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Report of the Committeeon Gas Pricing - 2014
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INDEX
Chapter No. Topic ·PageNo.
1 Introduction 1-2.2 Natural Gas Price Regimes in India . 3 - 12
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r Government's role in PSC regime after the3 13 - 14Judgment of Hon'ble Supreme Court in Civil
Appeal no 4274 of 2010 ..I~
4 Discussion regarding the Rangarajan 15 - 21Committee Report-
5 Suggested Approach for Gas Price 22 - 23Determination
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CHAPTER-1
1.1 Introduction:
The Government of India had constituted a Committee under the Chairmanship of Dr.C. Rangarajan, the then Chairman of the Economic Advisory Council to the PrimeMinister, in May 2012 to look into the Production Sharing Contract (PSC) mechanismin Petroleum Industry. One of the terms of reference (ToR-v) of the Committee was to
suggest structure.and elements of the guidelines for determining the basis or formulafor the price ofdomestically produced gas, and for monitoring actual price fixation. Acopy of the above mentionedToR is at Annexure-I.
In December 2012, the Committee submitted its report on Production Sharing Contract
(PSC) mechanism in Petroleum Industry. The report, inter-alia, recommended a
formula for pricing of domestically produced gas. The relevant Chapter (24) dealingwith the recommendations on the above ToR is at Annexure-II.
This issue was considered by the Cabinet Committee on Economic Affairs twice, on27thJune, 2013 and 19thDecember, 2013. Thereafter the Government notified the
<, Domestic Natural Gas Pricing Guidelines, 2014 on 10th January, 2014
(Annexure-III) setting out the formula for the price of domestically produced natural .
gas, based on the recommendationsof the RangarajanCommittee.
The Notification was to be implemented with effect from 1stApril, 2014. But the samecould not be implemented as the Election Commission deferred the notification of GasPrice till the completion of 2014 Lok Sabha General Election process. After the newGovt. assumed office, it was decided that the whole issue of gas pricing becomprehensively re-examined and directed that the Domestic Natural Gas Pricing
Guidelines, 2014 be kept in abeyance up to 30 September, 2014, and till that time, thedomestically produced gas may continue to be priced at the rate prevailing on 31st
March,2014.
1.2 Constitution of the Committee:
On 13thAugust, 2014, the Ministry of Petroleum and Natural Gas constituted a
Committee comprising the following members:
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1. Sri P K Sinha, Secretary (Power), Govt. of India, Member
2. Sri Ratan P Watal, Secretary (Expenditure), Govt. of India, Member
3. Sri J K Mohapatra, Secretary (Fertilizers), Govt. of India, Member
4. Sri Rajive Kumar, Addl. Secretary, (P&NG), Govt. of India, Member Secretary.
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The Terms of Reference (ToR) of the above Committee was to undertake acomprehensive re-examination of the issue of Gas Pricing. The Committee was alsomandated to consult the major stakeholders before submitting its recommendations.
The Committee deliberated upon the scope of its ToR, keeping in view the limited ~me
available to it. In the backdrop that this issue has already been considered twice bitheCCEA, the Committee felt that all the issues that arise out of the Rangarajan
Committee's recommendation on gas .pricing be examined in detail, along with otherrelated issues.
1.3 Issues before the Committee:
The Committee discussed the issues related to domestic gas pricing on 19.08.2014,
22.08.2014,28.08.2014,03.09.2014, 05.09.2014, 09.09.2014, 11.09.2014, 14.09.2014and 15.09.2014 in the light of the Terms of Reference (ToR) mentioned above. TheCommittee met with the representativesof the major producers and consumers of gasin India, including their Associations, on 25.08.2014 and subsequently reviewed therepresentations made by them. The comments from the Department of EconomicAffairs, Department of Micro, Small and Medium Enterprises, Department of HeavyIndustries and Public Enterprises, Department of Steel and Department of Chemicaland Petrochemicals were also invited. The Committee also considered! deliberated indetail on specific issues on gas pricing as suggested by Ministry of Petroleum andNatural Gas. It also considered the views expressed by the Parliamentary StandingCommittees relating to Ministry of Petroleum and Natural Gas and the Ministry ofFinance on the subject (Annexure-IV) and also the comments by various Ministries!
Departments at the time of consideration of Rangarajan Committee Report by theCCEA.
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CHAPTER-2
Natural Gas Price Regimes in India
The issue of gas pricing has been examined over the years by a number ofCommittees. The position of gas produced under different regimes and its supply todifferent sectors during 2013-14 may be seen at Annexure-V. The prevalent pricing
regimes for gas in the country are detailed below:
The natural gas produced by ONGC and OIL from nominated blocks comes either
from existing or from new fields (Le. the ones which went into production after May,
200S). There are separate price regimes for these two, viz., Administered PribingMechanism (APM) and Non Administered Pricing Mechanism. Of the 80.02 MillionStandard Cubic Meters per day (MMSCMD) of total supply of domestic gas in 2013-14, 47.18 MMSCMD (S8.96%)was under the Administered Price Mechanism (APM),while 9.12 MMSCMD (11.40%)was under Non-APMmechanism.
2.1 Administered Pricing Mechanism (APM)
Gas produced from existing fieldsof the nominated blocks of National Oil Companies(NOCs), viz., OIL & ONGC, is covered under this mechanism. These gas-producingblocks were allotted to National Oil Companies on a nomination basis under the tax
royalty regime. This gas is being supplied predominantly to fertilizer plants, power
plants, court-mandated customers, and customers having a requirement of less than
SO,OOOstandard cubic metres per day at APM rates. The price for APM gas wasinitially fixed on cost plus basis. However, with effect from 01.06.2010, theGovernment fixed APM gas price in the country at $ 4.2/mmbtu (inclusive of royalty),except the Northeast, where the APM price is $ 2.S2/mmbtu, (60% of the APM priceelsewhere). The balance 40% is paid to the NOCs as subsidy from the Government
Budget. The price of APM gas supplied to customers not entitled for APM gas is beingnotified by the Ministry of Petroleum and Natural Gas from time to time. This price,effective from 1.7.2010, is as below:
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Area I Zone Price ($/mmbtu)
Western & NorthernZones (coveringMaharashtra,Gujarat and other States covered by HVJI DVPL, viz., 5.25Rajasthan,M.P., U.P., Haryana& Delhi)
SouthernZone -- KG Basin 4.5
Southern Zone -- Cauvery Basin 4.75
North-East ., 4.2
Identified onshore fields in Gujarat & Rajasthan 5.0,
Owing to existing supply linkages and operational requirements, it would happen thatcustomers entitled for APM gas physically get market priced gas and vice versa. It wasdecided to have a Gas Pool Account mechanism with inflows coming from sale ofAPM gas to consumers not entitled for APM gas at market price and outflow being forpurchase of non-APMgas for supply to customers entitled for gas at APM price.
2.2. Non-APM Gas produced by NOes from Nominated Fields
National Oil Companies (NOCs), viz., ONGC & OIL, are in principle free to charge amarket-determined price for gas produced from new fields in their existing nominatedblocks. However, Government has issued a pricing schedule & guidelines forcommercial utilization of non-APM gas produced by NOCs from such new fields intheir nominated blocks. Four supply zones have been identified in the guidelines. The
prices of non-APM gas sold by NOCs in these four zones are the same as in the tableabove.
Further, a premium of $ 0.25/mmbtu for production of non-APM gas from offshorefields has been provided, as higher investment is required for development andproduction from offshore fields.
2.3 Pre-NELP Gas
Certain blocks where discoveries were made by NOCs were auctioned under a
Production Sharing Contract (PSC) to private sector E&P companies to overcome
funding constraints and lack of advanced technologies. In 2013-14, these blocks4
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supplied 9.85 MMSCMD (12.31% of the total) gas to various customers. Under these
PSCs, viz., Panna-Mukta, Tapti (PMT) and Ravva, the entire gas produced has to be
sold to the GOI nominee (vlz., GAIL), as per the price formula specified in the PSC. It
may be noted that the prices of gas for these PSCs were discovered through limitedtender and GAIL as Government nominee, in every case, matched the highest price
bid. The PSCs for Panna-Mukta & Tapti were executed on December 12, 1994 andthat of Ravva on October 28, 1994. In case of Panna-Mukta & Tapti PSCs, the priceformula for gas is linked to an internationally traded fuel oil basket, with a specifiedfloor and ceiling price of US$ 2.11/mmbtu and US$ 3.11/mmbtu respectively. These
PSCs further have a provision to revise the ceiling price after 7 years from the dat~ offirst supply.With this revision, the revised ceiling price in case of Panna-Mukta gas isUS$ 5.73/mmbtu and in case of Taptl, it is US$ 5.57/mmbtu. GAIL, as 'theGovernment nominee, is buying gas from the PMT JV at this rate. Out of the totalallocation 17.3 mmscmd, 5 mmscmd of PMT gas has been allocated to power &
fertilizers sectors, which is being supplied at the APM rate to consumers. The
difference in price is recovered from the gas pool account.
• As regards Rawa & Ravva Satellite fields, under the provisions of their PSC, onexpiry of five years from the date of first delivery of gas, the JV and the Governmentwere required to enter into good-faith negotiations to determine the basis forcalculation of the purchase price, taking into account all reasonably relevant factors.
The present price of the Rawa field is US$ 3.5/mmbtu and that of Rawa satellite is
US$ 4.3/mmbtu. Revision of the prices is due, and GAIL & the JV are in negotiations.The gas from Rawa field is being supplied at the APM rate to consumers and thedifference in price is being recovered from the gas pool account.
2.4 Pricing under Small-sized Discovered Fields & Pre-NELP Exploratory Blocks
24 small-sized discovered fields and 28 pre-NELP exploratory blocks (of which 17 arein operation) were settled under a Production Sharing Contract (PSC) with private
E&P companies (viz. Hazira, RJ-ON-90/1 etc.). These provide for the sale of gas inthe domestic market at prices obtained on arm's length principle, in case the gas issold other than to the Government nominee. There is no price formula specified under
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Contract.
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the PSCs and unlike NELP, the price formula does not require prior approval of theGovernment before sale of gas by the Contractor.
