By Ambassador R. Dayakar
- Among non-traditional security imperatives of nation-states, energy is now recognized as a top-rung concern. Assured energy supply constitutes a sine quo non for any country in achieving prosperity and social stability so much so that quest for energy impacts significantly the country’s foreign and domestic policies. Energy, in both have and have-not countries, has come to play the role of a key determinant in shaping foreign policy’s focus and orientation and geo-political identity. With a projected annual growth rate of about 8 %, the avowed objective of raising share of the manufacturing sector in its economy from the present 17% to 25 % by 2025 and an obligation to meet the growing demands of its 1.25 billion people whose per-capita energy consumption is one of the lowest in the world, India faces enormous challenges in coping up with the energy needs.India is the third largest consumer of energy after China and USA with the conventional sources like coal, oil, and natural gas accounting for much of its consumption. Nuclear, solar and wind energy account for the rest. Its current energy mix broadly consists of coal (53%), oil (29%), natural gas (9.8%), renewable (6%) and nuclear (1%). Coal has the dominant share, followed by oil and gas. With limited energy resources coupled with several policy constraints, the country has to look abroad willy-nilly for its energy needs. In practical terms, call for self-sufficiency in energy is not a conceivable goal for India much less an achievable prospect and is likely to remain no better than an aspiration. However energy independence based on sufficiency which in turn is based on guaranteed and dependable supplies unaffected by political vagaries is an imperative and achievable objective through overseas supply tie-ups and production investments. The government has prioritised energy as a focal point of its economic diplomacy. Close attention, paid by India in recent summit meetings particularly those with Japanese PM Shinzo Abe in New Delhi and the Russian President Putin in Moscow, to nuclear power and hydro-carbons, bears this out.
India’s needs for petroleum and natural gas are humongous. Of various sources of energy, natural gas is a preferred choice for being the least polluting hydro carbon, globally abundant reserves, relative safety in handling and comparatively easy portability. It is principally used in India in power generation, fertilizer production, transportation and as domestic fuel. Natural gas has always been cheaper than oil on thermal equivalent criterion and the difference in monetary value between gas and oil varied from time to time, given the volatility in oil price. However in comparison to oil logistics, infrastructure required for gas liquefaction and shipment involves a higher financial outlay. Also its storage as a strategic reserve is not a feasible proposition. But on the whole, economic and environmental considerations favour gas over oil as a source of energy. Global quest for clean energy will make natural gas a prized commodity. India’s current natural gas reserves account for only 0.6 % of the world’s total proven gas reserves and are projected to last 26 years at the current level of exploitation. It is therefore inevitable that India sources its gas needs from abroad.
Qatar is the first country with which India has entered into a long-term agreement for supply of gas. It fulfils the four basic criteria to play a role in India’s energy security namely abundance, availability, accessibility and affordability of its gas supplies. The gas is found in Qatar in abundance with the reserves rated as the third largest in the world and its less than a quarter million of natives do not pose any conflict from domestic demand that could cause fluctuations in supply. The historically cordial relations between the two countries provide a politically conducive setting to be a long term supply arrangement. The geographical proximity, availability of a fleet of Liquified Natural Gas (LNG) tankers and the gas terminals at both the ends ensure easy accessibility. Finally the business-like attitude of Qatar, the professionalism of the two principals and the price agreed make the gas affordable.
Petronet India Ltd, the country’s biggest gas importer, signed an agreement in 1999 with RasGas, the state-owned offshore drilling company of Qatar for supply of LNG for 25 years for deliveries beginning from 2004 and the first shipment arrived in Dahej in Gujarat in end 2004. Subsequently, Petronet’s LNG terminal at Kochi in Kerala began receiving Qatar’s LNG supplies from 2008 onwards. The original agreement between Petronet and RasGas had specified the price and the duration of the sale and purchase agreement, the quantities of LNG to be lifted by India annually and penalties for any shortfall by either side for failure to deliver or to lift the contracted quantities. India is committed to buy annually 7.5 million tonnes of LNG from RasGas under the long term contract. However , in fixing the price for the 25- years term, both the sides seemed to have not adequately factored in the cyclical nature of supply and demand of energy that tend to move in parallel with the economic cycles and the original contract omitted to make allowance in price structure for possible cyclical character inherent in commodity markets.
