting cheaper and cheaper gas.” While Singh did not answer calls made for comments, Tellurian did not reply to an e-mail on the matter. Officials privy to board deliberations said Petronet promoters, including state-owned gas utility GAIL India Ltd, refiner Indian Oil Corp (IOC) and Oil and Natural Gas Corp (ONGC) were not in favour of locking imports for 40 years together with an equity investment in the LNG terminal of Tellurian. The company, they said, did not need board approval for signing a non-binding MoU but if the deal was to be finalised it had to be approved by the board. Hoping the repeat his success at Cheniere Energy — the US liquefied natural gas pioneer — energy tycoon Charif Souki launched Tellurian four years ago but the 27.6 mtpa plant, costing USD 30 billion, remains unbuilt years after construction was due to begin. The LNG market has been pummelled as the coronavirus pandemic has sapped demand. Tellurian would have been the first long-term LNG import contract signed since the Narendra Modi government came to power in 2014. All the previous deals — 7.5 mtpa with Qatar, 1.44 mtpa with Australia, 2.5 mtpa with Russia and 5.8 mtpa with the US — were signed during the Congress-led UPA regime. Officials said India is looking at reopening pricing of previously entered LNG import deals with the US as well as seeking a second price renegotiation for the Qatar deal to align them with the slump in gas prices seen in the spot market. On June 30, Singh had said, “We are now in a position to come to a stage where very quickly we will be coming to the nation with virtually spot pricing for a long-term deal.” He had, however, refused to give details.
Coronavirus pain drives Big Oil’s dash for record debt
The world’s top oil and gas companies locked in cheap borrowing rates to raise a record amount of debt in the second quarter of 2020 and boost cash reserves as a buffer against a collapse in revenues because of COVID-19. The dash for debt piles pressure on company balance sheets and the issue is particularly acute for BP and Royal Dutch Shell . Already burdened by high levels of borrowing, they also face the disruption of a major shift towards renewables and low-carbon. The world’s top seven energy firms – BP, Shell, Exxon Mobil , Chevron , Equinor , Total and Eni – raised $60 billion in debt in the quarter, nearly half of the $132 billion in oil and gas sector borrowing over the period, Refinitiv data showed. BP, which had $78.5 billion in debt by the end of March, raised the most at nearly $16 billion, using for the first time hybrid bonds that place less strain on the balance sheet as the principal is not required to be repaid. Oil majors’ revenues are expected to drop sharply in the second quarter after movement restrictions to limit the spread of the novel coronavirus that causes COVID-19 led to a steep drop in fuel consumption. Benchmark Brent crude averaged below $30 a barrel in the second quarter when it hit the lowest in two decades. Exxon, the largest US oil company, is expected to report a second consecutive quarterly loss, while Shell said its fuel sales in the second quarter fell by around 40 per cent. COVID RECOVERY? The coronavirus crisis has battered oil company shares, which underperformed the broader indexes, as concerns over their ability to withstand the short-term shock added to uncertainty linked to the world’s shift to renewable power. The share price drop dealt a double blow to the companies as the ratio of their debt to total market size, known as gearing and an indicator of financial health, is set to rise. Higher gearing can impact a company’s credit ratings and increase its cost of borrowing. Jason Kenney, analyst at Santander, said oil majors were likely to see debt levels spike in 2020. “This is not necessarily all bad given the current low interest rates and the chance to increase liquidity cheaply,” Kenney said. “That said, gearing and leverage levels will likely move out of target ranges before moving back to more usual levels over the coming years.” The debt crisis coincides with Shell and BP’s plans to shift from fossil fuels in the coming decades, details of which they are expected to unveil later this year. BP acted to reduce its debts with the $5 billion sale of its petrochemical business in late June, helping it reach its $15 billion asset disposal target. But the strain on its balance sheet could lead its CEO Bernard Looney to cut the company’s dividend when it reports its second quarter results on Aug. 4. Redburn analyst Stuart Joyner said he expects BP to reduce its dividend by 33 per cent. Although the debt levels of BP and its rivals are set to rise, the companies do not face severe distress with current oil prices of above $40 a barrel, Joyner said. “As long as you believe that there is some sort of recovery from COVID, there is no problem with the debt,” Joyner said.
