News Release Details

IOC will not ink long-term LNG price deals
New Delhi   08-Oct-2015


Mr. A. K. Sharma, Director (Finance)


Indian Oil Corporation (IOC), the country's largest refiner and fuel retailer, will not enter into long-term price contracts with liquefied natural gas (LNG) suppliers, drawing lessons from the fiasco where staterun Petronet LNGBSE -0.27 % has been forced to purchase expensive LNG to honour an old contract but struggles to sell it further to consumers.

The company would have a long-term agreement only for the quantity of gas and not for the price, AK Sharma, director (finance), told ET in an interview. "This would be to ensure that there is no shock to consumers," Sharma said.

IOC just wants to avoid the difficulty Petronet LNG, which it co owns with other state oil firms, is caught in.

IOC is betting big on the gas business, hoping it would help the firm defend its market share in the fuel business as rising environmental concerns and a public rage against air pollution are accelerating a shift towards cleaner fuel. Natural gas is considered one of the cleanest among fossil fuels such as coal and crude oil but higher prices have kept its industrial usage suppressed well below the potential in India.

IOC has a 30 per cent share in the LNG segment. India imported about 18.5 billion cubic meters (BCM) of the 51 BCM of natural gas it consumed in 2014-15. Much of its cooking and transport needs are met by cheaper domestic gas but industries also have to depend on expensive imports.

Since the crude oil prices started falling sharply last year, Petronet, a firm engaged in importing LNG and selling to domestic gas consumers, has been struggling to find buyers for the gas purchased under the term contract with Qatar's RasGas.

Petronet had agreed to take 7.5 million tonne of LNG a year from RasGas at a rate linked to the trailing five year crude oil prices. As crude oil prices halved in a year, it quickly depressed the spot LNG prices. At about $6.8 per unit, the spot LNG is almost 50 per cent cheaper than the price Petronet is charging from consumers. It is this situation IOC wants to escape by not entering into long-term price contracts.

Meanwhile, the shifting market dynamics has given IOC the hope that the future belongs to gas. "Gas is a big threat to our liquid fuel business," Sharma said, referring to how compressed natural gas (CNG) fuelling stations are potentially impacting demand for diesel and petrol in many cities.

He said the company would like to get into a situation where all its filling stations (it has about 25,000 at present) are able to provide every fuel — petrol, diesel, gas — that a customer may demand. He said the industrial demand for natural gas would also rise as the supply of cheaper substitute, fuel oil, drastically reduces. Fuel oil is often cheaper than even crude oil but is enormously polluting. A slide in crude oil prices had made fuel oil relatively cheaper for industrial consumers, who in many cases dumped the cleaner fuel to save cost. Refineries are installing coker units that will drastically cut fuel oil production, he said.

IOC plans to strengthen its presence in the gas business by setting up a LNG import terminal near Chennai, laying 1,167-km pipeline to carry the gas.