State-run GAIL (India) Ltd has initiated arbitration against a former unit of Russia's Gazprom in London after the latter reneged from its contractual obligation to supply liquefied natural gas (LNG), Chairman and Managing Director Sandeep Kumar Gupta said on May 19.

“They had alleged force majeure. We did not accept that considering that this was a portfolio contract and they should have supplied from other territories if there was actually an issue in supplying Russian gas,” Gupta said.

“We have taken this up legally against them to press for this specific performance and to claim damages. Our request for arbitration has been filed,” he said.

In 2012, Gazprom Marketing and Trading Singapore (GMTS), a unit of the German arm of Gazprom, entered into a 20-year deal with GAIL for the supply of 2.5 million tonnes of LNG. Subsequent to the Western sanctions on Russia after it invaded Ukraine, the parent Gazprom relinquished the ownership of Gazprom Germania. In April 2022, the German government placed Gazprom Germany in the trusteeship of the Federal Network Agency (Bnetza), renaming it SEFE.

Last year in May, SEFE declared force majeure citing the war in Ukraine, and suspended supplies to GAIL. Gazprom started diverting some cargo from Singapore to Europe to fetch better prices. Meanwhile, GAIL had to cut down supplies to its customers and was forced to buy expensive LNG from the short-term market.

Gupta said that the arbitration has been filed in a London court but declined to disclose the quantum of damages that GAIL is seeking.

“We are pressing for a specific performance and the additional cost, which we had to incur for the period. I can't quantify it as of now. The amounts will be submitted to the arbitration tribunal later when it is constituted,” he said.

GAIL’s standalone net profit almost halved to Rs 5,301.51 crore for fiscal 2022-23 as against Rs 10,363.97 crore in the previous year as it was hit by the double whammy of disruptions in supply from Gazprom and a steep rise in gas prices.

GAIL said supplies from SEFE have now been restored.

“The supplies have resumed and we are now receiving the full quantity as per contract for the past two months. We expect those volumes to continue in the future also,” Gupta said.

In March and April, SEFE supplied two cargoes of LNG and has indicated that it will supply four cargoes per month in May and June. But the resumption in supplies happens at a time when gas prices have softened, which means that GAIL is paying a higher price based on the contract even as spot prices have declined.

“We are paying according to the contractual formula, which takes an average of nine months,” Gupta said.

GAIL officials told Moneycontrol on the sidelines of the press meet that it paid an average of $13 per mmBtu for the cargoes from SEFE even as spot market prices are around $10 mmBtu. Natural gas prices have softened, lowering prices of LNG, due to receding winter in Europe and muted demand in China.