NOVATEK’s Yamal LNG to restore LNG supplies to Indian Gai

NOVATEK’s Yamal LNG will soon restore LNG supplies to Indian Gail under a long-term contract for 2.9 million tons per year. These deliveries were interrupted in the summer of 2022, after Germany took control of Gazprom’s business in the country. Russia then gave temporary permission to NOVATEK so as not to interrupt supplies to India. However, the former Gazprom Germania (now SEFE), instead of supplying cargo to Gail, resold them at a higher price on the spot market. As a result, NOVATEK stopped shipments, and Gail and SEFE started pre-trial proceedings. Now, according to Kommersant, the issue has been settled. The drop in LNG spot prices has made the resale scheme unattractive to SEFE, analysts say.

NOVATEK’s Yamal LNG project will resume gas supplies under a contract with the former Gazprom structure Gazprom Marketing & Trading Singapore (GM&T Singapore) to India’s Gail, Russian government sources familiar with the situation told Kommersant. Shipments should resume in the previous contract volumes in the near future, says one of Kommersant’s interlocutors.

We are talking about a long-term contract for the supply of up to 2.9 million tons of LNG until 2041.

Control over these volumes, previously sold through the trading division of Gazprom, was lost after the Russian monopoly in March 2022 ceased participation in the German Gazprom Germania GmbH and all its assets, including Gazprom Marketing & Trading Ltd. These assets were then actually nationalized German authorities, and Gazprom Germania was renamed Securing Energy for Europe GmbH (SEFE). In response, the Russian government imposed sanctions on GM&T and SEFE, after which NOVATEK could no longer sell Yamal LNG to Gazprom, and Gazprom itself stopped deliveries of Gail.

However, in order not to interrupt gas supplies to friendly India amid a sharp increase in LNG prices, in May 2022 the Russian government issued Yamal LNG a temporary permit to interact with SEFE (for 90 days). But, as reported Bloomberg, SEFE, instead of shipments to India, sent cargo to the spot market, where at that time prices were several times higher than under a long-term contract with Gail. SEFE, according to Bloomberg, paid Gail a penalty for refusing planned deliveries – 20% of their value – and still received a high margin due to spot sales.

At the same time, Gail, which was in dire need of LNG, was forced to pay record amounts to compensate for the lack of supplies from Yamal LNG. The Indian company started pre-trial proceedings with SEFE and demanded the resumption of supplies. As a result of negotiations in March of this year, SEFE resumed shipments of Gail. In March-April, the Indian company received two batches of LNG, in May-June – four.

As a result, the government of the Russian Federation on June 13 issued orderallowing Yamal LNG to supply gas to SEFE until the end of 2024.

“To allow the commission of actions in respect of which … a ban has been established and which are related to the supply of liquefied natural gas by the open joint-stock company Yamal LNG and Yamal Trade Pte Ltd … (Singapore) in favor of SEFE Marketing & Trading Singapore PTE Ltd”, says the order.

NOVATEK, Gail, SEFE did not provide operational comments.

It is likely that the decision of the Russian government will allow Yamal LNG to increase shipments, including delivering volumes to Gail that were underdelivered in 2022, Sergey Kondratiev from the Institute of Energy and Finance believes. According to him, SEFE supplied LNG to India at $530 per ton in April, which is significantly cheaper than other traders: imports from the United States cost Indian consumers $658 per ton, from Qatar – $742 per ton. “These prices were also below April spot prices in Europe and East Asia. I think that the main reason for SEFE returning to the contract with Gail is the current oversupply of LNG in the world market,” he says.

Based on the previous contracts, GM&T (now SEFE) received a minimal margin from the resale of Yamal LNG volumes to India, says independent expert Alexander Sobko: in both cases, contracts (between Yamal LNG and GM&T and between GM&T and Gail) were oil-pegged with little difference between them. GM&T’s contract with Gail included a 13.7% peg to the price of oil and a small fixed portion corresponding to shipping costs. This means that at a medium-term oil price of, say, $75/bbl, SEFE would receive almost $11/MBTU from Gail. “This is noticeably higher than current LNG spot prices. And here we don’t even take into account the penalties that SEFE paid Gail for underdelivery,” he notes.

Accordingly, at current LNG spot prices, a return to supplies under long-term contracts is beneficial for Yamal LNG as well.

“One way or another, apparently, all participants in these contracts, against the backdrop of falling LNG spot prices, preferred to return to long-term relationships with more predictable income and minimal risks,” Alexander Sobko concludes.

Tatyana Dyatel, St. Petersburg