Issues of Gas Pricing in the context of Domestic Gas and LNG for competitive Pricing

Prepared By: Click to edit Master subtitle style Siddharth Madan 2011E01 Venkayya Chowdary 2011E05 Anoop Thomas 2011E08 27/07/2012

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Definition.

n Primary methane n Converted liquid @ -162 cent n Reduces by 600 times

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Current Scenario
n n

Worlds 7th largest Natural gas:

n India 11% n World 24%(production & consumption)

Deficit:
n Import 2010:45MMSCMD; 2011-

12:140MMSCMD
n

No cross country pipeline

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Demand Projections..

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Gas Supply projections..

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Demand supply gap.

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Regulatory Frame work

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Pricing and Allocation of Upstream and Midstream Gas

2007:Pricing formula GP=2.5+(OP25)^.15 Demand VS Supply
n Gas utilisation policy

Priority
n Fertilizers, LPG & petrochemicals n Power , CGD, Refineries

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Regulations for Pricing Downstream Gas

n n n

Price fix by EGoM :1987-2005 2002: APM 2006:

n PNGRB created n End of monopoly n Build & operate

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Current pricing mechanism in India

Broadly 2 pricing regimes for gas in the country:

Non-APM or free market Gas priced under APM gas. (Administered Pricing Domestically produced The pricing of JV Mechanism) gas is governed in terms of the PSC (Production Sharing gas from JV fields. Contract) provisions. Imported LNG Click to edit Master The price of LNG imported under subtitle style

Term contracts is governed by the SPA (Special Purchase Agreement) between the LNG seller and the buyer. Spot cargoes purchased on mutually agreeable commercial terms

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Administered Pricing Mechanism

Prices administered by the govt of India.

The Government raised the consumer price be revised from Rs. 2,800/MSCM to Rs. 3,200/MSCM with effective from July 1st 2005 for the following categories of consumers. Power sector consumers Fertilizers sector consumers Consumers covered under court orders Consumers having allocations of less than 0.05 MMSCMD

Prices were further revised by the Tariff Commission. 9/1/12

APM prices - June 2010

Price of APM natural gas produced by National Oil Companies has been fixed at US$ 4.2/ MMBTU.

The Pricing would be on NCV basis.

The price would be converted to Rs/mscm ( @10,000 Kal/scm) at the RBI reference exchange rate of the month previous to the month during which supply of AP gas is made.

Price exclusive of cess, transportation charges, marketing margin/service charge, tax. 9/1/12

Production sharing contracts

Pricing under PSC is divided into 2 parts:
n Pricing under pre NELP Provision. n Pricing under the NELP Provision.

Pricing under NELP Provision

EGOM was set up to decide the pricing mechanism.

Selling price (in US $/MMBTU) = 2.5 + (CP-25)0.15 (in US$/MMBTU).

CP=crude price in US$/barrel, with cap of CP=US $60/barrel. 9/1/12

LNG Pricing
A contract was signed with RasGas, Qatar for supply of 5 MMTPA LNG (equivalent to about 18 MMSCMD) by Petronet LNG Limited (PLL) and supplies commenced from April 2004. This quantity has subsequently increased to 7.5 MMTPA effective from January 2010.

LNG Pricing is divided into 3 types of contracts:

Long term contracts

For the first five years, Petronet paid a fixed-price agreed in the contract (USD 2.53/MBtu for 5 mtpa). In January 2009, this price was raised to USD 3.12/MBtu while volumes increased to 7.5 mtpa in Q4 2009. 9/1/12

Pricing issues
APM gas supplies have been declining while non-APM gas saw a dramatic increase in volume and share.

APM gas has been allocated in priority to power producers and fertilisers, 2 sectors expected to see their demand increasing .

Ministry of Petroleum and Natural Gas has been pushing for higher prices to limit losses from the PSU.
9/1/12 Pricing issues are divided into 2 parts

Supply side issues

From the supply side, keeping artificially low APM prices is a big challenge.

Gas prices have to be high enough in order to attract upstream investments, and cover production costs and the recovery of capital in order to limit.

Under-recoveries from PSUs (the difference between the international market prices and the domestic retail price) is also an issue.
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Demand side issues

On the demand side, the challenge is to perform a transition to prices closer to market prices while maintaining the consumers competitiveness.

KG-D6 gas price for the first five years of production is USD 4.21/MBtu, being a private sector company, RIL cannot sell gas at under cost; therefore their clients have to be able to pay cost-plus for any of their gas.

There are two direct competing fuels for gas in these two sectors:
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New Price Pooling Mechanism

n

Means of Balancing
n Customers Expectations & n Suppliers Expectations

Need of Price Pooling Mechanism

n Expansion not in tandem with demand n Rapid demand from Power & Fertilizer

Industry

n LNG a potential gap filler:

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Higher price of LNG

New Price Pooling Mechanism

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Road Map of Pooling Mechanism

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Conclusions
n

Clear cut Policy and Regulatory Framework

n To attract investments
n n

To sustain Higher Economic Growth To deal with poverty

Lack of Rationalization of Prices

n Lack of investment of upstream n Lack of investment in efficiency

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(Demand Market)

References
n n

Report on Natural Gas in India: IEA Report on Pricing of Natural Gas , Indian infrastructure. Report on Common Pool Pricing by Mercados Energy Market International and GAIL Websites
n http://www.eia.doe.gov/cabs/India/Natur

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alGas.html

Thank You

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