Shares of Indian PSU tanked amid concerns over prices, lack in demand and long-term lock-in period of investment without final agreement

One week after it was announced with considerable fanfare at the start of Prime Minister Narendra Modi’s visit to the United States, several loose ends are yet to be tied up in the $2.5 billion (₹17,668 crore) investment planned by Indian PSU Petronet in American LNG company Tellurian.

According to information with The Hindu, 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.

“Petronet had been evaluating what type of volumes they needed and were ready to get more specific with this MOU. Over the coming months, we will be negotiating contract details and aim to complete documentation in March 2020,” senior vice-president, public affairs and communication at Tellurian Inc., Joi Lecznar stated in written replies to The Hindu.

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

A report by news agency PTI — which Petronet did not deny — said the Indian company’s board had disfavoured the Tellurian deal at a meeting in May 2019.

Board worried

Reasons for the board’s disquiet included major price drops in LNG, India’s demand shortfall, expected LNG supply from the Indian market and a negative experience with “locking in” contracts for a long period.

Worried by the stock prices, it is learnt that Petronet officials held a conference call with major investors to reassure them about the deal with Tellurian.

Petronet LNG did not respond to email and phone queries by the time of publication of this story.

A government official privy to the deal negotiations, however, told The Hindu: “The pricing of gas is volatile. What looks like a bad deal now will look brilliant when prices change, and they will, and vice-versa.”

Apart from the prices, a bigger problem is the demand deficit for LNG, given the recent downturn in manufacturing, coal dependence, and the lack of regasification plants and pipeline infrastructure in India.

“The timing of the deal will be crucial, when the supply of gas will start for India,” National Head of Energy and Natural Resources at KPMG India Anish De said. “In the next two to three years, the Indian market will be over-supplied, and the current spot prices are such that getting into any long term deals will not be easy.”

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.

Same protagonists

Disquiet has also been growing over an ongoing lawsuit between Cheniere and its former CEO and Chairman Cherif Souki, who founded Tellurian Inc. after he was dismissed by the Cheniere board in 2015. At the time, the board had questioned his plans to build the same Driftwood LNG project, which includes a liquefaction plant and 96 km pipeline, terming them “too ambitious”.

For the current project, Tellurian is looking at a number of investors including Petronet India to help finance construction for Driftwood, offering 1million tonnes per year of offtake for every $500 mn of investment. Significantly, both Mr. Souki in his previous capacity at Cheniere Energy, and Petronet LNG India CMD Prabhat Singh, as Director, Marketing for GAIL had helped negotiate the former U.S. deal in 2011 as well.

Prestige project

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.

On Friday, State department Acting Assistant Secretary for South and Central Asia Alice Wells said the deal was “so important” to the relationship because it showed that investment was a two-way street where “India is investing and creating jobs in America” with the Petronet investment resulting in an estimated 50,000 jobs and $60 billion in exports.

Much will depend on how quickly the two sides can negotiate the agreement, and at what cost to Petronet.

“With PM Modi’s support and plans, we are confident in India’s ability to provide the necessary infrastructure,” Tellurian’s spokesperson told The Hindu when asked how soon the deal will fructify and what assurances of purchases Petronet has provided. “Again, the significance of the U.S. and Indian government support cannot be understated,” Ms. Lecznar wrote.