2.5 New Exploration and Licensing Policy (NELP):
The following provisions of the PSC (for NELP I) are relevant in the context of sale of
natural gas and the price to be adopted for valuation purposes to calculate costpetroleum, profit petroleum share and royalty:
Articles 21.6 Valuation of Natural Gas
21.6.1 The Contractor shall endeavour to sell all Natural Gas produced and s'!:ved
from the Contract Area at arm's length prices to the benefits of Parties to the
;,.
21.6.2 Notwithstanding the provision of Article 21.6.1,Natural Gas produced from the 1ContractArea shall be valued for the purposes of this Contract as follows:
(a) Gas which is used as per Article 21.2 or flared with the approval of the 1Government or re-injected or sold to the Government pursuant toArticle 21.4.5 shall be ascribed a zero value; 1
(b) Gas which is sold to the Government or any other Governmentnominee shall be valued at the prices actually obtained; and
(c) Gas which is sold or disposed of otherwise than in accordance withparagraph (a) or (b) shall be valued on the basis of competitive arm'slength sales in the region for similar sales under similar conditions.
21.6.3 The formula or basis on which the prices shall be determined pursuant to
Article 21.6.2 (b) or (c) shall be approved by the Government prior to the sale
of Natural Gas to consumers!buyers. For granting this approval, Government
shall take into account the prevailing policy, if any, on pricing of Natural Gas,including any linkages with traded liquid fuels, and it may delegate or assignthis function to a regulatory authority as and when such an authority is inexistence.
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2.6 Evolution of Gas Prices under NELP Regime: Under NELP, gas pricing has
formally been approved only in case of RIL's KG Basin discovery, which supplied
13.53 MMSCMD,(16.91% of the total) of domestic gas in 2013-14.
In May 2007, the Contractor of KG-DWN-98/3 block, viz., RIL submitted a proposal of
price formula/basis for approval by the Government. In the proposal, the price formula
was benchmarked to international crude price, with a floor and a ceiling price, and also
with a constant factor "C' to take care of bidding. The price formula proposed was as
under:
SP (Rs.lmmbtu) = 112.5*K + (CP-25) O.15*ER+ C
Where
SP is the sale price of gas in Rs/mmbtu.
CP is the annual average Brent crude price for the previous financial year, with a cap
of $ 65/bbl and a floor of $ 25/bbl.
ER is the average $/Rs. exchange rate for the previous financial year.
K is 1 for ER between 25 and 65, or ERl25 when ER is less than 25 or ERl65 when
" ER is more than 65.
C is the premium quoted by the customer.
RIL, in its proposal, stated that bids were received from 10 customers (5 each from the
power and fertilizer sectors), and based on the bids received, at a value of C=4, most
of the gas stood picked up by the bidders.
The above price proposal was initially considered by the Economic Advisory Council to
the Prime Minister (EAC), chaired by Dr Rangarajan, which examined the pricing .
formula and made important recommendations. The Government also constituted a
Committee of Secretaries (COS) under the Cabinet Secretary to consider the gas
supply and pricing issues. This. committee recommended that the Government may
consider framing a Gas Pricing and Gas Utilization Policy, before considering the price
proposal. Finally, the matter was considered by an Empowered Group of Ministers
(EGoM), constituted on 13th August 2007 to examine and decide issues relating to gas
pricing and commercial utilization of gas under the New Exploration & Licensing Policy
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(NELP). The EGoM, after taking into account the reports submitted by the said twocommittees and representationsmade by various stakeholders, at its meeting held on12thSeptember 2007, took the following decisions:
(I( i) It will not be in the country's interest to renege from PSCs entered into in good
faith under the New Exploration & Licensing Policy (NELP). Sanctity of thecontracts signed should be maintained.
(ii) The price basis/formula submitted by Mis. RIL-Niko under Article 21.6.3 forvaluation of natural gas may be accepted with modifications as per therecommendations of 'the EAC, including denomination of the entire formula in
US Dollars. However, for all NELP-I to NELP-VI, contracts, for natural gas price
calculation, the constant will be pegged at $ 2.50. Since C is the only biddable
component, assigning a value ot zero to this component in the present case willadequately take care of the transparency aspect of the bidding process as the
price will be determined by the Government only on the basis of a formula. Thisshould bring the price down by about 8%. Under Article 21.6 of the PSC, this
price basis I formula will be valid for five years from the date of commencementof supply. The decisions taken in this EGoMmeeting will be without prejudice to
the NTPC vs. RIL and RNRL vs. RIL cases which are separately subjudice.
(iii) The cap for CP in the formula would be frozen at US$ 60 per barrel.
(iv) Though in the present instance the value of C is to be retained at zero, for thepurpose of retaining the biddable character of the formula and allocation of gas
amongst priority sectors, the formula must retain C as a positive non-zerointeger.
(v) The price discovery process on arm's length basis will be adopted in the future
NELP contracts only after the approval of the price basis I formula by theGovernment. The price discovered through this process would be applicable toall sectors, uniformly. Ii
The price formula finally approved by the EGoM is given below:
5P (U5$/mmbtu) = 2.5 + (CP_25)o.15
Where,
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SP is the sales price in $/mmbtu (on Net Heating Value / NHV basis) at the
delivery point at Kakinada.
CP is the average price of Brent crude oil in US$/barrel for the previous financial year,based on the annual average of the daily high and low quotations of the FOB price ofdated Brent quotations as published by Platts Crude Oil Market wire. CP is capped at
US $ 60/bbl, with a floor of US$ 25/bbl. CP is fixed for each contract year and is based
on the CP for the preceding financial year.
FYmeans the financial year, which commences each year on 1stApril and ends on the
following 31st March. (~
The selling price comes to US$ 4.2/mmbtu for crude price greater than or equal toUS$ 60/barrel. This is equivalent to Rs?,500/mscm at an exchange rate of US$ 1
= Rs. 45.
The above Gas Pricing Framework under NELP was examined by the Hon'ble
Supreme Court. Implications of this judgement relating to PSC provisions arementioned later in Chapter-3
~2.(: Pricing of CBM:
The sale and pricing of Natural gas from CBM Blocks is defined under Article 18 of the
CBM Contract. As per Article 18.1 of the Contract, the Contractor shall have theI
freedom to sell CBM at arm's length prices in domestic market. The relevant Articles18.5 and 18.6 of the Contract deal with valuation of CBM.
18.5 Valuation of CBM
18.5.1The Contractor shall endeavour to sell all CBM produced and saved from the
Field/Development Area at Arms-Length Prices to the benefit of Parties to the
Contract.
18.5.2 Notwithstanding Article 18.5.1, CBM produced from the' Field/ DevelopmentArea shall be valued for the purpose of this Contractas follows:
(a) CBM which is used as per Article 18.2 or flared with the approval of the
Government or re-injected shall be ascribed a zero value;
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(b) CBM which is sold to the Government or to the State Government(s) in lieu of
either Production Level Payments (PLP) or Royalty shall be valued at the pricesactually obtained; and
(c) CBM which is sold or disposed of otherwise than in accordance with paragraphs(a) or (b) above shall be valued on the basis of competitive Arms Length Sales inthe region for similar sales under similar conditions.
18.6 The formula or the basis on which the CBM prices shall be determined pursuantto Article 18.5.2 (c) shall be approved by the Governmentprior to the sale of the 5BMto consumers/buyers within sixty (60) Business Days from the receipt of proposal orfrom the date of receipt of clarification/additional information, where asked for by theGovernment.
Such approva/(s) from the Government shall be required to be obtained by the
Contractor on one time basis prior to execution of such sale/purchase
agreement(s) for the CBMand subsequent modification(s), if any, in this regard.For granting this approval, the Government shall take into account the prevailingpolicy, if any, on pticini; of CBM including any linkages with traded liquid fuels, and it
may delegate or assign this function to a regulatory authority as and when such anauthority is in existence and in place.
Present Status:
The approval for the gas price formula / basis for valuation of CBM has been issued inthe following three cases:
i) Raniganj (South) CBM Block: The Block is operated by M/s Great Eastern
Energy Corporation Limited (GEECl) and commercial production of CBM has
commenced from July 2007 (0.3 Million m3 /day). GOI has on 14.02.2008approved the formula/basis for valuation of CBM gas at a sale price of US$6.79/mmbtu.
ii) Raniganj (East) CBM Block: The Block is operated by M/s Essar Oil Limited
(EOl). GOI has on 29.03.2011 approved sale of incidentally produced CBM gas
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at a price of US $ 6.25 I mmbtu for a short period up to the end of Phase-II .
(01.05.2012). Further, for Phase-III (Development Phase and Commercial
Production), GOI vide letter dated 17.05.2013 approved CBM gas price of US $
4.2 / mmbtu at the well-head.
iii) Jharia CBM Block: The Block is operated by ONGC. GOI vide order dated
16.07.2009 approved sale of incidentally produced gas at price of US $ 5.1 /
rnmbtu.
The CBM supplies in 2013-14 were limited to only 0.34 MMSCMD (0.42% of the
total domestic gas).
2.8 Pricing formula based on Rangarajan Committee Report:
Based on the Rangarajan Committee's recommendations on domestic gas pricing,MOPNG notified the Domestic Natural Gas Pricing Guidelines, 2014 on 10th January,2014. Para 1.1 of the Guidelines (Annexure-III) states that the guidelines will beapplicable to all natural gas produced domestically, irrespective of the source, whether
conventional, shale, CBM etc. Under Para 1.2 it is also mentioned that these-, guidelines shall not be applicable where prices have been fixed contractually for a
certain period of time, till the end of such period.
Discussions regarding gas pricing formula recommended by the RangarajanCommittee is in Chapter-4.
2.9 Pricing of Imported LNG:
During 2013-14, 41.11 MMSCMD of LNG supplemented the domestic production of80.02 MMSCMD of natural gas. The imported LNG sourced from the internationalmarkets can be divided into following three categories:
i) Long Term
ii) Medium and Short Termiii) Spot
The price of imported LNG is not controlled / fixed by the Government. The price of
Long Term, Medium Term and Short Term R-LNG is based on the pricing formula
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agreed between the buyer and the seller, whereas the price of Spot LNG varies fromcargo to cargo depending on international demand supply position.
