November 11, 2022 [Reuters] – GAIL (India) Ltd (GAIL.NS) has turned down a compensation offer for undelivered liquefied natural gas (LNG) from a former unit of Russia’s Gazprom (GAZP.MM) as it wants to retain the right to the missed cargoes, four sources familiar with the matter said.
GAIL agreed a 20-year deal with Gazprom Marketing and Singapore (GMTS) in 2012 for annual purchases of an average 2.5 million tonnes of LNG. GMTS was a unit of Gazprom Germania, now called Sefe, but the parent gave up ownership after Western sanctions were imposed on Moscow for its invasion of Ukraine.
Sefe is offering compensation equivalent to 20% of the LNG cost, equivalent to 14% of the Brent prices, in line with the original GMTS contract terms with GAIL, the sources said.
“We are not accepting the penalty as this would give them (Sefe) an exit route from the contractual obligation. We don’t want to lose our right to buy the cargoes again,” one of the sources said on Thursday.
This source said the compensation which Sefe has offered GAIL is low compared to current spot LNG prices of $24-$25 per million British thermal units (mmBtu), adding that the Indian company would be “taking a hit” by accepting it.
GAIL did not respond to an email and call seeking comment, while Sefe said both companies “are addressing this issue together as part of their contractual arrangements”.
“As a result of the Russian sanctions against Sefe and its subsidiaries, including Sefe Marketing & Trading and Sefe Marketing & Trading Singapore, both the Sefe Group and GAIL have been affected by the subsequent suspension of supplies,” a spokesperson for Sefe in Germany said.
GAIL finance head Rakesh Kumar Jain said in a post earnings analyst call last week that Sefe has not delivered 17 LNG cargoes up to the end of September.
In order to meet local demand for gas, GAIL has had to cut supplies for fertilisers and industrial clients and to buy spot LNG at about $39/mmmBTU, sources earlier told Reuters.
GAIL is consulting lawyers about arbitration over the contract with Sefe, the sources said, adding that the Indian company is also in talks with Gazprom to explore buying LNG directly from the Russian company, which has cut supplies to Europe following western sanctions.
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