Ex-Gazprom Unit Pays Tiny Penalty to Cancel LNG Cargoes to India

The former unit of Gazprom PJSC is paying a small penalty to scrap scheduled liquefied natural gas shipments to India, according to a government official.

The move is the latest example of energy suppliers exercising cancellation clauses in long-term contracts to free up shipments to sell into the more lucrative spot market. The strategy is becoming popular because spot prices are far higher than the value of shipments via long-term contracts, which were signed before the current energy crunch.

The Singapore unit of SEFE Marketing & Trading Ltd., formerly known as Gazprom Marketing & Trading Ltd., is continuing to cancel promised LNG supply to GAIL India Ltd. by paying a fee of 20% the value of the contractual shipment, according to an Indian government official. The penalty is roughly 4% the value of current spot gas prices in Europe, according to Bloomberg calculations.

A GAIL spokesperson declined to comment. SEFE wasn’t immediately able to comment.

GAIL’s contract allows for SEFE to cancel a shipment for a penalty, the Indian official said. However, the cancellation puts the company at a big disadvantage.

Due in part to that loss, GAIL was forced to purchase a September delivery shipment from the spot market at nearly $40 per million British thermal units last week, according to traders with knowledge of the matter. A shipment from a long-term contract would be nearly one-fourth the price.

The global energy crisis is upending the sanctity of long-term contracts, forcing some cash-strapped developing nations to rethink the role of LNG in their power mix. The cancellations are also exacerbating supply shortfalls in nations that can’t afford the pricey spot market.

India, the world’s third-biggest energy consumer, meets about half of its gas requirements through imports, and the supply shortfall is squeezing fuel for industries such as petrochemical plants, oil refineries, steel mills and fertilizer makers.

--With assistance from Todd Gillespie.