The Hindu Business Line : What if the Iran gas deal does not go through?

If the Iran gas deal does not go through, there may be ramifications for LNG prices in India as a major supply source is taken out. This shortfall would have to be met with new gas sourced at substantially higher prices.

BAD NEWS for some can be good news for others. The LNG (liquefied natural gas) deal with Iran appears to be unravelling to India's disadvantage due to various reasons. But that could be good news for at least two companies in the gas business in the country — Reliance Industries and Petronet LNG. Both are emerging big players and competitors in the natural gas industry. While Reliance is working on producing gas from its KG (Krishna-Godavari) basin field by 2008-09, Petronet LNG, having already proven the viability of importing and re-gasifying natural gas it for onward sale to users, is now on an ambitious expansion programme.

First on why the Iran deal may not happen. Even as New Delhi grapples with the nuances of the position that the country should take at the upcoming IAEA (International Atomic Energy Agency) meeting, it is increasingly becoming clear that the LNG deal may well unravel and for reasons not connected to the vote by India against Iran.

The United States appears to be leaning on American companies that are eager to supply equipment for the liquefaction of LNG in Iran. Reports are that General Electric has refused to supply critical equipment for the liquefaction plant in Iran.

Liquefaction is the process where gas is super-cooled to minus-161 degrees Centigrade when it becomes liquid. This liquid (LNG) is then transported through cryogenic vessels that maintain the low temperature and is then re-gasified into natural gas. GE's compressors are important equipment in this process and if it has indeed refused supplies, the liquefaction plant could be a non-starter.

Besides this, the US can also prevent the transfer of the liquefaction technology developed by its companies. German company Linde has reportedly refused to give this technology to Iran, as Germany is one of the sponsors of the resolution to refer Iran to the United Nations Security Council.

As the plot thickens on the nuclear violations controversy, it is unlikely that the Iran LNG deal will come through by 2009 as originally planned, which is bad news for India.

By 2009, the demand for natural gas is projected to run way ahead of supplies; Iran was a crucial supply source to bridge this gap. But this may buy time for Reliance Industries and Petronet LNG. Reliance's development of the KG basin is behind schedule, and the first commercial gas from this field is expected to flow by 2009, the same time the Iran LNG was supposed to arrive.

Similarly, Petronet LNG is planning to double its re-gasification capacity at Dahej, Gujarat, to 10 million tonnes and is also planning a second terminal and plant at Kochi of 2.5 million tonnes. The Dahej expansion could be complete by 2008, with the Kochi terminal following a couple of years from then.

To be sure, given the huge increase projected in demand, the Iran LNG was never a threat to either of these two companies. In fact, in Petronet's case there was talk that the LNG may be re-gasified at its expanded plant at Dahej and in Kochi, though this was never certain because Indian Oil was keen on setting up its own LNG plant.

A failure of the Iran deal would mean that domestic gas prices could settle at a higher level and we are not talking of APM (administered pricing mechanism) gas prices here, which will continue to be under government control anyway.

The possible failure of the deal holds ramifications for gas prices in the country as a major supply source is taken out. LNG prices globally now hover at $8-$10 per million British thermal unit (MBTU) compared to the $2.5 that Petronet pays its supplier.

The Iran LNG was priced just over $3 per MBTU, which is substantially lower than the prevailing global prices. If the deal falls through, this gap would have to be met with new gas sourced at substantially higher prices. Petronet is now negotiating for LNG supplies for its increased re-gasification capacity; these could be benchmarked to the prevailing global prices. The company will now have more freedom in price negotiations, as the unmet demand will be huge in the domestic market with little cheap gas available. This freedom in negotiating the price will certainly help in LNG sourcing.

Similarly, Reliance could get a much higher price than the $3 per MBTU that it quoted for the NTPC deal. This means that its project economics will look a couple of shades brighter.

There is one major assumption here though — that gas buyers in India such as power, fertiliser and petrochemical producers will be willing to pay market prices that are almost three times what they pay now under the APM.

They may hold out in the short-term, but in the long run with APM for gas gradually being phased out, they may have no option but to shift to the free-market gas.

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