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Issues pending in Petronet-Tellurian deal (Relevant for GS Prelims & Mains Paper II; IOBR)

On February 14 this year, Petronet and Tellurian signed a pact for purchase of 18% equity stake in American LNG company Tellurian by Indian PSU Petronet for $2.5 billion.   The purchase of 18% stake will enable Indian company to secure 5 million tonnes of LNG a year.

Only MOU
The first sign of trouble for the deal came at the signing itself on September 21, when it became clear that what was signed in the presence of Mr. Modi was not the actual agreement, but only a second Memorandum of Understanding. On February 14, Petronet and Tellurian had already signed an MoU for 5 million tonnes a year and an 18% equity stake.

Tellurian Inc. had promised to “make a final investment decision and begin construction in the first half of 2019” for its Driftwood LNG project in Louisiana and had been negotiating to complete the agreement in time for Mr. Modi’s visit.

Asked why the deal could not be signed in time, Tellurian said the current MoU was more focused, without giving details of how it differed from the previous one. Over the coming months the future negotiations will be conducted.

Impact of deal on Petronet
Petronet stocks plunged 7% when Indian markets opened last Monday, over news of the massive investment plan in the U.S.

Infact, it has been reported that Petronet’s board is not in favour of deal. There are several reasons behind this.

  1. LNG prices are expected to fall in future.
  1. Petronet may not be able generate such large demand of LNG, as is agreed in the project because there is downturn in manufacturing, high coal dependence, and the lack of regasification plants and pipeline infrastructure in India.
  1. Long period lock in periods have not proved to be beneficial in the past. In fact, in the next two to three years, the Indian market will be over-supplied, and the current gas prices are high for long term deal.
  1. In 2011, another PSU, GAIL had entered into 20-year contracts with American companies Cheniere Energy and Dominion Eenergy to buy 5.8 million tonnes of LNG a year with fixed annual fees. It has since been reselling much of it to other markets due to lack of demand.

Political pressure behind deal
Both U.S. and Indian officials say the Petronet-Tellurian deal is now a prestige project for India-U.S. relations that are otherwise facing headwinds over trade issues, and both Prime Minister Modi and President Donald Trump have hailed the deal publicly.

Source: The Hindu



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