GAS PRICES AND PRICING

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GAS PRICES AND PRICING

Peter Ross, Wimbledon Energy Slide

Peter Ross, Managing Director, Wimbledon Energy, UK

ASIAN GAS BUYERS SUMMIT

MUMBAI

March 25 2003

IBC Gulf Conferences FICCI

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GAS PRICING


“How prices are determined is often a mixture of voodoo and bingo.”

London Business School, Assistant Professor of Marketing 2002

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GAS PRICING


“The LNG market is becoming more and more a liquid market with short period supply contract and a netback pricing instead of a long contract with defined pricing formula."”

Abdullah Al-Attiyeh, Minister of Energy & Industry, Qatar 29 October 2002 at IBC Conference MEGAS 8, Tehran.

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GAS PRICING


"We want to buy LNG preferably on a fixed price basis ... we want the supply of fuel to have minimum linkage with the movement of the international crude oil price.”

Mr. Jain, Chairman, National Thermal Power May 2002

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CRUDE OIL INDEXATION


Paper, Futures

and other Derivatives

15 Day IPE M + 1

CFD

BFO

Other crudes priced by reference DB +/-

Now

Physical Not to Scale

"BRENT"

Nymex 2001: “two thirds of world production c. 50 mmbbls/day are priced directly or indirectly against

Dated Brent”

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CRUDE OIL - JCC


The average of 17 crude oils imported into Japan

History

Relevance now?

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CRUDE OIL - JCC


Japanese consumer still pays too much for energy

And

Still a very rich consumer economy

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CRUDE OIL - JCC


“Hold close to nurse

for fear of something worse”

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RasGas SELLING TO PETRONET


Volume building 2.5 mty to 5 mty LNG

25 years

MBQ (take or pay) basis Price indexed to JCC

3 Indian company marketing team

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INDIAN MARKET FOR GAS


Power + fertiliser 80%

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Fuel – naphtha Replace with pipeline gas

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Pricing naphtha Crude oil * 1.2 current / historic assumption ?

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INDIAN MARKET FOR ELECTRICITY


Relationship to crude oil ? Relationship to naphtha ? Future relationship ?

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INDIAN MARKET FOR ELECTRICITY


End-user ability to pay? State electricity boards? NTPC declined LNG proposal as too expensive - preferred their own tender Compare fertiliser companies as a market

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QATAR AS PRODUCER


Drill and produce gas

Sell gas, LNG and condensate

Use ethane

Build liquefaction, jetties, etc

Use gas for power

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QATAR AS PRODUCER


Raise finance

Load LNG ships

Use boil-off

Diesel?

Unload

Receive USD

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QATAR AS PRODUCER


LNG price

Relevance of crude oil?

Relevance of JCC?

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QATAR AS PRODUCER


Gas price for projects in Qatar

is not related to

JCC;

or to Crude oil

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OMAN AS PRODUCER


Gas into fertiliser plant

For export to India

Price is $0.80

Not JCC

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INDIA - GAS PRICE AT CONSUMER GATE


LNG price DES excludes

Regas facilities andVery high customs duty on LNG capital goods

Very high Import taxPipeline transport

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Consumer can afford maximum $3.50 at gate

Suggests LNG max DES $2.50

Most need a lower price

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Domestic production approx. $2 to $3.5 delivered

Can be complex / subsidised

Can be localised e.g. NE Region

1997 target: parity fuel oil in 4 years

Rs 2,850 / m3 (2002) + tax + transport

40% Fuel Oil parity 2002 estimate

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Gas Consumer targets include

NTPCLNG $2.50 to $3.00 Enabling 2.5c to 3.0 c/kWh

Also = Dhabhol viability estimate

“Stability”Naphtha minus 20%

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INDIA - PRICE FOR IMPORTED GAS


August 2002 sign main price terms

BaseJCC = $18 LNG des = $2.28

Seller proposes

FloorJCC = $16LNG des = $2.03

Cap JCC = $24LNG des = $3.04

And finalise fully termed GSPA asap ........

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INDIA - PRICE FOR IMPORTED GAS


November 2002

Seller: OK,

Cap reduced to JCC = $21 to $22

Provided GSPA signed very soon OrRevert to previous pricing

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INDIA - PRICE FOR IMPORTED LNG


February 2003

No sales at all announced

To Indian consumers

By LNG Buyer

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• Negotiating position of seller

• Consumers price expectation now

• Gas discovery in India

• LNG Buyer’s terminal

• Pipeline

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Who can afford to move?

Indian consumer?

Qatari seller of gas and associated liquids?

Indian government?

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INDIAN GOVERNMENT ROLE


Low LNG import price – good for

Clean efficient industryBalance of paymentsIndian tax base versus end-user

Other countries phasing out import taxKorea – no tax on LNG import for power

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LNG PRICING INDXATION


Includes

Mixed basket

Coal indexed

etc

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LNG PRICING


We’ve seen

• Oman remove the floor

• Tepco and Tokyo Gas concede

volume and shipping flexibility

• Customer responsive

• Trinidad to USA / Netback

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LNG PRICING - GENERAL


MORE FLEXIBLE TERMS

More flexibility for Buyer on offtake

More downward quantity toleranceExtended catch-up or make-up after an undertakeLinked relaxation of the MBQ obligation

Duration Shorter to medium contract durations 5 to 10 years, to complement existing longer term 20to 25 year contracts

as demand growsdiversification of risks and timing, price, contract termsbetter average terms, and more flexibilityportfolio of long term, medium term, spot supplies

Option to extend contract on notice

Volume Option to reduce the contract volume on notice

Price Move from crude oil indexation to a more market related and risk diversifying mixed basketof indices e.g. oil products, electricity, coal

Shipping Option to switch from cif to fob for some / all volume on noticeCargo diversion rights

Service Meeting irregular demandMeeting summer air-conditioning peak demandFlexible supply – requirements based, without need to make-up

Price may reflect the degree of service required by the Buyer, but volume, shipping and durationflexibilities have been secured at competitive price.

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LNG PRICING


Now much more competitive

Limited market for LNG

Inflexible deliverability

Price is coming down

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GAS PRICING


• Equatorial Guinea

• Big gas find

• Rapid development

• Price of gas 25 cents into plant

• Profit from royalty and NPI on plant

• LNG and GTL for next development

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GAS PRICING


Move bulk at low price

Collect rent mid and down stream

Add value; service; associated liquids

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GAS PRICING


Possible:

Market related LNG versus traditional pricing -flexibility

Gas long market erodes MBQs – classic

Increased infrastructure = competition = erosion of MBQs

GTL priced against oil products netback – “no gas price”

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GAS PRICING


• Gas increasingly as a commodity

• Market gas long?

• Failure to monetise – competition

• Take your profit where?

• Market segmentation

• Risk diversification

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GAS PRICING


OR

STORE IT IN THE GROUND

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GAS PRICING


“Why should people in Europe suffer for the price of my gas because of what’s happening in Venezuela ?”

Egyptian Oil Minister, Mr. Sameh Fahmy, February 2003.

Proposing new gas price-fixing formula, ending link

between gas prices and crude oil prices.

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The next big success story

Our Indian hosts?


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THE END


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GAS PRICES AND PRICING