2.10 Pricing of Small/Isolated fields
The Government on 8th July, 2013 issued "Guidelines for Selection of CustomersforDomestic Gas available from Small/Isolated Fields" (Annexure-vi). Definition of the
fields to which these Guidelines will apply is the Gas produced from fields ofNominated Blocks of National Oil Companies (NOCs), viz. ONGC & OIL, whose peakproduction is less than 0.1 MMSCMD and which are situated more than 10 km awayfrom gas grid or Fields whose peak production is less than 0.1 MMSCMD and ha¥.Sagas pressure less than grid pressure. Allocation of Gas, from these fields is done byNOCs through open competitive bidding and awarded to highest price bidder.. ifhe
base price of the bid is equal to Non-APMprice of gas in that zone.
2.11 Summary of Gas Prices under different regimes in India
1.
2.
3.
4.
5.
6.
7.
8.
APMAPM to Non APM CustomersNon APMAPM - North East Price
Pre-NELPa) Panna Mukta
b) Taptic) Ravvad) Ravva Satellite
NELPSmall Sized Discovered Fields (24) -Pre NELP Exploratory Blocks
$ 4.2/mmbtu$ 4.2 to $ 5.2.5/mmbtu$ 4.2 to $ 5.0/mmbtu$ 2.52 I mmbtu
$ 5.73/mmbtu
$ 5.57/mmbtu$ 3.50/mmbtu
$ 4.30/mmbtu
$ 4.20/mmbtuNo formula;No prior Approval;
Sale on Arms-Length Principle
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CHAPTER-3
Government's role in PSC regime after the Judgment of Hon'ble Supreme Court in
Reliance Industries Ltd. (RIL) vs. Reliance Natural Resources Ltd. (RNRL) case( CivilAppeal no 4274 of 2010)
Special Leave Petitions were filed by the Union of India, Reliance Industries Ltd. (RIL) andReliance Natural Resources Ltd. (RNRL) before the Hon'ble Supreme Court against theorder of the Division Bench of -the Bombay High Court in the matter arising out of aMOU/family agreement between the members of the Ambani family. The judgment in thiscase has a bearing on the gas allocation and pricing issues under the NELP contracts. ;?:
In brief the position which emerged from the judgment of the Hon'ble Supreme Cou~ onthese issues is as follows (Para 91 of the judgment):
i) The natural resources are vested with the Government as a matter of trust in the name
of the people of India. Thus, it is the solemn duty of the State to protect the national
interest.
ii) ~ Even though exploration, extraction and exploitation of natural resources are within the
domain of governmental function, the Government has decided to privatize some of its
functions. For this reason, the constitutional restrictions on the government would
equally apply to the private players in this process. Natural resources must always be
used in the interests of the country and not private interests.
iii) The broader constitutional principles, the statutory scheme as well as theproper interpretation of the PSC mandates the Government to determine theprice of the gas before it is supplied by the contractor.
iv) The policy of the Government, including the Gas Utilization Policy and the
decision of EGoMwould be applicable to the pricing in the present case.
v) The Government cannot be divested of its supervisory powers to regulate the supply
and distribution of gas.
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Proper Interpretation of the PSC (Para 92 0 of the Judgement):
The objective of the PSC inter-alia is to regulate the supply and distribution of gas. Keeping
this objective in mind, Article 21 of the PSC must be interpreted to give the power tothe Government to determine both the valuation and pricing of gas. It is not feasibleto restrict the power of the Government in such matters of national importance,especially when the governing contract, the PSC also provides for it.
Role of the Government (Para 92 E of the Judgement):
In a Constitutional democracy like ours, the national assets belong to the people. .Ther:
Governmentholds such natural resources in trust. Legally, therefore, the Governmentowns
such assets for the purposes of developing them in the interests of the people. In, thepresent case, the Government owns the -gas till it reaches its ultimate consumers. Amechanism is provided under the PSC between the Government and the contractor (RIL, in
the present case). The PSC shall override any other contractual obligation between the
contractor and any other party.
The relevant extracts of the judgment are at Annexure-VII•
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CHAPTER-4
4.1 Discussion regarding Rangarajan Committee Report
As stated earlier, in December 2012, the Rangarajan Committee submitted its reporton "Production Sharing Contract (PSC) Mechanism in Petroleum Industry". The
report, inter- alia, recommendeda formula for pricing of domestically produced gas.
The Rangarajan Committee made the following observations in para 24.2 of their
report while discussing "An Approach to Gas Pricing till Such Time When Gas -on
Gas Competition Becomes Feasible."
"24.2.1 As discussed above, it may not be feasible to introduce gas-on-gascompetition at this juncture. Therefore, a policy for pricing natural gas, till such time
when gas-on-gas competition becomes feasible, is discussed below. However, it is
recommended that Government review the situation after five years to examine the
feasibility of introduction of gas-on-gas competition.
24.2.2 In the light of the discussion in §24.1, a policy on pricing of natural gas for India
• is proposed. Since a competitive domestic price for gas does not currently exist and
" may not be expected to come about for several more years, the policy will have to be
based on searching out from global trade transactions of gas the competitive price of
gas at the global level. As the global market is not fully integrated in terms of physical
flows and is also not everywhere liquid enough, it is proposed to combine two methodsof search for such prices.n
The Rangarajan Committee had recommended that their gas pricing formula shallapply uniformly to all sectors, while allocation of gas will be as per the prevailing Gas
Utilization Policy (GUP) of the Government ( Para 24.5 of the Rangarajan CommitteeReport).
The report further stated that the proposed formula would only apply prospectively and .would not be applicable to cases where gas prices have already been approved (Para24.4 of the Rangarajan Committee Report).
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The Government subsequently vide its Domestic Natural Gas Pricing Guidelines,2014made the pricing formula, based on the Rangarajan Committee recommendations,applicable for all natural gas produced domestically, irrespective of the source,whether conventional, shale, CBM etc. from 1st April 2014 with the followingexceptions:
i) where prices have been fixed contractually for a certain period of time, till theend of such period.
ii) where the production sharing contract provides a specific formula for naturalgas price indexation / fixation.
iii) pricing of natural gas from small / isolated fields in the nomination blocks of;1
NOCs will be governed by the..extant policy in respect of these blocks issuedon 8th July, 2013.
The prices calculated and determined were to be applicable to all consuming sectorsuniformly and these guidelines were also applicable for natural gas produced byONGC/OIL from their nominated fields.
Para 1.10 of the Domestic NaturalGas Pricing Guidelines, 2014 provides as below:
"In respect of 01 and 03 gas discoveries of block KG..DWN-9813, these guidelines
shall be applicable subject to submission of bank guarantees in the manner to be
notified separately."
The Committee has dealt with this specific issue relating to production of gas from KGDWN-98/3block under NELP-I separately in Para 5.2 (iv) later.
After consideration of the matter twice by the CCEA, the Guidelines on DomesticGasPricing Policy were issued. Hence, the Committee inferred that the issue of legal
feasibility and applicability of Natural Gas Pricing Guidelines, 2014(except forcategories mentioned in Para 1.2 of the Notification dated 10th January, 2014) to
different categories of producers may have already been examined by the
Administrative Ministry at that time.
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4.2 The formula recommended by Rangarajan Committee is as under:
Netback price, N = A-8-C (I)
P1AV= (N1 * V1 + N2 * V2+ ) / (V1 + V2 + V3+ ) (II)
Where:
A= Imported LNG Price on Netback FOB
B= Liquefaction costs at the respective loading port
c= Transportation and Treatment cost of natural gas from well head to liquefaction
plant •
P1AV=Average Producers Netback Price for Indian Imports for trailing 12 months.
N1, N2....... are Producers Netback Price-
V1, V2, are the volumes corresponding to N1, N2 etc.
V1, V2, V3 and A shall be for trailing 12months period
Prices and volumes shall be for trailing 12 months, and P1AVshall be arrived at for
every month.
PWAV= (A1* PHH+A2*PNBP+A3*PJAV)/ (A1+A2+A3) (III)
PWAv=Weighted average price to producers in the global markets"
A1= Total Volume consumed in North America at average Henry Hub prices on yearly
basis
PHH= Annual average of daily prices on Henry Hub for the relevant year
A2= Volume consumed through various hubs in Europe/Eurasia in the relevant year
(entire consumption of Europe and FSU)
PNBP= Annual average of daily prices on National Balancing Point (NBP) in the UK for
the relevant year
A3= Volume imported by Japan in the relevant year
PJAv=Yearly weighted average producers netback price of gas in Japan for the
relevant year (weighted by the total volume of long term and spot imports)
PJAVshall also be calculated as P1AVis calculated.
PAV= (P1AV+ PWAV)/ 2 (IV)
PAV=Simple average of Producer's Netback Price for Indian Imports and Weighted
average price to producers in the global markets.17l.-
The Rangarajan Committee recommended consideration of simple average of
Producer's Netback Price for Indian Imports and World Average Producer's
Netback Price ( Para 24.3 of the Report) without giving due justification 'for using
the simple average here, although weighted averages are used for every other
component of the formula. The volume of Indian LNG imports as per the formula
works out to be less than 1% of the total volume considered in the formula.Hence, it would seem that use of weighted average of Producer's Netback Pricefor Indian Imports and World Average Producer's Netback Price may perhaps bemore appropriate.
111111111111
Based on the observations /comments of the Parliamentary Standing Committees,various stakeholders and the views of the concerned Ministries/Departments, theCommittee deliberated on the different components of the formula in detail and felt thatcertain aspects of the Rangarajan formula need to be reconsidered .These arementioned below:
a) Consideration of Simple average of Producer's Netback Price for Indian ImportsandWorld Average Producer's N.etBack Price:
,b) Consideration of Henry Hub price for volume of consumption in Canada:
The Canadian consumption is approximately 11% - 12% of the total volume of
North American basket (Source: BP Statistical Review of World Energy June 12014). A reference price for Canadian market l.e. Alberta Gas Reference Price isavailable in the public domain according to which the natural gas prices at ,Canada's Alberta Hub are approx. 20% lower than the Henry Hub price.( Source:
Alberta Reference Price). In this background, it may perhaps be appropriate to 1account for the Canadian volumes at Alberta Reference Prices rather than at the
Henry Hub prices. 1c) Consideration of NBP price for consumption in Russia:
11111
In the Rangarajan Committee formula, it was recommended to consider NBPPrice for volume consumed in EU and FSU countries. The sale price of gas
within Russia (Source: Russian Govt. website) which is part of FSU countries is
substantially lower than the price quoted at NBP hub. Therefore the well head
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prices for Russian gas producers would be less to that extent. This view is also
reflected in the RangarajanCommittee Report at Para 24.2.10.
