Iran to stop LNG supply to India if oil crosses $ 80/barrel

Iran’s National Iranian Gas Export Corporation (NIGEC) has said it will reserve the right to withdraw supply of 2.5 mm tons of LNG to IOC, GAIL and BPCL, if global crude oil prices cross $ 80 per barrel.
This is the first time that Iran has put such a stiff condition while negotiating LNG supply to Indian oil companies. LNG prices are linked to the global oil price movement in long-term contracts.

Such a clause would be difficult for India to accept as these long-term contracts fuel large projects in vital sectors like power and fertilisers, and it may not be possible to provide back-up at short notice, if supplies are suddenly withdrawn.
Senior petroleum ministry officials who were in Tehran came back somewhat disappointed that NIGEC wanted a more open-ended contract, full of uncertainties. Officials said Iran also refused to concede the standard practice of agreeing to a price band, with a floor and ceiling, to arrive at a long-term contract price.

For instance, in the past, India has done similar deals with Qatar with a floor price of $ 16 per barrel and ceiling of $ 32 per barrel. This price band insulates both the buyer and seller of LNG from volatility in oil prices. Consequently, if oil prices fell below $ 16, India would continue to pay Qatar, the supplier, at the same price. If the oil prices rose above $ 32 per barrel, India could continue paying that price for LNG.
However, in the current negotiations, Iran is refusing to agree to a floor and ceiling, possibly because of the current view that oil prices are not likely to come down in the medium term. So Iran wants to make the best of a rising market. It is this logic that has prompted Iran to put in a fresh clause that above $ 80 it must be allowed to call off the deal.

The Indian government is in a spot and does not know how to respond to these conditions. There is also some pressure on the government from the Left parties, which want relations with Iran to be restored after India voted against Iran at the International Atomic Energy Agency (IAEA) on the latter’s nuclear programme.
Iran’s stiff conditions on the 2.5-mm tpy LNG deal is on top of problems over the MoU relating to the 5-mm tpy LNG supply, which the new government in Iran has not ratified.

Recently, IOC, GAIL and BPCL, signatories to the $ 20-bn India-Iran LNG deal, legally questioned NIGEC’s claim that work on the project cannot begin without a formal ratification of the agreement by the new regime in Iran.
The two companies had backed their claim with a legal opinion by the attorney-general, saying an agreement signed under one regime need not be ratified by a subsequent government.