Issues in Gas Pricing

7/31/2019 Issues in Gas Pricing

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Issues of Gas Pricing in the

context of Domestic Gasand LNG for competitive

PricingPrepared By:Siddharth Madan 2011E01Venkayya Chowdary 2011E05Anoop Thomas 2011E0827/07/2012


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Definition.

n Primary methanen Converted liquid @ -162 cent

n Reduces by 600 times


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Current Scenario

n Worlds 7th largest

n Natural gas:

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

n 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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r c ng an oca on oUpstream and Midstream

Gasn 2007:Pricing formula GP=2.5+(OP-25)^.15

n

Demand VS Supplyn Gas utilisation policy

n Priority

n Fertilizers, LPG & petrochemicals

n Power , CGD, Refineries


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Regulations for PricingDownstream Gas

n Price fix by EGoM :1987-2005

n 2002: APM

n 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:

The pricing of JV gas is governed in terms of the PSC (Production Sharing

Contract)provisions.

The price of LNG imported under Term contracts is governed by the SPA (Special Purchase

Agreement)

between the LNG seller and the buyer. Spot cargoes purchased on mutually agreeable commercialterms

Gas priced under APM(Administered PricingMechanism)

Non-APM or free marketgas.Domestically produced

gas from JV fields.Imported LNG


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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.


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APM prices - June 2010

Price of APM natural gas produced by National Oil Companies has beenfixed 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 theRBI 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.


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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.


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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 commencedfrom April 2004.

This quantity has subsequently increased to 7.5 MMTPA effective from

January 2010.

LNG Pricing is divided into 3 types of contracts:

n Long term contracts

For the first five years, Petronet paid a fixed-price agreed in thecontract (USD 2.53/MBtu for 5 mtpa). In January 2009, this price wasraised to USD 3.12/MBtu while volumes increased to 7.5 mtpa in Q42009.


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Pricing issues

APM gas supplies have been declining while non-APM gas sawa dramatic

increase in volume and share.

APM gas has been allocated in priority to power producers andfertilisers, 2

sectors expected to see their demand increasing .

Ministry of Petroleum and Natural Gas has been pushing forhigher prices to

limit losses from the PSU.

Pricing issues are divided into 2 parts


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Supply side issues

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

Gas prices have to be high enough in order to attractupstream investments,

and cover production costs and the recovery of capital in orderto limit.

Under-recoveries from PSUs (the difference between theinternational

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 closerto market prices while maintaining the consumerscompetitiveness.

KG-D6 gas price for the first five years of production is USD4.21/MBtu,

being a private sector company, RIL cannot sell gas at undercost; therefore

their clients have to be able to pay cost-plus for any of theirgas.

There are two direct competing fuels for gas in these two

sectors:


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New Price PoolingMechanism

n Means of Balancing

n Customers Expectations &

n Suppliers Expectationsn Need of Price Pooling Mechanism

n Expansion not in tandem with demand

n Rapid demand from Power & FertilizerIndustry

n LNG a potential gap filler:

n Higher price of LNG


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New Price PoolingMechanism


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Road Map of PoolingMechanism


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Conclusions

n Clear cut Policy and RegulatoryFramework

nTo attract investments

nTo sustain Higher Economic Growth

nTo deal with poverty

n

Lack of Rationalization of Pricesn Lack of investment of upstream

n Lack of investment in efficiency

(Demand Market)


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References

n Report on Natural Gas in India: IEA

n Report on Pricing of Natural Gas ,Indian infrastructure.

n Report on Common Pool Pricing byMercados Energy MarketInternational and GAIL

n Websites

n http://www.eia.doe.gov/cabs/India/Natur

alGas.html


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Thank You

Documents

Issues in Gas Pricing