Costly sanction battles
Garman Foreign Policy, 11 Dec 2023
India’s largest gas utility demands US $1.8 billion in compensation from German supplier SEFE (formerly Gazprom Germania) for non-supply. The reason: sanction battles with Russia.
Gail, India’s largest natural gas utility, is demanding up to US $1.8 billion in compensation for contact breach by GMTS, a subsidiary of the German gas supplier SEFE (ex-Gazprom Germania). The arbitration claim is based on GMTS’s failure to deliver agreed liquefied natural gas cargoes to Gail last year. The German company had planned to deliver Russian LNG, but Russia’s response to the EU sanctions regime meant that it has not received Russian gas since late spring 2022. Although SEFE/GMTS managed to procure LNG from alternative sources, it has prioritised deliveries to the German market. Gail estimates the damage caused by supply shortfalls to be in the billions of dollars. The Indian company has now initiated proceedings before the International Court of Arbitration in London. India was not the only country in South Asia to suffer LNG shortages last year as European energy companies snapped up available stocks on the global market and drove up prices. Bangladesh and Pakistan also saw a sharp decline in LNG imports. Indeed, only this month has Pakistan received its first gas shipment from the spot market since mid-2022.
Dispute over Gazprom Germania
The background to the current compensation claim by the Gail energy group is a dispute over Gazprom Germania. This former unit of the Gazprom group was placed under the trusteeship of the Federal Network Agency on 4 April 2022 – reportedly because Gazprom wanted to liquidate the entity, thus causing major problems for Germany’s utilities.[1] Gazprom Germania had handled almost half of Germany’s gas imports. Moscow responded to this move by imposing sanctions on Gazprom Germania and its subsidiaries on 11 May 2022, after which no more Russian gas could be supplied to the company. Gazprom Germania then had to source natural gas elsewhere, at significantly higher prices, in order to avoid jeopardising supplies to Germany. On 14 November 2022, the Federal Ministry of Economics finally ordered nationalisation of the company, which had already been rebranded as SEFE (Securing Energy for Europe) since 20 June.[2]
It was reported that the German government could escape the compensation claims due to the parent company, Gazprom, by arguing that Gazprom Germania/SEFE had already incurred losses of more than €3 billion euros by the end of August, while the company’s equity value amounted to no more than one billion euros.[3] So the German position is that any compensation is out of the question.
Europe first
The conflict has had major repercussions for Gail, India’s largest and majority state-owned gas provider, because Gail had concluded a 20-year contract with the Gazprom unit GMTS (Gazprom Marketing and Trading Singapore) in 2012, a deal that was later transferred to Gazprom Germania. The contract stipulated that GMTS was to supply Gail with 2.5 million tonnes of LNG on average each year.[4] However, following the imposition of Russian sanctions on SEFE, GMTS stopped receiving Russian natural gas. Gail received one last LNG cargo in June 2022, after which deliveries were stopped completely. Supplies were only resumed this year after Moscow lifted sanctions on SEFE and its subsidiaries. By then, Gail had lost a total of 30 shiploads of liquefied gas. The complaint levelled by the Indian energy group against GMTS is that the latter had been contractually obliged to procure replacement deliveries from other sources for any cancelled Russian deliveries. GMTS said it was not prepared to do so, arguing that it first had to “meet demand in Europe” [5] and offering to pay Gail only a contractual penalty calculated at 20 per cent of the gas purchase price [6].
Losses in India
Gail suffered major losses as a result of the supply shortfall. The Indian utility calculates that GMTS gas was contributing at least eight to nine per cent to annual sales. Replacing this input meant buying NLG on the spot market, which was much more expensive, costing up to three times the price agreed with GMTS.[7] Even so, Gail could not make good the gas shortages. It failed to meet the demand of important customers, such as Indian fertiliser producers and other industrial clients. These businesses were damaged and Gail itself saw its pre-tax profit fall by more than US $700 million in the 2022/23 financial year. The group attributes its difficulties primarily to non-supply by GMTS.[8] Its position is that GMTS had been contractually obliged to procure liquefied gas from non-Russian sources as a replacement but failed to do so. Now demanding compensation of up to US $1.8 billion from the German supplier, Gail has initiated proceedings at the International Court of Arbitration in London.[9] In response, SEFE subsidiary GMTS is trying to defend itself by claiming that the Russian sanctions came as a “force majeure” for which it is not responsible. Observers doubt that the Court of Arbitration will accept this defence.
