(Bloomberg) -- Petronet LNG Ltd. has reached an agreement to rework a liquefied natural gas supply agreement with Exxon Mobil Corp., the second such renegotiation by the Indian company for gas supplies after reaching a similar deal with Qatar, according to people with knowledge of the development.
Under the new terms, the cost of the gas from the Gorgon LNG project in Australia will be 13.9 percent of the price of Brent crude, said the people, who asked not to be identified because they aren’t authorized to speak to the media. That’s down from an earlier ratio of 14.5 percent of the cost of a slightly more-expensive basket of crudes that has traditionally been used to price LNG contracts, according to data from Bloomberg New Energy Finance.
While the agreement will lower the price, the Indian company is considering raising the volume it buys, according to the people. The new price is also on a delivered basis, meaning Petronet saves on transport costs but cedes control of shipping.
A global abundance of LNG, thanks to a surge of investment in the past decade in natural gas export projects, has emboldened buyers to seek more favorable deals while leaving producers eager to lock up long-term customers. The oversupply is forecast to last until next decade.
Petronet signed the 20-year contract with Exxon in 2009 to buy 1.44 million tons a year of LNG. As part of the renegotiated deal, Petronet would increase this annual volume by about 1 million tons, according to the people.
Petronet said in a stock exchange filing that the companies reached “a broad understanding” and discussions continue, while Chief Executive Officer Prabhat Singh said an announcement might not come for “another couple of months.” Exxon declined to comment.
India, the world’s fourth-largest LNG buyer, is becoming more reliant on natural gas imports as it seeks to double use of the fuel by the end of decade amid falling domestic production. Gas currently accounts for about 7 percent of the South Asian nation’s fuel mix.
“This development is a negative for LNG vendors seeking to sell into India with Petronet,” Ben Wilson, an analyst at RBC Capital Markets, wrote in a research note Monday. “We do not believe this dynamic is pervasive in the LNG industry, which counts contract sanctity as one of its core tenets. It is, however, indicative in a directional sense of where LNG pricing is heading and the changing nature of LNG contracting.”
Under the new Petronet-Exxon deal, the seller will deliver the cargoes to India, rather than the buyer being responsible for the transport, said the people. Overall, the changes will cause the current price of the shipments to fall by $1 per million British thermal units, the people said. Analysts at RBC Capital Markets see an effective reduction in realized pricing of $1.10 to $1.30 per million Btu.
India was among the first countries in Asia to renegotiate a long-term deal when Petronet in December 2015 reworked its 25-year agreement to buy LNG from Qatar’s RasGas Co., its biggest supplier of the fuel.
That deal was reworked to change the pricing link to the three-month average price of crude from an earlier link to the five-year average, which had the immediate impact of slashing prices by about half. Petronet also agreed to purchase an additional 1 million metric tons of LNG annually from RasGas through the remainder of that contract.
In both the Qatar and Exxon deals, the new price is pegged to Brent, moving away from the so-called Japan Crude Oil Cocktail, which is the average price of oil imported by the country and a traditional LNG benchmark owing to Japan’s role in fostering the LNG market as it became the world’s largest buyer. JCC averaged about $54.10 a barrel during the first half of the year, compared with almost $52.70 for Brent.
Petronet shares rose as much as 7.1 percent on Monday before paring gains to close up 5.9 percent at 237.1 rupees in Mumbai, its highest closing price on record.
"India has, yet again, been able to address the long term price issue of LNG from Gorgon to suit Indian market,” Oil Minister Dharmendra Pradhan said in a tweet on Saturday. "Indian consumers will receive LNG volumes at amicable price soon; this is done in a similar way to what we had done with LNG from Qatar,” he added.