India has won a price cut on a 20-year liquefied natural gas (LNG) deal with global giant ExxonMobil Corp. in a rare contract renegotiation, a bad sign for producers in a heavily oversupplied global market.
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.
Roiled by new supply
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 Saturday on social media. Indian consumers would soon receive LNG at an “amicable price”, Mr. Pradhan said. India started receiving Gorgon supplies from January.
Petronet said in a stock exchange filing on Monday 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 deal, leaving the major to pursue damages and resell the volumes on a weak spot market.
‘Lesser evil’
“They’ve probably taken the lesser of two evils,” said Mr. Wilson, adding 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.
Exxon has agreed to absorb shipping charges, two sources told Reuters.