Hydrocarbon carbon prices are market- sensitive. The drastic fall in oil price over the last 2 years from a peak of $115 to $30 has made gas less attractive as a fuel. The peak difference in oil and gas price in thermal equivalent terms has come down from $80 to $15. When the global gas prices fell steadily in the last two years, Petronet made the commercial decision to go for the spot purchases for its needs at market based prices rather than buy from RasGas at economically unviable rates. In other words, for Petronet, the 1999 agreement needed to be renegotiated to reflect the market trends. But such a proposal faced heavy odds. RasGas had no ready incentive or compulsion to renegotiate the contract because as Petronet was legally bound to lift the agreed quantities at a calculated price of $12 – 13 per mm BTU or pay substantial penalty to RasGas in case of default.
A breakthrough became possible following the discussions between Prime Minister Modi and Qatar’s Ruler Sheikh Tamim bin Hamad Al-Thani in March last year in New Delhi during the State visit. Soon a series of meetings ensued, reportedly 51 in all, between Petronet and RasGas, culminating in a revised Agreement. The dented gas demand, sober studies and projections of gas market dynamics in the short and medium term by energy think tanks, growing competition (e.g China has tied up with Russia for $400 billion long term gas supply), India shining bright in the near-stagnant world economy with a huge market potential and Qatar’s own sense of realism paved the way in driving home the summit breakthrough. Petroleum Minister Dharmendra Pradhan’s activism, energy and pragmatism ensured that India counted and the proposed arrangement accepted.The new agreement with its better costing formula makes an allowance for price fluctuations and provides for a reasonably calculated market driven price throughout the contract period. In the revised formula, the gas price is fixed on the basis of 3-month average of the benchmark Brent crude oil price as against the earlier provision of 5 year average of the crude import basket of Japan. The entire exercise makes a good case study in successful economic and energy diplomacy.
The key features of the revised agreement, renegotiated and finally signed on 30, December 2015 are that the contract period remains the same as in the original agreement that ends in 2028. The revised price is $ 6-7 per mmBTU, almost half of the previous price, and becomes effective immediately from January 1, 2016. There are multiple benefits for India in the revised agreement. Halving of the price saves Petronet Rs.4000 crore per year. Waiver of the penalty for the past shortfalls in the purchase of the contracted quantities saves another Rs 12,000 cr. The previous shortfall will now be lifted by Petronet at the revised price. Petronet’s savings, apart from supporting its balance sheet, cascades to a host of beneficiaries in India who are the major end users of gas like the public sector undertakings IOC, GAIL, BPCL and GSPC. A number of fertilizer companies also stand to benefit. In fact , upto one-third of the annual import of 7.5 million metric tonnes of gas goes to the fertilizer sector, giving it a overall saving of Rs 4700 crores per annum and benefitting ultimately the farmers with the resultant lower prices for urea and ammonia. Also, the long term gas contract, now resuscitated, has given, in its own way, an impetus for the Make in India campaign. India will soon be manufacturing LNG tankers with South Korean collaboration.
By agreeing to the revised formula, both the sides have displayed maturity, prudence and a long- term business outlook and a firm belief in the natural complementarity between the world’s third largest gas-rich country and the third largest energy consumer. It spared both the sides a costly and unproductive litigation and a negative political fallout and prevented a major diplomatic irritant in the historically cordial bilateral relations. The new agreement helped Qatar preserve its global market share. It also strengthens Qatar’s reputation as a dependable supplier. As the Minister for Petroleum and Natural Gas, Dharmendra Pradhan, summed –up the whole outcome saying that “the new deal has elevated the relationship between the two countries from one of buyer-seller to a truly long-term partnership.” A spirit of give and take informed the negotiations and the resultant agreement. The bilateral relations successfully withstood a serious challenge. It is too good to be not noticed and copied by other countries. This agreement becomes a major achievement for Prime Minister Modi’s redefined diplomatic approach – especially in the field of energy security.
(The author is a veteran diplomat, former Ambassador to Iraq, Norway, Sweden and was also Secretary Gulf Division in the MEA)