Posted on :Monday , 5th October 2015

Hindustan Petroleum Corp. Ltd (HPCL), the country’s third biggest oil refiner, is negotiating with its partners in the Mozambique gas field, operated by Anadarko Petroleum Corp., to bring natural gas to India for its upcoming liquefied natural gas (LNG) terminal in Gujarat.

The deal will not only give HPCL access to gas, which is logistically cheaper to source, it will also give the company a cost advantage in its natural gas trading business, which it started last financial year.

Natural gas extracted from oil and gas fields have to be first converted into liquid before they can be exported. Once exported, it has to be regasified before supplying to consumers. Therefore, both the source and destination countries have to set up LNG terminals.

HPCL is looking at a strong mix of long-term and spot contracts for sourcing LNG for its terminal, unlike the current trend where most buyers are locked in long-term contracts.

For this, the company has initiated talks with the partners in the Rovuma Area 1 gas field in offshore Mozambique, said two officials from two of the three state-owned crude-oil refining firms—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and HPCL. They declined to be named.

HPCL has an equal joint venture agreement with Shapoorji Pallonji Port Pvt. Ltd to build a five million tonnes per annum (mtpa) capacity LNG terminal at Chhara Port in Gir, Gujarat. The terminal will be built at an investment of Rs.5,400 crore and is expected to be commissioned by 2019, according to HPCL’s 2014-15 annual report.

The report said the commissioning of this terminal would facilitate the corporation to source LNG for its own refineries and to market natural gas for customers connected through gas pipelines.

“The terminal in Gujarat will be ready by 2019 while the LNG liquefaction capacity at Mozambique will be ready by 2021-22. So, we can look at some contracts from other sources for two years before gas is available from Mozambique. If we get gas from Mozambique, it will be much cheaper for us,” said one of the two officials.

An email sent to the firm on Tuesday remained unanswered.

The official said the company will look at sourcing gas from LNG aggregators and also fleet operators, such as British Petroleum Plc, Royal Dutch Shell Plc, etc. as that will give HPCL access to spot natural gas.

“The most cost-effective proposition for HPCL will be to source gas from Mozambique due to the proximity of the country from India. Shipping cost is almost a fifth of the total cost of landed LNG, and HPCL can benefit a lot from buying LNG from there,” the second official said.

But for the company to take full advantage of LNG sourced from Mozambique, it has to strike a deal at a very good gas price, said analysts.

“Anything above $10/mmBtu (million metric British thermal units) is unreasonable, at least for the next two years,” said Piyush Jain, equity research analyst, energy, industrials and basic materials, Morningstar Investment Advisor Pvt. Ltd, a provider of independent investment research.

The second official quoted above said that while partners in Mozambique have managed to sell 80% of their 12 mtpa capacity, Indian companies have so far not been able to seal a deal due to price negotiations. This will be tough for HPCL also.

In the past one year, the price of spot natural gas has fallen by over half to $7 per mmBtu, while firms such as Petronet LNG Ltd and GAIL (India) Ltd are locked in expensive long-term contracts of $12 per mmBtu.

Currently, Indian companies —BPCL, Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd—have a combined 35% stake in the Mozambique natural gas field, which is almost 10 times bigger than ONGC’s domestic gas field Bassein in Gujarat offshore.