In 2013, the total consumption in Europe was 533.8 SCM (15% of World
Consumption), while the consumption in the same year in Former Soviet Union(FSU) Countries was 656 SCM (19% of world consumption). The average pricein FSU countries is around US$ 41 mmbtu while it is approximately US$111
mmbtu for Europe (Source: IGU-Wholesale Gas Price Survey, 2014)(Annexure-VIII). As a result, the Rangarajan formula would yield a higher price
for the FSU volumes. Hence the European volumes and at least the Rusiianvolume, (for which prices are available) could possibly be accounted separately
at their respective prices.
d) Consideration of Hub price in calculation of World Average producer's price:
The hub price includes well head price, transportation and treatment cost fromwell head to trunk pipeline, transportation cost from the trunk pipeline to the
respective hub etc. The Rangarajan Committee in its report in Para 24.2.9 has
acknowledged that the prices of North American hub and NSP are higher than
the well head prices. The post well head components for NSP are comparativelysubstantial, as it includes long distance pipeline supplies and LNG imports.Whiledeductions for calculating Netback prices for LNG imports have beenrecommended in Para 24.3.3 of the Rangarajan Committee Report, however,deductions on account of appropriate transportation and treatment charges from
different hub prices viz. Henry Hub, NSP has not been recommended. It is
suggested that appropriate adjustment for this needs to be considered for all hubprices including HH, NSP, Alberta and Russianvolume.
e) Consideration of Japan/lndian LNG import in calculation of World weightedaverage producers' price.
As Japan sets the benchmark for LNG imports in Asia Pacific region, (Para24.2.4 of the Rangarajan Report), it recommended the methodology to calculatenetback price that estimates the well head producer's price of natural gas in LNG
exporting countries (details of deductions at Para 24.3.2 and 24.3.3 of
l. 19
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Rangarajan Report). However, the calculation, based on the above methodology 1would give the effective FOB realization of an LNG exporter and not the wellhead producer's price of the exporting countries.With such a long supply/process 1chain for LNG, it is difficult to ascertain as to what exactly is the producer's priceconsidering that profits may be getting booked at every stage of thesupply/process chain.
1111,11111111111
The recent IGU Wholesale Gas. Price Survey, 2014 states that the wholesaleprices in Japan in 2013 are almost US$ 16/mmbtu compared to approximatelyUS$ 10/mmbtu in UK, US$ 6/mmbtu in India and US$ 4/mmbtu in USA and
~approximately US$ 3.5 in Russia (Annexure-VIII). Japan's LNG has beenthe
most expensive in the world. It has negligible domestic production. It may benoted that Japan's LNG's prices..arestructurally expensive as most of the longterm contracts the country has entered into, are oil indexed.With steep increasein global crude oil prices over last few years, Japan's LNG import prices havealso increased substantially. The Indian LNG imports are similarly oil indexedandalso includes the so called "AsianPremium" on the crude oil imported by India.
The Article on "The Impact of a Globalizing Market on Future European GasSupply and Pricing: the Importance of Asian Demand and North American .
Supply" highlights "Unlike the situation with European pipeline gas contracts,
there is no explicit provision in Asian LNG contracts for a periodic price review.Each contract pricing formula is in effect "frozen" for the life time of thecontract" (Author: Howard V Rogers, NG 59 January, 2012, Source: OxfordInstitute of Energy Studies).
In any case, oil indexed LNG term prices do not have much relevance fordomestic producers' price, as pricing of about 90% of all global domestic
consumption of gas is based either on Gas-on-Gas competition or is underregulated price regimes. (Source: IGUWholesale Gas Price Survey, 2014).
Additionally, there are major uncertainties in calculating the netback pricewhenever LNG is involved due to long supply chain, e.g. for imports from Qatar,
a major supplier to both Japan and India has LNG trains which are both pre and
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post 2010, (with suggested deductions of US$ 2.501 mmbtu and US$3.501 mmbtu
respectively). However, it is understood that due to co-mingling at the time
of exports, the vintage of the train cannot be ascertained. Thus there are inherent
uncertainties in calculating producer's price based on LNG prices.
For these reasons, it is suggested by the Committee for consideration of the
Government that LNG component in the Rangarajan formula could perhaps be
excluded.
f) GCV vs. NCVI}
In India gas is historically being priced on NCV basis. In this context, it is relevant
to point out that it is not clear whether the price to be determined as. perRangarajan formula is on GCV or NCV basis, although the input prices being
used in the Rangarajan formula are based on GCV (E-mail message from Platts,
Annexure-IX).
The Committee feels that the Administrative Ministry may take an appropriate
view in this regard, while considering the modified approach suggested by the
Committee in Chapter-5.
g) Determination of Gas Price in INR vs. US$
In this context, the Committee felt that it needs to be pointed out that expenditure
in US dollars is incurred by the contractor mostly during exploration and
development phase. Therefore, the denomination of gas prices in US $ during
the production period also, puts the entire foreign exchange risk on the
consumers throughout the life cycle of the project. The Committee felt that the
Administrative Ministry may consider this aspect, in the light of the contractual
provisions, so that there is more equitable sharing of foreign exchange risk
between the producers and consumers.
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CHAPTER-5
Suggested Approach For Gas Price Determination
5.1 Suggested modification to the formula
Given the limited time available to the Committee and the complexity of the subject,the Committee held extensive discussions and arrived at a broad approach. TheCommittee also considered not only the views on record of the ParliamentaryStandingCommittees, Ministry of Financeand other Ministries of the Government but also those.of the various stakeholders, including both producers and consumers. After detailed
t=deliberations, the Committee would like to suggest the following modifications in theRangarajanformula for further considerationof the Government:
i) Removal of both the LNG import components i.e. P1AvandPJAV.
ii) Consideration of Alberta Gas Reference price in place of Henry Hub Prices forCanadian consumption
• iii) Consideration of Russian actual price as published by (e.g. Federal Tariff Service
of the Russian Government) in place of NBP price for the Russian consumptionconsidered under FSU.
iv) Consideration of appropriate deductions on account of transportation andtreatment charges, etc., for different hub prices, i.e., Henry Hub, NBP, AlbertaReference and Russian actual gas prices.
v) Regarding the periodicity of price determination, while the Rangarajan Reporthad envisaged a monthly adjustment, the Domestic Natural Gas PricingGuidelines, 2014 provided for a quarterly adjustment. The Committee felt thatthe Administrative Ministry may also consider examining the pros and cons of theoptions of bi-annual and annual price notification.
vi) A suitable cap on the price may also be kept, if considered appropriate.
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I I
5.2 Applicability of the Modified Approach:
i) The Committee was of the view that the suggested modified approach may not
be made applicable to the exclusions as specified in Para 1.2 of the
Domestic Natural Gas Pricing Guidelines, 2014.
ii) The Committee was also of the view that the suggested modified approach may
apply only prospectively and would not be applicable to the gas prices already
approved by the Government. Also, the suggested modified approach would
apply uniformly to all sectors of the economy and the allocation of gas will be as
per the Government's prevailing Gas Utilization Policy.
iii) The Committee was of the view that the NOCs may also get the same price as
determined under the proposed .dispensation, including for the gas from the
nomination fields.
iv) The Committee would like to emphasize here that the proposed modified
approach would not apply to gas production from 01-03 discoveries of Block KG
OWN-98/3 till the shortfall quantity of gas is made good. The Committee would
like to further suggest that the Administrative Ministry may take suitable action in
this regard to safeguard the interest of the Government.
v) The Committee was of the view that the Administrative Ministry may examine the
possibility of applying the suggested modified approach to Pre-NELP exploration
PSCs also which provide for arm's length pricing but do not provide for any
approval of the formula/basis by the Government.
l. e~~(Ratan P.Watal)Secretary(Expenditure)Member
~~(P.K.Sinha)Secretary(Power)Member
-(Rajive Kumar)Addl. Secretary(P&NG)Member Secretary
(J.K.Mohapatra)Secretary(Fertilizers)Member
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LIST OF ANNUXURE
o.
Annexure Topic Page No.No.
I ToR of RangarajanCommittee 1-2
II Chapter 24 of the Rangarajan. Committee 3 -12Report relating to ToR (v)
III Domestic Natural Gas Pricing Guidelines, 13 - 152014
IV Reports of the ParliamentaryStanding 16- 35Committees:
i) 74thStanding Committee on Finance on"Economic Impact of Revision of NaturalGas Price"
ii) 19thStandingCommittee on Petroleum &Natural Gas on "Allocationand Pricing ofGas"
V Production and Supply of Domestic Gas 36during 2013-14
VI Guidelines for Selection of Customers for 37 - 43.Domestic Gas available from Small / IsolatedFields
VII Relevant extract of the Hon'ble Supreme 44 - 64Court Judgment dated 07.05.2010
VIII International Gas Union (IGU) - Wholesale65··72Gas Price Survey, 2014 - Extracts
IX Communicationfrom Platts73
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Report of the Committee on the PSC Mechanism in Petroleum lqdustry
1.5.3 The committee also associated Shri R. N. Choubey, Director General(Hydrocarbons) and Dr Alok Sheel, Secretary, Economic Advisory Council to thePrime Minister with its deliberations, and drew upon their expertise as specialinvitees.
1.5.4 The terms of reference of the committee were as follows:
(i) Review of the existing PSCs, including in respect of the currentprofit-sharing mechanism with the Pre-Tax Investment M4Jtipie(PTIM) as the base parameter; ,.
(ii) Exploring various contract models with a view to minimis~ themonitoring of expenditure of the contractor withoutcompromising, firstly, on the hydrocarbons output across timeand, secondly, on the Government's take;
(iii) A suitable mechanism for managing the contract implementationof PSCs, which is being handled at present by therepresentation of Regulator/Government nominee appointed tothe Managing Committee;
(iv) Suitable governmental mechanisms to monitor and to auditGovernment of India's share of profit petroleum;
(v) Structure and elements of the guidelines for determining thebasis or formula for the price of domestically produced g6$, andfor monitoring actual price fixation;
(vi) Any other issues relating to PSCs.
