India has won a price cut on a 20-year LNG deal with global giant ExxonMobil Corp. in a rare contract renegotiation, on Sept. 11.
In a trade-off for ExxonMobil, India's Petronet LNG will increase its volumes from the Gorgon LNG project in Australia by an extra 1 million tonnes a year to about 2.5 million tonnes a year, but at cheaper rates than initially agreed in 2009.
Long-term contracts are rarely revised in the LNG market and for a big producer to cave in shows how supply from new plants in Australia and the U.S. over the past two years has transformed the market, analysts said.
“This trend is overall a negative for sellers, as they are forced to provide more flexibility to buyers’ needs to maintain their markets,” said Saul Kavonic, an analyst with energy consultants Wood Mackenzie.
India has been aggressive in seeking cheaper deals, also renegotiating a contract with Qatar in 2015, but the real pain for producers would come if major Asian buyers in Japan, Korea and China followed suit.
“Happy to share good news that India has, yet again been able to address the long term price issue of LNG from Gorgon to suit Indian market,” India's oil minister, Dharmendra Pradhan, said on Sept. 9.
Indian consumers would soon receive LNG at an “amicable price”, Pradhan said. India started receiving Gorgon supplies from Jan. 2017.
Petronet said on Sept. 11 it had reached a “broad understanding of terms” with ExxonMobil, without giving further details.
Citing market sources, RBC analyst Ben Wilson estimated ExxonMobil would receive 15% less revenue per unit on its sales to Petronet under the new deal.
If ExxonMobil had not agreed to renegotiate, Petronet might have scrapped the agreement, leaving the major to pursue damages and resell the volumes on a weak spot market.
“They've probably taken the lesser of two evils,” said Wilson. He added that it did not bode well for other LNG producers such as Australia's Woodside Petroleum, which has targeted India to diversify its heavy exposure to Japan and South Korea.
In a major shift from previous contractual terms, ExxonMobil has agreed to absorb shipping charges, Reuters reported.
The original LNG supplies would be priced at less than 14% of the Brent oil price, down from about 14.5% earlier, while the additional supplies would be priced about 12.5% of Brent.
ExxonMobil, which controls about a quarter of the 15.6 million tonnes a year Gorgon project, had no immediate comment.
Analysts said the fact India had managed to force ExxonMobil to renegotiate was the latest proof that buyers have the upper hand in a market where LNG spot prices are well below oil-linked contract prices that were signed during the oil boom.
“The risk of price renegotiations will become more acute over the next couple years as spot LNG prices remain depressed, even if oil linked prices rise,” Wood Mackenzie's Kavonic said.
“The elephant in the room will be how negotiations play out with traditional markets in Japan and Korea, and especially the Chinese national oil companies,” Kavonic said.