Why GAIL cut gas supplies and what could be its possible impact

Could India be staring at a natural gas shortage over the next few months as we approach the winters?

If the latest move by India’s biggest gas supplier is anything to go by, such a scenario may certainly be in the offing.

GAIL (India) Ltd has reportedly started rationing gas supplies to fertiliser and industrial clients after imports were hit under its deal with a former unit of Russian energy giant Gazprom.  

GAIL, which imports and distributes gas and also operates India's largest gas pipeline network, has cut supplies to some fertiliser plants by 10% and restricted gas sales to industrial clients to the lower tolerance limit of 10%-20%, a report said.

Citing unnamed sources, the news report has said that Gazprom Marketing and Trading Singapore (GMTS), now a subsidiary of Gazprom Germania, has failed to deliver some liquefied natural gas (LNG) cargoes to GAIL and has said it may not be able to meet supplies under their long-term deal.

So, why should this be a cause for worry?

This should be a cause for concern as a shortage would cause Indian companies to look for costlier gas supplies in the spot market. Not only will this mean a higher import bill and forex outgo, it would also be cost inflationary as the price of costlier gas will have to be factored into the prices of downstream commodities.

How bad is the situation?

While GAIL has not said anything about the issue on record, the report said that the state-run company is operating its petrochemical complex at Pata in northern India at about 60% capacity to save gas for other clients, they said. GAIL has advanced maintenance shutdown of some units at the 810,000 tonne-a-year plant.

GAIL has reportedly restricted its gas quantities to a 'take or pay level', the lowest level at which it will not attract a penalty from the customer.

What will be the net impact of this rationing?

GAIL's measures will cut gas supplies to clients by about 6.5 million cubic meters a day, while imports under the Gazprom deal were averaging about 8.5 mcmd.

Has GAIL already had to buy gas from the international spot market to meet demand?

Yes. Last month, GAIL bought a spot LNG cargo at $38 per million British thermal units (mmBtu) for August loading, well above the level at which it was getting gas under its deal with Gazprom, at about $12-$14 per mmBtu.

What really was the GAIL-Gazprom deal?

GAIL agreed a 20-year deal with Russia's Gazprom in 2012 for annual purchases of an average 2.5 million tonnes of LNG. Supplies under the contract began in 2018.

GMTS had signed the deal on behalf of Gazprom. At the time, Gazprom Germania was a unit of the Russian state firm.

However, following Western sanctions against Russia over its invasion of Ukraine, Gazprom gave up ownership of Gazprom Germania in early April without explanation and placed parts of it under Russian sanctions.

Could this have an adverse effect on the Indian rupee?

Yes, if India has to pay higher for gas imports, its overall energy import bill will go up and consequently the balance of payments will get skewed. So, yes, it could further weaken the rupee which is already struggling against the US dollar and is near its all-time lows. A weaker rupee will make imports even costlier.