Gazprom's move on long-term LNG contracts squeezes priority sector

Supply disruptions may be 'short-term', says GAIL

With Russia’s Gazprom invoking force majeure on long-term liquefied natural gas (LNG) contracts with GAIL (India), priority-sector customers like fertiliser units have already started feeling the pinch in India with a cut in supply.

According to industry sources, for the past two weeks, there has been a 10 per cent cut in supply from GAIL to key sectors like fertiliser.

GAIL has a total long-term LNG deal of around 14.5 million tonnes per annum (mtpa), of which around 2.5 mtpa, or 17 per cent, comes from Gazprom.

A company executive indicated that this may be a ‘short term’ problem and may settle by the end of this month. The company is gas rationing, trying to balance the requirements of priority and non-priority sectors.

GAIL may have to resort to costly imports from the international spot market to meet local demand. The other major priority sectors of gas are city gas distribution (CGD) and power. “Our members have already started seeing a cut in supply for the past two weeks. It is being managed by getting spot gas,” said an executive from The Fertiliser Association of India (FAI).

On the other hand, a GAIL source said that the crisis will be transitory and the company is trying to find equilibrium.

Of the total intake of 46 million metric standard cubic metres per day (mmscmd) of natural gas by the fertiliser sector in the month of June, around 31 mmscmd is imported LNG; the rest is met through domestic supplies and spot markets (8 per cent), based on FAI data. This comes at a time when spot LNG prices in the Asian market are hovering around $40 per million metric British thermal unit. Even if GAIL procures spot gas, sectors like power and fertiliser will be unlikely to purchase at a higher rate.

A rise in gas prices may affect the country’s urea and fertiliser production and India’s subsidy bill. During the first quarter of the current financial year (2022-23), of the total LNG consumption of 6,918 mmscmd, around 49 per cent was allotted to the fertiliser sector, followed by 16 per cent to the CGD segment, 7 per cent to power, 10 per cent to refinery, 4 per cent to petrochemical, and 12 per cent to other sectors.

In the aftermath of Russia squeezing supply to Europe, the countries in the region are facing an unprecedented energy crisis, pushing the economy to the brink of recession. After the invasion of Ukraine, Russia had started cutting the supply of natural gas to the region.

Early this month, Russian major Gazprom first reduced natural gas supply through the Nord Stream pipeline to 20 per cent and later opted for a complete cut, citing 10-day maintenance as the reason. This led to additional pressure in the international gas market, leading to a surge in natural gas imports by Europe. According to the Bank of America, Europe’s gas market moved from bad to ugly in July.