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1.5.5 The committee deliberated on its Terms of Reference (Tofes) andconcluded that a careful reading of the ToRs indicates that its recommendationsin respect of ToRs (i) and (ii) would apply only to PSCs entered into in future,while its recommendations in respect of ToRs (iii), (iv) and (v) would ~i,isobeapplicable to existing PSCs. However, insofar as ToR (v) is concerned, thecommittee recommended that the pricing formula proposed by it would onlyapply prospectively and is not proposed for application to gas prices alreadyapproved. . in I.
1.5.6 In making its recommendations, the main objectives that the co~':i'{mitteekept in view were the following: ..
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Report of the Committee on the PSC Mechanism in Petroleum Industry.
Recommendations on ToR (v)
24.1 Relevance of Different Price Formations ~' ..,_
24.1.1 Gas pricing mechanism in India is presently driven by sectoralprioritization, administered gas allocation and pricing, apart from huge supplyside constraints. While short-term demand changes in international demand dueto weather-related causes are quite frequent, the Indian gas market has notseen such volatility in demand in the short-term. This is mainly due to the factthat gas consumption is concentrated in the fertilizer, power and LPG sectors.Other factors resulting in short-term volatility, like business cycles and supplyinterruptions are also not relevant here. However, all these factors impactinternational gas price in the spot market and may impact profitability of Indianindustry substantially.
24.1.2 Public sector companies producing gas have a highly regulated pricingsystem in place. Gas prices in India can, in principle, incentivize investment inthe Indian upstream sector, so that production in India reaches optimum levelsand all exploitable reserves put to production expeditiously. India also needs toensure that producers don't cartelise as there is a huge unmet demand. The twinobjectives of expediting production and avoiding cartelisation can be achieved byensuring that producers in India get at least the average price of what producerselsewhere are getting.
24.1.3 Long-term prices in competitive markets in the US, the UK, continentalEurope and the Asia-Pacific depend on the marginal supply cost curve, theefficiency of monetization of reserves, demand side factors like economicgrowth, energy intensity of major countries, ability of consumers to switchbetween fuels, and technological progress. However, there is no globalcompetitive gas market. There are several regional markets in operation; all ofwhich are heavily constrained by infrastructural, tariff and policy barriers.
24.1.4 An attempt is made below to contextualize internationally prevalent gaspricing mechanisms to the Indian market.
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Report of the Committee on the PSC Mechanism in Petroleum Industry
24.1.4.1 Gas-on-gas competition is the soundest of all mechanisms whenfree trade prevails in the gas market. The supply side in India is dominated bytwo large players, NOGs and RIL. Together they control the entire domesticproduction. RLNG supplies are again dominated by two entities, PLL and GAIL.The greatest constraint, however, is the lack of infrastructure for importing gas.All these result in a seller's market, with pricing power, which can lead to~Unduebenefits. The consumption side is again dominated by PSU fertilizer units andpower sector utilities, which are heavily subsidized by the Union and StateGovernments. Further, both these sectors have been encouraged through statepolicy to adopt gas-based technologies and they constitute a huge strandedmarket vulnerable to exploitation by gas suppliers. Thus, the supply curve atpresent is almost vertical and demand is highly price inelastic. Therefore, puregas-on-gas competition will remain an aspiration till supply constraints areremedied substantially.
However, there are suggestions from several market players that sector-wiseprice discovery may still be possible in India. This idea merits a brief elaboration.Government of India has prioritized fertilizer, LPG, power am:l city gasdistribution sectors for gas allocation. Proponents of this limited gas-an-gascompetition model suggest that entities in each of these sectors can. competeamong themselves for allocation on price basis. Any such process will have twostages: the first stage being allocation of gas produced from the field to differentsectors as per the Gas Utilization Policy (GUP), and the second being sectorwise price discovery of gas. For example, if a certain portion of the gas producedfrom a field is being allocated to the urea producing plants, the producer issupposed to invite bids from all urea ,producing plants ready to produce urea ason date of gas supply commencement and discover the market price on marketclearing basis and the bids received. All bids from related parties need to bediscarded. This has to be repeated for all the sectors. However, this approachmay result in two scenarios. In the 1irst scenario, the demand in a particularsector may be high due to investments getting locked into gas-based technology.In such a scenario, price discovery may result in driving up prices to unviablelevels. In the second scenario, consumers may cartelise to drive down prices.The process is likely to get deadlocked unless a very elaborate mechanism withchecks and balances is set up.
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Gas-on-gas competition for price discovery will become feasible once importinfrastructure is ramped up and domestic production and transportationinfrastructure grow. Therefore, Government may consider reviewing the situationafter five years to examine the feasibility of its introduction.
24.1.4.2 Oil price escalation is one of the mechanisms suggested by severalstakeholders. This is also in operation in a few long-term contracts for import toIndia. An EGoM has already approved one such formula for the.gas produced inKG Basin by a consortium of RIL, NIKO and British Petroleum. All formulae havea base price for crude, a ceiling, and a factor to dampen volatility. The mainreason for adoption of oil price escalation formula in the Asia-PaCific and incontinental Europe is that gas replaces oil as fuel for domestic and industrialpurposes. The share of gas sold globally under an oil price escalation formula isgradually coming down, from 22% in 2005 to 20% in 2007. For indigenousproduction, such a linkage is available in only 5% of the 2,048 billion cubicmetres of gas produced globally in 2007.
24.1.5 Domestic production, consumed in the country of production, accountedfor approx. 2,000 billion cubic metres in 2005, around 70% of total worldconsumption. The two largest price formation categories were gas-on-gas andregulation below cost, with gas-on-gas accounting for approx. 35% of worldconsumption (mainly in North America, the UK and Australia) and the regulationbelow cost accounting for 34% of world consumption (mainly in the former SovietUnion, the Middle East and Africa). Regulation on social and political basis, at16% of world consumption, is spread across all regions. Regulation on cost ofservice basis, at 4% of world consumption, is principally in Africa and Asia, whilebilateral monopoly pricing at 5% of world consumption is mainly in the formerSoviet Union and the Asia-Pacific.
24.1.6 The Government of India has mandated that fertilizer and power sectorsget priority in allocation of domestically produced gas. In both these sectors, oilis not the alternative fuel to gas. In the power sector, as gas is mainly rep~acingcoal as a fuel, oil price linkage to indigenously produced gas may net be themost relevant factor. 81% of the existing capacity of urea plants is based onnatural gas, while 9% is naphtha-based and 10% is based on fuel oil. Here tooreplacing gas with oil is not a viable option as urea consumption is highly price-
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Report of the Committee on the PSC Mechanism in Petroleum Inpustry
elastic. Any increase in gas price for urea plants will certainly lead to a.huqeincrease in costs affecting food security. '.
24.1.7 Further, oil price indexation works on import parity and replacemen'ffuelprinciple. While it is clear that replacement fuel principle does not apply fully tothe Indian market, import parity also has its limitations. Landed price of LNGincludes customs duty, shipping, pipeline tariff, liquefaction costs, handling etc.These costs are extraneous to the producing activity and have no relevance todomestic producers. The competitiveness of domestic production will not beaffected by the inclusion or exclusion of that component of the price which doesnot accrue to the producer at the well-head. Hence, "import parity" will give ahuge monetary benefit to domestic producers.
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24.1.8 Planning Commission has correctly observed that high prices prevalent inLNG trade in the Asia-Pacific region can potentially 'kill the goose that lays thegolden eggs' .1. It is neither in the producer's interest nor in the national interestto take natural gas to unviable levels by linking to crude prices. It is to be bornein mind that fertilizer companies in India were actively encouraged by GOI toconvert to gas-based technology, with the expectation of domestic production atcheaper rates, thereby creating a stranded market for gas supplies. Similarpromises and gas sales agreements were also entered into with power plants fordomestic supply. If the new price becomes unviable to these two sectors, thedemand for gas may slump drastically, as happened in 2005 in the US, and thiswould be against the common interests of producers and consumers alike, apartfrom not being in the national interest.
24.1.9 Further, oil-linked prices are mainly followed in Brazil and Thailand, fordomestic production and consumption. In Brazil, Petrobras, which is aGovernment of Brazil company, is a major producer and the sole supplier andtransmitter of natural gas. The benefit of higher prices directly accrues to theGovernment of Brazil in substantial proportion, which in turn subsidizes otherimportant sectors. Even in Brazil, power companies get natural gas at regulatedprices. Production and consumption in Thailand is too miniscule to serve as aviable model for India. On the other hand, Japan is a major importer of LNG, withlarge volumes linked to oil prices. Japan has recently decided to delink oil' prices
1 Planning Commission Report of the Inter Mi~isterial Committee on Policy for Pooling. pf:NaturalGas Prices and Pool Operating Guidelines (page 32)
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from gas import prices. Russian export contracts too are increasingly indexed toEuropean hub prices. Gas markets are consistently evolving away from oil priceindexation and towards gas-on-gas competition. .
24.1.10 Netback from final product mechanism works where the. finalproduct is traded freely. Fertilizer and power sectors are still subject to anadministered price mechanism and hence this mechanism may not be relevant
in India.
India has consciously moved away from below-cost pricing and cost-of-servicebased regulation under NELP.
24.2 An Approach to Gas Pricing Till Such Time When Gas-on-GasCompetition Becomes Feasible
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24.2.1 As discussed above, it may not be feasible to introduce gas-an-gascompetition at this juncture. Therefore, a policy for pricing natural gas, tfll suchtime when gas-on-gas competition becomes feasible, is discussed below.However, it is recommended that Government review the situation after fiveyears to examine the feasibility of introduction of gas-on-gas competition.
24.2.2 In the light of the discussion in § 24.1, a policy on pricing of natural gas forIndia is proposed. Since a competitive domestic price for gas does not currentlyexist and may not be expected to come about for several more years, the policywill have to be based on searching out from global trade transactions of gas thecompetitive price of gas at the global level. As the global market is not fullyintegrated in terms of physical flows and is also not everywhere liquid enough, itis proposed to combine two methods of search for such prices.