US natgas output, demand to fall in 2020, 2021 due to coronavirus
US natural gas production and demand will drop in 2020 and 2021 from record highs last year as government steps to slow the spread of coronavirus cut economic activity and energy prices, the US Energy Information Administration (EIA) said in its Short Term Energy Outlook (STEO) on Tuesday. The EIA projected dry gas production will drop to 89.24 billion cubic feet per day (bcfd) in 2020 and 84.23 bcfd in 2021 from the all-time high of 92.21 bcfd in 2019. It also projected gas consumption would fall to 82.35 bcfd in 2020 and 78.62 bcfd in 2021, from a record 84.97 bcfd in 2019. That would be the first annual decline in consumption since 2017 and the first time demand falls for two consecutive years since 2006. The EIA’s gas supply projection for 2020 in July was lower than its June forecast of 89.65 bcfd, while its latest demand outlook for 2020 was higher than its June forecast of 81.87 bcfd. The agency forecast US liquefied natural gas exports would reach 5.35 bcfd in 2020 and 7.28 bcfd in 2021, up from a record 4.98 bcfd in 2019. That is lower than its June forecasts of 5.70 bcfd in 2020 and 7.31 bcfd in 2021. US coal production is expected to fall 29 per cent to 501 million short tons in 2020, which would be its lowest since 1967, before rising to 536 million short tons in 2021 when power plants are expected to burn more coal due to a forecast increase in gas prices, EIA said. It projected carbon emissions from burning fossil fuels will fall to 4.507 billion tonnes in 2020, the lowest since 1983, from 5.130 billion tonnes in 2019, the lowest since 1992, before rising to 4.775 billion tonnes in 2021 as coal use increases.
Delhi: Centre files forgery case against gas-field company
The Union petroleum and natural gas ministry has filed an FIR with Delhi Police after a company, which was allotted a small gas field, allegedly tried to dupe it by submitting forged documents. A senior official of Economic Offences Wing confirmed that an investigation had been initiated into this bank fraud case, filed by the ministry on Saturday on behalf of the directorate general of hydrocarbons. The FIR has been filed for cheating, forgery and criminal conspiracy. Under the Discovered Small Field (DSF) policy to extract oil and natural gas from unmonitised small discoveries, the ministry issued a notice inviting bids in 25 contract areas on August 9, 2018. Successful bidders were to enter a revenue-sharing contract with the government and the directorate general of hydrocarbons was implementing the policy. An essential requirement was a bank guarantee of the work programme commitment terms, under which “a one-time bank guarantee valid for the development period amounting to $ .15 million and $ .23 million was to be paid for the contract area of land and water, respectively”, the complaint stated. The ministry executed a revenue sharing contract with a firm on March 7, 2019. The firm submitted all required documents and compliances to the ministry for verification and managing the contract. However, on October 22, the company informed the ministry about changing its name and address without showing any reason. On February 14, 2020, the accused firm and its officials submitted a guarantee in the form of a demand draft of Rs 7.2 crore issued by Allahabad Bank, the ministry said. But when the bank was requested to verify genuineness, the branch said it hadn’t issued any such document, the ministry added. Sensing a forgery, the directorate requested the bank to probe the matter and submit another report. On March 13, the bank again confirmed that it had not issued the guarantee and the company was not even its client. The accused firm and its officials are based in Mumbai. “From these circumstances, it was evident that the document was forged and fabricated and legal opinion was sought by the ministry and Delhi Police was approached,” said a senior official. Police will soon ask the accused to join the probe. A team will go to Mumbai to serve summons to the accused.
