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Iran proposes fresh formula to break logjam over LNG to India

New Delhi, Feb 9, IRNA - Iran has proposed a fresh formula to break the logjam over the pricing issue of a 25-year contract to supply five million tonnes of LNG (Liquefied Natural Gas) per annum.

A consortium of three state-owned Indian firms - Indian Oil Corporation (IOC), Gas Authority of India Limited (GAIL) and Bharat Petroleum - had signed the deal with National Iranian Gas Export Company on June 13, 2005.

But the deal has been hanging fire as the Iranian firm's parent, National Iranian Oil Company, sought a higher price and refused to ratify it, a leading english daily "Times of India" reported said.

During a series of official interactions between the two sides over the last month or so, the Iranian side has suggested that the ceiling of the Brent crude, which was being used as benchmark for the LNG pricing formula, be revised to $55 a barrel.

At this ceiling, the LNG price works out to $4.78 per mBtu (million British thermal unit). In case this was not acceptable to the Indian side, Iran wants the government to reassign the contract to any private entity.

The original contract had pegged the benchmark at a floor of $10 a barrel of Brent crude and a ceiling of $31. This was done at a time when international LNG prices were less than half of the $9-10 mBtu and oil was in the region of $ 25 a barrel, far less than the dollars 90-levels it is sustaining at the moment.

The contract has stipulated fixing the LNG price at $2.9 mBtu for the first two years of the deal, at which level the LNG ceiling works out to $3.2 mBtu.

This, the new Iranian regime feels, is too low in view of the surge in global prices of both crude and LNG. It has been pressing the Indian side for renegotiation.

The Indian side appreciates the position and realises that LNG cannot be imported at less than $4.5 mBtu in view of the prevalent global conditions. It has suggested that the Iranian side seek a $50 per barrel ceiling for Brent crude at which the LNG price ceiling would be $4.45 mBtu, according to the formula agreed upon in the signed contract.

While this may break the logjam, the option will also bring certain technical problems for the Indian side. As far as the Indian authorities are concerned, the existing agreement is a valid contract and if this does not work out, then the option is to go for a long-drawn international legal proceeding.

Then, if the contract is opened for renegotiation, then it will create a bad precedence and other such government-to-government contracts may also face the same problems. Besides, in the new price ceiling, the entire pricing formula may have to be reworked.

The other option is to rework the contract but include the additional 2.5 million tonnes a year supply of LNG into the fresh contract.

... Payvand News - 02/09/08 ... --

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