Exxon Mobil And India’s Petronet Renegotiate Long-Term LNG Contract

Petronet LNG of India has reached an agreement to purchase extra liquefied natural gas amounting to one million tons from Exxon Mobil’s portion of Australia’s Gorgon project. According to sources Petronet will purchase the liquefied natural gas on delivered basis.

Dharmendra Pradhan, India’s oil minister, revealed on Saturday via social media that the contract, which had been initially signed in 2009, had also been renegotiated. The renegotiation involved price cuts, sending negative signals in a global market that is heavily oversupplied. According to an analyst at RBC, Ben Wilson, Exxon Mobil would get 15% less revenue under the renegotiated deal. Had the oil major refused to renegotiate, Petronet would most likely have walked away and Exxon Mobil would have had no choice but to sue and then resell the natural gas in a spot market that is weak.

Exxon Mobil to absorb transportation costs

The renegotiated deal between Exxon Mobil and Petronet will also see the world’s biggest oil company by market capitalization absorb shipping charges. Australia’s Gorgon project produces about 15.6 million tons of liquefied natural gas every year and Exxon Mobil controls around 25% of it.

With the discount, it will now mean that Exxon Mobil will need more time to recoup its capital costs in the Gorgon project. It is estimated that the project cost $54 billion. Additionally it will also mean that the Australian government will wait longer before the project breaks even and begins remitting the rent tax on petroleum resources.

Increased supply from Australia and U.S.

Typically long-term contracts rarely get renegotiated and the fact that Exxon Mobil agreed to new terms is an indication of how new plants in the United States and Australia has led to a transformation of the market.

“This trend is overall a negative for sellers, as they are forced to provide more flexibility to buyers’ needs to maintain their markets,” Saul Kavonic, an analyst at energy consultancy firm Wood Mackenzie, said.

In recent years India has aggressively pursued cheaper deals. Two years ago the second most populous country in the world renegotiated a contract it had with Qatar. Producers will likely feel more pain if other Asian buyers of liquefied natural gas such as China, South Korea and Japan follow suit. Some of the Australian producers who are going to be facing pressure when negotiating with current and potential customers of natural gas include Origin Energy, Santos, Oil Search and Woodside Petroleum.

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