Shell weighs sale of Convent, Louisiana refinery
Royal Dutch Shell Plc is weighing the sale of its 211,146 barrel-per-day (bpd) Convent, Louisiana, refinery, the company said on Tuesday. Robin Mooldijk, Shell’s executive vice president of manufacturing, told employees in an internal message on Tuesday about the possible sale of the refinery, located 58 miles (93 km) west of New Orleans, according to sources familiar with plant operations. Shell took sole ownership of the refinery on May 1, 2017, when Motiva Enterprises became a wholly-owned subsidiary of Saudi Aramco. Motiva had been a joint-venture between the two companies for 15 years. Shell spokesman Curtis Smith said the possible sale was part of the company’s plan announced in 2019 to structure its operations to match the future market for downstream products. “The remaining core sites will be advantaged by way of increased integration with Shell trading hubs and by producing more chemicals and related products expected to be resilient in a low-carbon future,” Smith said in an email. Shell has not announced consideration of a possible sale of its 227,400 bpd Norco, Louisiana, refinery which produces motor fuels and also supplies feedstocks to the company’s adjoining chemical plant. Along with the refinery, Shell plans to sell “its associated co-located logistics infrastructure – the products truck terminal, marine docks, Sorrento, Louisiana, salt cavern LPG storage, and line history rights for Bengal Pipeline,” Smith said. In February, Shell sold its 156,400 bpd Martinez, California, refinery and logistics assets to PBF Energy for $960 million plus the price for oil and refined products on hand. That would set the pre-pandemic price for refining assets at about $6,000 a barrel. Because of reduced travel caused by the COVID-19 pandemic, US refinery utilization fell to 68 per cent of 19 million bpd in April. Utilization rose to 75.5 per cent by the last week of June.
Why proposed change in gas tariff calculation would impact GAIL’s earnings
The new gas tariff proposal based on the cumulative transmission capacity is expected to prune GAIL (India)’s earnings by over 25 per cent. This together with lower domestic gas demand due to economic slowdown may affect its stock in the near term. It has underperformed the Nifty Energy index by 6 per cent in the past three months. In the last week of June, the Petroleum and Natural Gas Regulatory Board (PNGRB) proposed a new gas tariff structure wherein the volume divisor in the tariff equation will be based on the total gas transmission capacity of a company. The volume divisor helps in ascertaining the utilisation rate of the pipeline depending upon its age. For instance, in the case of a pipeline with a capacity of 10 million standard cubic metres per day (mmscmd), the regulator may consider 30 per cent utilization rate in the first year, 40 per cent in the second year and gradually increasing it from thereon. Typically, the utilization rate after the fifth year of operation is fixed at either 75 per cent of the normative capacity or actual utilization, whichever is higher. At present, the gas tariff of a pipeline is computed using the discounted cash flow method based on the projected volume transmission, capital expenditure incurred and operating expenses. Under the proposed unified or pooling method, the pipeline tariff will be computed by pooling capital expenditure and operating expenses of all the cross-country pipelines of a company and apportioning them over the cumulative volume in such a way that allows 12 per cent after tax return. In the case of GAIL, pipelines such as Jagdishpur-Haldia-Bokaro and Chainssa-Jhajjar have no source of gas so far. Therefore, the proposed method of adding all the pipeline capacities together will inflate the volume divisor thereby resulting in lower tariff and reduced return on investment. Of the total gas transmission capacity of 235 mmscmd of GAIL, nearly one-third has no gas source. Hence, the company’s actual transmission volume may be less than 40 per cent of the volume divisor. This would bring down the after tax return below the proposed rate of 12 per cent. According to Nomura, if the proposed unified tariff were to be implemented, GAIL’s average transmission tariff may decline by over 20-30 per cent. GAIL transmitted 109 mmscmd of gas in FY20. Analysts expect around 7 per cent volume drop at 101-102 mmscmd for the current fiscal following lower demand. This will further widen the gap between the actual utilization and the normative utilization considered by the regulator. Given a spate of overhangs on the earnings due to unified tariff, probable loss on the US gas contracts and petrochemicals, the street may shift to the stock’s valuation based on the book value compared with the sum of parts method. At Monday’s closing price of Rs 103.7, the stock was traded at 1.1 times its trailing book value. While this looks attractive, the uncertainty over the proposed regulations may affect the stock’s near term movement.