24.2.3 First, the netback price of Indian LNG import at the wellhead of theexporting countries should be estimated. Since there may be several sources ofgas imports, the average of such netback of import prices at the wellheads wouldrepresent the average global price for Indian imports. It may be assumed thateach gas exporting country also faces competition and, therefore, there is noreason to suppose that India faces any bias of being over-charged or undercharged vis-a-vis other competing buyers in the global gas market constructedthrough such aggregation for averaging. Such a netback average price may be
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Report of the Committee on the PSC Mechanism in Petroleum, Industry
.'interpreted as the arm's length competitive price applicable for India, and suchprice may be estimated on the basis of recent historical transactions.
I
24.2.4 A second method of searching for a competitive price for India is to takethe average of pricing prevailing at trading points of transactions - i.e., the hubsor balancing points of the major markets of continents. Currently, as per BritishPetroleum statistics, total natural gas consumption across the' globe stands at3.2 trillion cubic metres in the year 2011, of which North America, Europe & .Eurasia, and Japan consumed around 65%. The average prices of natural gasconsumed in these regions are also publicly available (British PetreieumStatistics I World Energy Intelligence Report, Platts etc.). Theretore, theweighted average of natural gas prices in these three major markets can beused for arriving at the price for domestic gas produced in India. For this, (a) thehub price (at the Henry Hub) in the US (for North America), (b) the price at theNational Balancing Point of the UK (for Europe)2, and (c) the netback price at thesources of supply for Japan (a big buyer treated in the Asia-Pacific region assetting a benchmark for the region) may be taken as the prices most relevant forthe purpose of approximating India's average price for producers at their supplypoints across continents. Such a global average price may also be interpreted asan arm's length competitive price for India.
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24.2.5 Finally, the average of the prices arrived at through the aforementionedtwo methods may be taken. Such an overall average of global prices, derived onthe basis of netback and hub I balancing point pricing principles, can be taken asthe economically appropriate estimates of the arm's length competitive pricesapplicable for India. While the formulae detailed in this section dirl?c,tly orindirectly take into account the data of a wide range of transactions includingthose with India, the methodology neutralizes any bias for India and ensures thearm's length aspect of pricing, as best as possible.
IIIIII
24.2.6 The approach outlined in this section could be formulated into a Policy forPricing of Natural Gas in India. The necessary steps for determlnlnq.the twoaverages discussed above are presented in §24.3. , ~;'.'
2 According to International Gas Union (IGU) Report, 2011, the UK and Continental Ellrope arephysically connected by pipelines and prices in European hubs are following NBP ve-:y closely.Hence, NBP is a good proxy for entire Europe including UK.
116
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24.2.7Before that, certain aspects having a bearing on the merits of. therecommendedpricingformulaare discussedbelow.
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24.2.8Viewedfroman investmentperspective,it maybe notedthat theweightedaveragefor gas productionatwell-headpricesof NorthAmerica,Europeand theexports to the Asia-Pacificshall indicate, by and large, what global gas playersare getting from their investments.Hence, from an investment perspectiveaswell,' such a price may be considered as an appropriate reference price fordomesticgas pricingin India.
24,2.9It may be noted that although hub prices of natural gas in the US andEurope are slightly higher than well-head prices, since they include pipelinetariffs up to the hub, since such hub prices are readily available from standardsources,thesemayserve as better benchmarks.
24.2.10 The US and European markets have large volumes contrlbuted byconventional/non-conventionalgas sources and they also representgeo!ogicalsituations present in India. Further, the UK, continental Europe and FSU aredeveloping into one single marketplace and hence need not be treated asstranded markets. FSU countries continue to have, by and large, a regulatedprice lower that the market price, muchof the quantity consumedin FSU beingbelow the European hub prices. While using European hub prices for FSUconsumptionwill result in a slightly higher average price, it may be noted thateven in FSUs, there is a distinct trend towards alignment of gas prices withEuropeanhubprices. '
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24.2.11 Indian importsof LNGare likely to grow rapidly over the next few yearsas domestic production is declining and new discoveries are yet to becommercialized.Hence,the netback to producersof LNG from such imports toIndia (both spot and term) can be used as a basis for deciding domestic gasprices in India.While currently a majority of Indian LNG imports are fr6m theMiddle' East (mainly Qatar), the LNG import prices may not b6";>~:i'truerepresentationof globalgas prices.Since India's LNG importsfrom internationalmarketsare set to grow with time and become a well-diversifiedpori.lc1j9 withsuppliescomingfrom all parts of the world (the US,Africa, Europe,Mi':~'~i'~Eastand Australia),the recommendedmethodologyof netbackpricingmay ~)K~'.moresuitable.
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24.3· Steps for arriving at the recommended pricing
III
24.3.1 While calculating netback to producers, the following components', arededucted from the FOB price as they do not accrue due to production activit}/:
Netback Price, N =A - B - C. (I)
Where:
IA = Imported LNG Price on Netback FOB available from World EnergyIntelligence
B = Liquefaction costs at the respective loading port (source)
C = Transportation and treatment costs of natural gas from wellhead toliquefaction plantI
II
N1,N2 are Producers' Netback, calculated as per Formula (I).
V1,V2 are volumes applicable to Nl, N2 ... Available from World EnergyIntelligence or Platts
PIAV= Average Producer Net Back for Indian Imports for traiiing 12months
IIIII
V1, V2,V3 and A shall be for trailing 12 months period.
All imports, including term contracts, shall be included in the calculation.
Prices and volumes in the above calculation shall be for trailing 12 months, andPIAVshall be arrived at for every month.
24.3.2 The average price of liquefaction costs with older plants is of the order of$ 2.5/mmbtu3. For plants which started deliveries in 2010 or after, theliquefaction cost is of the order of $ 3:5 to 4.0/mmbtu. A recent contracC':signedby GAIL with the Sabine Pass facility in United States of America for supplies tocommence in the year 2016 from a brownfield project is around $ 3.0immbtu.
3 Planning Commission Report of the Inter-Ministerial Committee on Policy for Pooling' ~j"NaturalGas Prices and Pool Operating GuidelinesI
II
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Report of the Committee on the PSC Mechanism in Petroleum lndustry
Hence, it is recommended that an average of $ 2.5/mmbtu may be ad~p~ed asthe liquefaction cost while calculating the average producer netback for Indianimports and the weighted average price to producers in the global f1J~rketsforolder plants, and $ 3.5/mmbtu for exports from plants starting dellverles after2010. These figures may be reviewed after five years.
The trend of liquefaction costs can be ascertained from the data available fromthe reports of Facts Global LNG and Wood Mackenzie.
24.3.3 The transportation cost from the well-head to the liquefaction plant maybe considered as around $ O.5/mmbtu. This includes handling charges andsweetening cost of gas.
{III)
PWAV= Weighted average price to producers in the global marketsA1= Total volume consumed in North America at average Henry Hub. .~.;.
prices on yearly basisPHH= Annual average of daily prices on Henry Hub for the relevant yearA2=Volume consumed through various hubs in Europe/Eurasi,a. in therelevant year (entire consumption of Europe and FSU) ":'-'PNBP= Annual average of daily prices on National Balancing Pofnt (NBP)in the UK for the relevant year~= Volume imported by Japan in the relevant yearPJAv=Yearlyweighted average producers netback price of gas in Japanfor the relevant year (weighted by the total volume of long term and spotimports)PJAVshall also be calculated as PIAVis calculated in Formula (I).
24.3.4 Prices and volumes used in this formula shall be for trailing 12 monthsperiod. It is recommended that PWAVbe calculated every month by the aboveformula. :~. :..
24.3.5 The netback price of LNG to be delivered in Japan from vartous potentialsources across the globe can be determined from the FOB price afthe loadingcountry. The netback FOB prices and volumes at those prices from variousexporting countries are available from LNG Daily and World Energy !ntelligencewebsites. The FOB price includes liquefaction costs of gas at the ··plantin the
119
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Report of the Committee on the PSC Mechanism in Petroleum'tridustry
producing country at the loading port, plus the transportation, including handlingand sweetening charges of the gas from the producing asset to the liquefaction
plant. Thus,
Producer's Netback for LNG Import= Netback FOB Price - Liquefaction Cost - TransP9rtationCost (including Sweetening and Handling Gharges)
. (IV)
The formulae for PIAVand PWAVgive an average price which producers ~crossthe world are realizing through production of natural gas. PIAVis specific t9 Indiaas it is calculated from Indian imports. Hence, an average of PIAVand PV.JAVwillrepresent the recommended appropriate price PAVfor domestic producers:
PAY= (PIAV+ PWAV)12 (V)
24.4 It is clarified· that the proposed pricing formula would only' applyprospectively and is not proposed for application to gas prices already approved.
24.5 The proposed pricing formula would apply to all sectors uniformly, whileallocation of gas will be as per the prevailing Gas Utilization Policy (GUP) of the
Government.
......
120
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IIIIIIIIIIIIIIIIIII
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5
1.1 These guidelines will be applicable to all natural gas produced domestically, irrespective of the source, wbetherconventional, shale. CBM etc. These guidelines shall apply from 1st April 2014 with the exception of cases bdicatedin
Para 1.2.1.2 These guidelines shall not be applicable where prices have ~een fixed contractually ~or a c~ period of ti~, tillthe end of such period. These guidelines shall also not be applicable where the producnon sharing contract prOVIdesaspecific formula for natural gas price indexation I fixation. Further, the pri~g o~natural gas from smallI1:;o~d fieldsin the nomination blocks of NOes will be governed by the extant policy In respect of these blocks ISSUedon
8th July, 2013.1.3 The prices determined under these guidelines shall be applicable to all consuming sectors unifonnly.1.4These guidelines shall also be applicable for natural gas produced by ONGClOn. from their nominated fields.
1.S The pricing of natural gas produced domestically shall be based on the following methodology:1.5.1 First, the netback price of all Indian imports at the wellhead of the exporting countries will.be:·estimated asdetailed in Para 1.7 below. Since there may be several sources of gas imp()rts. the weighted average of ,;;ub~,netbackofimport prices at the wellheads would represent the average global price for Indian LNG iltipClrts. .. .,1.5.2 Secondly, weighted average of prices prevailing at trading points of transactions - i.e., the hubs' or balancing'points of the major global markets will be estimated. For this, (a) the hub price (at the Henry Hub) in the US (for NorthAmerica), (b) the price at the National Balancing Point of the UK (for Europe), and (c) the netback wellhead price atthe sources of supply for Japan willbe taken as the average price for producers at their supply points across continents.
