Based on the existing contract, NTPC is supposed to buy around 2 million metric standard cubic metres per day (mmscmd) of liquified natural gas (LNG) from GAIL. For the current year, the contract price for this gas was fixed at close to $11-12 per million metric British thermal units (mmBtu). However, NPTC has failed to pick up any of this contracted gas so far this year, leaving GAIL, which sources the gas from a third party, in a spot.

“More than 60% of the default (deferred offtakes of gas volume by various companies) is because of NTPC,” said R.C. Gupta, executive director-finance and accounts at GAIL, while speaking to analysts after the company’s earnings were announced late on Tuesday.

For the September quarter, GAIL posted a 66% drop in net profit to Rs.440.5 crore, compared with Rs.1,302.9 crore in the same quarter last year. Lower offtake of gas was one of the reasons for the fall in profit.

“Gail has a binding take-or-pay contract with NTPC for offtake of 2 mmscmd of RLNG till December 2019. However, there has been practically no withdrawal of gas under the contract by NTPC in the current fiscal. As these issues are contractual in nature, discussions are on between GAIL and NTPC for their resolution,” said a GAIL spokesperson.

A mail sent to NTPC on 4 November remained unanswered.

NTPC’s reluctance to buy gas from GAIL stems from the widening price difference between the price of contracted LNG and spot prices. Spot LNG prices have fallen by over 50% in the past year to $6 per mmBtu.

“Our customers are not ready to buy power at a tariff determined through expensive LNG since they can source power at cheaper rates from power plants running on spot gas. If they are not ready to buy power, we cannot produce it using expensive LNG,” explained an NTPC official. The official did not wish to be named.

NTPC has seven gas-based power plants with a capacity of 4,017.23 megawatts (MW), which require up to 7mmscmd.

“Most of its (NTPC’s) gas-based power generation was from domestic sources of natural gas as it does not make sense for the company to produce power from imported LNG. Therefore, the company had to cut down its gas-based power generation this quarter,” said an analyst with a domestic brokerage. He did not wish to be named as he is not authorized to speak to the media.

NTPC operated its gas-based power plants at a plant load factor (the percentage utilization of a power plant) of 25.73%, in contrast with 77.27% for its thermal power plants and 83.29% for its hydro power plants.

NTPC’s refusal to buy LNG from GAIL is having a domino effect. GAIL has been forced to defer almost 32% or 1.44 mtpa (5 mmscmd) of the total 4.5 mtpa (16 mmscmd) in LNG it buys from supplier Petronet LNG Ltd.

GAIL buys LNG from Petronet LNG which, in turn, sources it from RasGas Co. Ltd in Qatar.

Gupta from GAIL expressed hope that Petronet LNG might manage to strike a deal with RasGas to bring down the price of long-term LNG.

“Once an agreement with RasGas is reached, the price of long-term gas will come down substantially. And if that happens, then probably NTPC will also start lifting its volume,” he said in the conference call.

In the interim, NTPC may have to eventually pay even if there is no offtake of gas as the contract has a “take or pay” agreement built into it, said Gupta, while adding that the two companies are trying to find a way to resolve the issue.

Companies locked in long-term contracts have a take-or-pay agreement under which the buyer has to pay a pre-determined penalty even if it does not take delivery of the contracted commodity.

GAIL, on its part, may also have to pay a penalty.

“While the contract (for imported LNG) allows total deferment of 10% of volumes in any given year, higher volume shortfall in the next two years will potentially expose GAIL to a take-or-pay settlement with RasGas, amounting to a cumulative Rs.57 billion (Rs.5,700 crore) liability. We are assuming GAIL will absorb 50% of the calculated penalty, eroding Rs.22 from its share price,” said a 4 November report from Edelweiss Securities Ltd.