Gas boom risks ‘perfect storm’ for climate, economy: report
Global natural gas capacity under construction has doubled in a year according to new analysis that warned Tuesday the investment boom in the world’s fastest-growing fuel risks a “perfect storm” of climate chaos and stranded assets. Capital expenditure on liquefied natural gas (LNG) facilities has surged from $82.8 billion to $196.1 billion over the last 12 months, according to a report by Global Energy Monitor. Following a string of divestments from high-profile LNG funders, the report warned that at least two dozen projects were recently cancelled or are in serious financial difficulty. “LNG was once considered a safe bet for investors,” said Greg Aitken, research analyst at Global Energy Monitor. “Not only was it considered a climate-friendly fuel, but there was substantial governmental support to make sure that these mega-projects were shepherded to completion with all the billions they needed. “Suddenly the industry is beset with problems,” Aitken said. As the coronavirus pandemic squeezes investors and a growing social movement against new gas projects gathers pace, the report said troubled projects were facing a range of difficulties in sustaining finance. In the past year Berkshire Hathaway and the governments of Sweden and Ireland were among financiers to drop several billion dollars worth of gas project funding, it noted. – ‘Economically unsound decision’ – While its proponents push LNG as a “bridge fuel” because it is less polluting than coal, a new gas-fired power plant has roughly the same environmental impact as a new coal plant, given the leakage of methane throughout the supply line. Methane is dozens of times more potent a greenhouse gas than carbon dioxide over a 100-year time scale. The landmark 2015 Paris climate deal enjoined nations to limit global temperature rises to “well below” two degrees Celsius (3.6 Fahrenheit) over pre-Industrial Revolution levels. The accord also commits countries to work towards a safer warming cap of 1.5 degrees Celcius. According to the Intergovernmental Panel on Climate Change (IPCC), the safest and surest way to reach the 1.5 degrees Celcius goal would require a 15 percent decline in gas use by 2030 and a fall of 43 percent by 2040. Global Energy Monitor said that any new gas infrastructure “directly contradicts the Paris climate goals”. The European Investment Bank (EIB) — the world’s largest multilateral lender — said last year it was ceasing funding for nearly all new fossil fuel projects. EIB vice-president Andrew McDowell said investing in new LNG capacity “is increasingly an economically unsound decision”. “We need to take advantage of opportunities that put us firmly on the path to reaching net-zero by 2050 whilst securing more jobs in the short and long term,” he told AFP. “This will undoubtedly be challenging, and it can’t be instant. But it must happen.”
Global LNG projects jeopardized by climate concerns, pandemic delays: report
Prospects for nearly half of the world’s projects to build infrastructure for exporting liquefied natural gas have faltered in recent months, amid rising concerns about climate change, public protests and delays due to the coronavirus pandemic, according to a report published Tuesday. Out of 45 major LNG export projects in pre-construction development globally, at least 20 – representing a capital outlay of some $292 billion – are now facing delays to their financing, researchers at Global Energy Monitor found. That marks a stark shift by investors away from what many had considered a promising fuel market, already buffeted by slower growth in demand, rising competition from renewable energy technologies and opposition over the industry’s climate-warming emissions. The vice president of the European Investment Bank said the report underlined the unacceptable risk of investing in LNG assets. “Investing in new fossil fuel infrastructure like liquefied natural gas (LNG) terminals is increasingly an economically unsound decision,” Andrew McDowell told Reuters in an email. The bank had announced in November that it would stop financing fossil fuel projects at the end of 2021. The LNG industry has made big bets on a more positive outlook, as many analysts have predicted that demand would outstrip supply sometime in the next decade. Companies committed $160 billion to $170 billion to new LNG export terminal construction around the world in 2019, almost triple the roughly $65 billion committed in 2018, said researchers at the San Francisco-based non-profit research group. In total, companies