1.5.3 Finally, the simple average of the prices arrived at through the aforementioned two methods will be determined asthe price for dome,stically produced natural gas inIndia.1.6 Netback FOB Pricing: Netback FOB, according to Argus, is calculated based on daily spot LNG vessel charteringfates and accompanied and accompanying shipping related costs. These additional costs shall include:_Daily spot LNG vessel chartering rates for east and west of Suez voyages based on 138,000 - 155,000 eu IIIstandardsize vesseL .
a dailyboi! off rate ofO.lS % I day based on 98 %"Vesselcapacity utilization rate .. ' .:"An average 50 pc of fuel consumption based on daily bunker consumption of 150 t based on local rates
I'~~
An average of 50 pc of LNG fuel consumption based on the boil-off rate.Voyagetiming based on a laden leg speed of 19.5 knots.
Netback FOB prices reported ingovernmental or standard industry sources shall be adopted.1.7Producer's Net back pricing shall be arrived as per the following procedure:I. Calculation of Producer's Netback Price for Indian Imports
:.1"..
,:
(i) While calculating netback to producers, the following components are deducted from the FOB price as they do notaccrue due to production activity:Netback Price, N :: A - B - C. (l)
(ll)PL..v = (N) oj< VI +Nl oj< V,. + ••••••) I (VI +V1 +V3+••••)
Where:A = Imported LNG Price on Netback FOB available from standard industry sources.
B = Liquefaction costs at the respective loading port (source)C =Transportation and treatment costs of natural gas from wellhead to liquefaction plant
Nit Nl are Producers' Netback. calculated as per Fonnula (1).VI>V1 are the volumes corresponding to NI>N1.•...• etc.PlAy'=Weighted average P~ucer Net Back for Indian gas imports for trailing four quarters with a 1:;.£d one quarter.Allimports, term and.spot, WIllbe included in the calculation. . .: . .
VI,V2. V3 lI;D.dA shall be for th: trailing four quarters with a gap of ODequarter. PlAYshall be calculated on quarterlybasis for.trailing ~ourquarters Wl~ a lag of one quarter. The weighted average of quaiterly P'lAVshaHbe the applicablePlAY.This .data will be made aVallable by Indian importers and confirmed through customs departm.,iI::,,;Thiswill befurther validated from leading industry publications.
14
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6 THE GAZBTl'E OF INDIA ; EXTRAORDINARY [PAf.TI-SSC. 1]
I(ii) AD average of $2.5/mmbtu shall be adopted asthe ~quefa~tio~ cost for plants which have s~ deliv~rles in or upto 2010. and $ 3.5/mmbtu for exports from plants startmgdelivenes after 2010. These figures will be reviewed after a
period of five years.The trend of liquefaction costs can be ascertained from the data available from the reports o_fFacts Global LNG andWood MackenZie. Where it is not possible by any means (through customs or through Industry sources et:-) toascertain whether a particular shipment is from pre-ZOIO or post 2010 LNG Train, an average of $ 3.0/IIl)llbtuwill beassumed as the liquefaction costI
I (iii) The transportation cost from the well-head to the liquefaction plant will be considered as $ 0.5{jnn1btu•This"'1ncludeshandling charges and sweetening costs of gas.n. Calculation of World Average Producer'S Netback Price r,
PWAV= (AI* PHlJi"A2·P~ A3*P'JAV)I (Al+Al+Al) ,_ . (Ill)PWAV= Weighted average price to producers in the global markets for trailing four quarters with a lag of 4ne quarter.
Total volume consumed in North America in the relevant 'year i.e, trailing four quarters with a lag of onequarter.Weighted average of quarterly hub prices at Henry Hub. Quarterly hub prices will be a weighted average ofmonthly prices. Monthly prices will be based on simple average of daily prices during the month. PHHshallbe calculated for trailing four quarters with a lag of one quarter.Volume consumed in EU and FSU in the relevant year i.e. trailing four quarters with a lag of one quarter.Weighted average of quarterly hub prices at National Balancing Point. (NBP) in UK. Quarterly hub priceswill be a weighted average of monthly prices. Monthly prices will be based on simple average of,daily pricesduring the month. PimP shall be calculated for trailing four quarters with a lag of one quarter. .Volume imported by Japan in the relevant year-i.e. trailing four quarters with a lag of one quarter ..·
IIII P'AY = Weighted average producer's netback price of gas imported by Japan for trailing four quarters With a lag of
one quarter. All imports. term and spot, will be included in the calculation.
P,AYshall be calculated in the samemanner as PlAYis calculated in Formula (l)(iv) The netback price of LNG to be delivered in Japan from various potential sources across the globe can bedetermined from the FOB price at the loading country. The netback FOB prices and volumes at those' 'prices fromvarious exporting countries are available from LNG Daily and World Energy Intelligence. Argus. Plaas etc. The FOBprice includes liquefaction costs of gas at the plant in the producing COUDtry at the loading port, plus the tl-ansportation,including handling and sweetening charges of the gas from the producing asset to the liquefaction plant. Thus,
Producer's Netback for LNG Import= Netback FOB Price - Liquefaction Cost - Transportation Cost (Including Sweetening and Handling
Charges) . (IV)Liquefaction costs and transportation costs (including sweetening and handling) are same as in the case of Indianaverage price in Para L7 (I){ii) and 1.7 (I) (iii).(v) The. formulae for PlAVand PWAvgive an average price which producers across the world are. l~!?lizing throughproduction of natural gas. The average ofP1..,vand PWAVwill be the price PAYfor domestic producers:
PAv'" (Pu.v + PWAV)12 (V)1,8 Domestic Gas prices shall be notified in advance on a quarterly basis using the data for four quarters,with a lag ofone quarter.1.9These policy guidelines shall be applicable for a period of five years with effect from lstApril. 2014',1.10 ~ :espect of D1 and 03 ~as discoveries of Block KG-DWN-98/3. these guidelines shall be apf'li~a!'ie subject tosubmission of bank guarantees m the manner to be notified separately.
IIIIII
GIRIDHAR ARAM<?J-IE. It. Seey.
IPrintedby theManager. Government oflndia Press,RingRoad, Mayapuri. NewDelhi-I 10064-
andPublishedby theControllerofPublications.Delhi-ll00!54. .':I: '.~
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19
-AN M ~ 'j,vR, f,·hi
STANDING COMMITTEE ONPETROLEUM & NATURAL GAS
(2013..14)
FIFTEENTH LOK SABHA
MINISTRY OF PETROLEUM& NATURAL GAS,
ALLOCATION AND PRICING OF GAS
NINTEENTH REPORT
LOK SABHA SECRETARIAT
NEW DELHI
October, 2013/ Asvina, 1935(Saka)
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61
OBSERVATIONSANDRECOMMENDATIONS
RecommendationNo.1
Demand and Supply of Natural GasThe Committeenote that NaturalGashas emergedas one of the principal
sourceof energyin the world and accountsfor 23.94%of total global energymix.Dueto its inherent advantagesover other fossil fuels there is a global trend ofshift in energymix from oil to natural gas. However, in case of India, share of
natural gas in total energymix accounts only 8.7%which is even lower than the
AsiaPacificshareof 11.27%.
As the Governmentpursued the economic policy to achieve high growth,
the demandfor natural gas has also sharply increased in India during the pastfew years, and expected to escalate further. The Committee are however,constrainedto note the widening gap betweendemandand supply of gas in thecountry,as during 2012-13therewas only 134mmscmdof gas availableincluding
the importedLNG against the demandof 286 mmscmd. Thus there was hugeunmetdemandof 152mmscmd. Duringthe year2015-16,the expectedgapwouldbe to the tune of 300 mmscmd as against the demand of 439 mmscmd theavailablegas supply would be 139mmscmd only. The chunk of this growingsupply deficit is expected to be met through LNG imports from differentcountries. However,the Committeenote that present LNGterminal capacity is 53mmscmdonly unable to support the increased purchase of LNG. Though theLNGinfrastructure is expectedto grow to 180mmscmdby 2016-171it would notstill besufficient to cater to the increasingLNGimport in the coming years.
IIII
TheCommitteeare of the view that MoPNGshould evolvea plan to explore
all possible options to increase the production and supply of natural gas in thecountry. Towards this end, the Committee desire that the Ministry shouldIncreasethe blocks awarded for exploration, intensify activities tor ,explorationand production of shale gas, pursue strong diplomatic efforts' to expedite
construcrlon of tr~hsriatibnai pipelines from neighbouring regions to bring gasarid try to ehter into long term contract for import of LNGat cheapercost. TheCoffiffiiUee furtHer de§Irethat unconventionalsources of gas like Gas Hydrates,
17
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62
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CBM, Shale Gas should be seriously monitored for exploitation and development.
Therefore, the Committee recommend that Ministry should prepare a blue print to
improve the production and supply of natural gas in the country so that there is
no deficit in meeting the domestic demand.
Recommendation No.2
"
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GasAllocation by EGoMThe Committee note that domestic production of Natural gas "during the
12thplan was projected to be 111.54mmscmd in the year 2012-13 and is expected
to go up to 175 mmscmd by the end of the plan i.e. by 2016-17. The Committee
however are surprised to note that the allocations made by EGoM for the year
2012-13 were to the tune of 238.27mmscmd, which is more than double the
projected production during the same period. This shows huge mismatch devoid
of any realistic estimations on part of EGoM. Though the Committee u,:,derstands
that the minimal surplus allocations are unavoidable but at the same time such
excess allocations is not acceptable.
III
Further the shortfall in the actual production which plunged to 91.36
mmscmd in 2012-13 forced the Ministry to cut back the allocations to various
sectors on pro-rata basis. So much so, that the consistent decline in production
of gas from KG-06 basin ultimately resulted in nil gas supply from the KG-06
basin to power sector. These developments have an adverse impact on the
projects and investment plans of many sectors of the economy which expects
assured gas supply on basis of allocations made by the Govetriment. The
Committee therefore recommend that the allocations should be' made by
adopting a more pragmatic approach, and should not be more than 10% of the
projected production.
....