“Sucked dry”
Gail was by no means the only gas utility in South Asia to be hard hit last year by the dire supply situation as European corporations combed global markets, buying up virtually all available LNG stocks for consumption in Europe. As prices were driven up, there was hardly anything affordable left for other players. In the first half-year of 2022, European countries increased their LNG imports by 49 per cent against the same period of the previous year. In July 2022, Pakistan’s Petroleum Minister Musadik Malik complained, “Every single molecule that was available in our region has been bought by Europe because they want to reduce their dependence on Russia.”[10] An expert from Wood Mackenzie, a consultancy specialising in energy and commodities, was quoted as saying, “The European gas crisis is sucking the world dry.”[11] Bangladesh, for example, which generates a good three quarters of its electricity from liquefied natural gas, reported at the beginning of July 2022 that the government had to impose electricity rationing. Its fragile industrial sector, which had been experiencing a cautious upturn, was hit particularly hard. According to industry data, Bangladesh’s LNG imports fell from 5.08 million tonnes to 4.43 million tonnes in 2022, a drop of 13 per cent[12].
Losers and winners
As for Pakistan, the exorbitant prices on the spot market meant the country was unable to purchase even one large LNG cargo. Even those imports that had been contractually guaranteed did not arrive. Liquefied natural gas producers were able to charge such extortionate prices in Europe that it was more profitable to divert the LNG shipments already on course for Pakistan to European markets and pay the contractual penalty due to Islamabad. The state-owned Pakistan LNG Ltd (PLL) announced in early October 2023 that it had just succeeded in acquiring the first liquefied gas cargo in over a year and expected it to arrive in December.[13] Pakistan’s industry was badly damaged by the energy deficits. The combined LNG imports to India, Pakistan and Bangladesh sank by 18 per cent in 2022,[14] while gas imports to the EU-27 and UK rose by 73 per cent.
[1] Martin Greive, Mareike Müller, Julian Olk, Klaus Stratmann, Catiana Krapp, Moritz Koch: So entging Deutschland knapp einem Blackout. handelsblatt.com 09.12.2023.
[2] Treuhandverwaltung SEFE Securing Energy for Europe GmbH. bundesnetzagentur.de.
[3] Klaus Stratmann: Bund verstaatlicht Ex-Gazprom-Tochter Sefe. handelsblatt.com 14.11.2022.
[4], [5] Former Gazprom unit cuts LNG supplies to India. businesstoday.in 04.08.2022.
[6] Gazprom Singapore Pays ‘Meagre’ Penalty For Defaulted LNG Deliveries To India. outlookindia.com 12.09.2022.
[7] Former Gazprom unit cuts LNG supplies to India. businesstoday.in 04.08.2022.
[8] Mathias Peer: Deutsche Staatsfirma soll 1,8 Milliarden Dollar zahlen. handelsblatt.com 07.12.2023.
[9] GAIL seeks $1.8 bn from former Gazprom unit. economictimes.indiatimes.com 01.12.2023.
[10] Nasrul: Use gas and electricity judiciously. dhakatribune.com 06.07.2022. See also After us the Deluge.
[11] Saeed Shah, Anna Hirtenstein: Europe Scoops Up LNG, Choking Off Power Supplies in Poorer Nations. wsj.com 07.07.2022.
[12] Another deal inked with Oman to increase LNG import. tbsnet.news 19.06.2023.
[13] Daniyal Ahmad: Pakistan buys first LNG spot cargo since 2022. profit.pakistantoday.com.pk 04.10.2023.
[14] Global liquefied natural gas trade volumes set a new record in 2022. eia.gov 05.07.2023.