had announced plans to build $758 billion of projects that are as yet in the pre-construction phase. But with 20 projects now in jeopardy, including nine in the United States, that planned capital outlay could be reduced by $292 billion, or 38 per cent, if the delays persist indefinitely, the researchers told Reuters. “LNG infrastructure faces the risk of becoming stranded assets and should be avoided,” said Erik Fransson, head of the fund department at the Swedish Pensions Agency, which has $12 billion of assets under management. Meanwhile, the pace of LNG terminal development has been pushed back by at least 18 months since the pandemic, the authors said. “The sector is really shut down at the moment in terms of advancing further new projects,” report co-author Ted Nace, executive director of Global Energy Monitor, told Reuters. LNG investment has had strong government support in many countries. And oil companies in the United States, Europe and elsewhere still plan to boost LNG exports over the next decade. That has raised worries that resulting emissions of carbon dioxide and methane could make it harder to achieve the temperature goals in the 2015 Paris climate accord. Though burning natural gas emits less planet-warming carbon dioxide than coal per unit of energy produced, climate scientists have warned that the industry’s rapid growth as well as leaks of methane – a potent greenhouse gas – threaten progress in limiting climate change. As for future projects, 12 companies had said at the start of this year that they planned to make final investment decisions in 2020 to build new LNG export plants in North America, according to a Reuters survey. That total is now down to four, and analysts only expect one project to move forward this year.
Gas exporters book 90 per cent capacity of key pipeline link from Russia via Poland: auction results
Gas exporters have booked almost 90 per cent of the capacity of the Yamal-Europe pipeline’s Polish section in the period from Oct. 1 this year and Sept. 30 2021, data showed on Monday, suggesting Russia will continue to pump gas to Europe via the link. A gas transit deal between Russia and Poland dating back to the 1990s expired on May 17 as Warsaw aligned its energy regulations with European Union rules and moved to curb its decades-old dependence on Russian fuel. Since then Poland’s gas grid operator has started selling capacity on the Yamal pipeline that carries Russian gas from the northern Yamal peninsula to Poland and on to Germany via auctions. The auction results in May showed that about 92 per cent of capacity has been booked for June and roughly 80 per cent for the quarter starting on July 1. In May, when capacity was available in partial-day or daily auctions, the flows via the pipeline fell significantly. “Almost 90 per cent of the capacity at the Yamal pipeline was booked for the year between Oct. 1 2020 and Sept. 30 2021, almost everything that was available,” said a spokeswoman at Poland’s gas grid operator Gaz-System. She declined to reveal names of companies that booked capacity. A Polish official responsible for energy infrastructure said in May that he expected Gazprom to continue gas transit via Poland, considering potential delays in the Nord Stream 2 undersea pipeline expected early next year. Russian gas giant Gazprom did not respond to a request for comment on Monday. The end of the transit deal in May had no impact on Russian gas supplies to Poland, which are based on a separate contract. The Yamal pipeline has annual capacity of 33 billion cubic metres (bcm) in Poland.
IOC bets big on digital change to retain biz in post-Covid era
State-run Indian Oil (IOC) is betting big on mobile computing, a lean, digital-savvy workforce and new-age offerings such as natural gas, hydrogen as well as electric mobility to reshape its leadership role in the post-pandemic “new normal” of India’s energy market, according to chairman Shrikant Madhav Vaidya. Parallelly, IOC will consolidate its core business by becoming the least-cost supplier through cost and asset optimisation. Expansion of business footprint will be through “meaningful collaborations”, sources quoted Vaidya as saying in his video message to employees after taking over reins of India’s largest refiner-retailer on July 1. He said IOC’s focus on “technological immersion” has proven to be a promising enabler in the “new normal” and sought to scale up the digital transformation for smooth business process flow and empowering customers as well as channel partners with digitally-aided logistics, supply and distribution network.