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63
RecommendationNo.3
IIIIIII
Allocation of gas to various sectors
TheCommitteenote that allocation of natural gas is to be made,to various.. ~consuming sectors as per the priority order decided by EGoM. . As per thispriority order, fertilizer industry comesat first placefollowed by LPGpi,antsat thesecondand power plants at third place. The city gas distribution' network rank
fourth in priority.
IIIIIII
. The Committee,however note that due to less supply, allocation to thesectors have been much below the demand. In case of power sector, theallocationhasbeenonly 42.53mmscmdagainstdemandof 135mmscmdin 2012-13 which is projected to go up to 207 mmscmd in 2016-17.However, largeinvestments have been made in gas based power plants which has becomeinfructous dueto non-availability of gas. The power plants have the option of
using importedLNGor coal in placeof naturalgas. As the cost of importedLNGis high, its use is uneconomical. As regardsthe usageof coal, the plants whichhavebeen designed for using natural gas have to make extra investments forshifting to coal as fuel. TheCommittee,therefore,recommendthe Gdvernmenttoindicatethe clear picture regardingthe availability of gas for power sector in thenext 5 to 10 years so that before making the investments in gas based power
plant,the gasavailability is factored in by the companies.
IIII
The Committee note that during 2012-13, power and fertilizer sectorscumulatively received 61.6%of natural gas whereas CGDsector -recelved only11.6%of the total availablegas. Besidesbeing an efficient environmentfriendlyfuel, natural gas presently used in PNGand CNG does not alsovcontaln anysubsidy element in its cost structure. Even a small quantity of. natural gasallocation can cater to a large number of customers in the CGO'network.TheCommitteeseriously feel that in order to benefit a wider section of society,expansionof PNG/CNGnetworkwill be theway forward as this wm;tdsosavethesubsidy burden of the Governmenton the use of LPG and dlesoli Hence,theConli'hitteerecommendthat the eGDnetw~rksmust beallocatedan-Increased
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I 64
II
quota of gas due to a slew of benefits that could be achieved by the use of natural
gas over the other conventional fuels.
I
The Committeewould also like to point out that requirement ofJ)atural gas
varies from time to time and hence the allocation policy of Government needs tobe dynamic and responsive towards the societal needs and changing economy.Therefore, the Committee desire that the allocation policy should be n~viewedto .reflect the changing demand supply scenario of the various sectors and the
II
direction in which the Governmentwants to move forward. "":" ...'~I
RecommendationNo.4
I Production of Natural Gas from KG - D6Basin
I The Committee note that KG-D6basin is one of the successful:.discoveriesin the NELPregime which gave hope to the country in its quest for exploration ofhydrocarbon resources. The Committee note that the planned production as perthe approved field development plan (FOP),which was 33.83mmscmd in 2009-10was to go up to 86.73 mmscmd in 2012-13. However, the production from the
KG-D6basin started declining as the actual production was 55.89 in 2010-11to
26.18mmscmd in 2012-13.
IIIII
The Committee find that one of the reasons stated by the Ministry for thedeclinilig production was due to non-drilling of required number of gas producerwells by the contractor in line with Addendum to initial DevelopmentPlan (AIDP).Whereas according to the contractor, the decline has been due ;:0 substantial
variance in reservoir behavior and higher pressure decline than envisaged. TheCommittee have been further informed that the contractor has been advisedcertain corrective measures to increase natural gas production i~ ·'K.G-D6block.However, the contractor has failed to adhere to the corrective measures.
III The Comtnittee also observe that DGH had commissioned .~.study by an
expert on the decline in production and the expert has concluded that reserves asestilfiat~'~ earli~ri which is around 10 TFC are' still available; and remedial
ffi~a~l:tres*iH help the prodUction tb g() up. the expert has also observed that theIII
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65
shortfall in gas production is due to non-drilling of adequate number of wells as
per ADP (Approved Development Plan) and delays in commissioning additional"
producers would trigger water drive in the reservoir and consequent reduction of, . i,
the ultimate recovery as a result of water encroachment as well aspermanent:; ~\
loss of some of' the gas reserves. Based on the aforesaid repor~ the cost
disallowance amounting to US $ 1.005 billion has been imposed "upon the
contractor which the contractor has taken for arbitration.
The Committee are worried and express their unhappiness at the whole
series of events. The KG - 06 basin was success story of NELP regime which
invited private companies and MNCs in the exploration and production regime
which until then was a NOCs forte. However, the contractor has not adhered to
the measures suggested by the upstream regulator DGH to drill wells to increase
natural gas production. Also coincidentally, the demand for increase in the price
of natural gas by the contractor over and above the discovered price by arm
length mechanism as provided in the PSC has also brought question mark
regarding the interest of contractor to abide in the sanctity and stability of the
PSC.The Committee has taken serious note of the statement made by the
Ministry that the contractor (RIL) failed to adhere to the approved field
development plan both in terms of gas production as well as drilling and putting
on stream the required number of wells, even after repeated reminder. The','
Committee also note that the action taken by the Ministry in respect of cost
disallowance of US$ 1.005 Billion to contractor based on arbitration, procedure.
In view of the above, the Committee is of the opinion that non-adherence by the
contractor to approved field development plan should be construed as 'default'
and not just failure and remedial action by the Ministry in this regard must be
premised on 'default' by the contractor and not on 'failure'.
The Committee would like to point out that Supreme Court has observed" t/
that natural resources are national assets and are to be utilized for jo:!~gergood of
the people. Therefore, the Committee would recommend to MoPNGto explore all
possible options and take corrective measures to increase the natural gas
production from KG-aS basin, as observed in the study commiSSior~e'~:bYDGH.
21".: "{.
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66
Recommendation No. 5
Allocation to States
The' Committee note that the natural gas produced from' differentdenominatedfields like APM,Non-APM,KG 06 and PMTare allocated as per thegasutilization policy by the EGoM. As per the policy the allocation otgas is donesectorwise in the order of priority as decided by EGoMand the geographicallocation of any oil/gas producing asset does not influence the allocation criteriaof Government. Hence, this means that eventhough natural gas' ~~.producedfrom or adjoining areas of a State, there is no gurantee of any allocation to theStatewhereas industries in the priority sector in any state including far off ones
would get preferencein allocation of gas.
TheCommitteeobservethat total gas production during 2012·13 was40678million cubic metres, out of which the share of private/JV in the KG 06 basinlocatedin coastalareaadjoining AndhraPradeshwas 13700 million cubic metres.This accounts for 30% of the total natural gas production of the country.However,the allocation to Andhra Pradeshis peggedat 29.02 mrnscmdin 2012-
13, out of a total allocation of 216.27 rnmscmdwhich works out to less than 15%.TheCommitteenotethat only regional preferencegiven to AndhraPradeshis thatthe power plants have beenallocatedKG06 gas basedon 75%plant load factorwhereaspower plants outside Andhra Pradeshhavebeenallocated to operateat70% PLF.The Committeeare of the opinion that this is an inalqnlficant privilegegiven to Andhra Pradeshconsidering the quantum of gas produced'in the State.Further,~~oughthe gas producing and nearby states have enoug:.'demandforgas, it is transported from East to West Coastand vice-versa thus entalllnq extraexpenditureincreasingthe cost of gas. TheCommitteefeel that utlllzation of gasin nearby,areas or states, could be more pragmatic and eccnornlcal than
" ,I •• ~.
transporting it to longer distances until a nationvide gas Pipeline network is inplace.
The Committee are of the strong view that this policy s!lould be re~x~furnedand the lrtdustrfes in the state concernedor in the neighb·)i"ingregions
shouldbe given priority in matter of allocation of gas as the state in tvhich the
22.
I .' .,I,
I .' \'
I67
field is locatedwill be very eagerand interestedto use the gas for its economic
III
development. The Committee,therefore recommendMoPNGto supply atleast50%of the gas producedto industries belonging to the statewhere the fields are. ' .situated.
RecommendationNo.6
Royalty to States on Natural Gas Productionc":
II
The Committeenote that oil and natural gas is produced from the fieldslocated in onshore, shallow water and offshore. Some of the' fields forexploration and production were awarded under nomination basis and onceNELP regime came into being, the fields were awarded under competitive
bidding. As per Production SharingContract (PSC)the contractor has to payroyalty to the Central/State Governmentdependingon the area from where thenaturalgas is produced. The royalty rates on natural gas production are 10%ofwell headvalue for onland and shallow water areasapplicable uniformly for allregimeand it is paid to respective states in which the fields are located. Theroyalty rates applicable for gas producedfrom deepwater fields under NELPis5% of well head price for first 7 years and 10%thereafter on ex-royalty basis.However,in case of production from deepwater, royalty accrues on!y to CentralGovernmenton the consideration that all the resourceswhich are in the offshore
areasbelongto the Unionof India.
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The Committeefeel that this policy has put the States where the gas isbeing produced from offshore fields to disadvantageousposition 'as they arebeingdeprivedof royalty arising out of the production of naturalgas. In the caseof KGD6 basinwhich is oneof the biggestdiscovery of natural gas in the recentyears,the royalty on the production accruesonly to Central Governhlentand norevenue is earned by the Andhra PradeshState Government. As the royaltypaymentsto States where the natural resources are located and ~producedisSUbstantialas seen in the case of Rajasthanwhere StateGovernm~:J~tis earningto the tune bf Rs.5000 crore/annum by way of royalty from B'~rmerfields,d~pH~iHgtither states of its rightful share of royalty from offs'\-1Srefields isuHjtistlfi~d~Evert th8ugl1,the dff~hbre fields lie in coastal areas,the hmtractors
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68
would set LIP offices and source other infrastructure to carry out the work in theadjoining state to the offshore Hence, it is reasonable for the state to expectsome benefits from such economic activities being carried out adjacent to theircoast will incentivize the states to extend all cooperation to carry out the
exploration and production activities.""
III
As the production of oil and natural gas is expected ,to· increasesubstantially with the new discoveries from offshore fields being made, the issuerelating to non-sharing of royalty from offshore areas with State GO\Vernmentsneedsto be revisited and the StateGovernmentshould also be benefited from theeconomic activities being carried out in their coastal region. Since theexploration and production activities are expected to increase in offshore anddeep waters in the years to come, the Committee therefore recommend thatMoPNGshould devise a policy for sharing the royalty earned from offshore areasalso with the concerned StateGovernments.
RecommendationNo.7Supply of APM Gas to TTZ Area
IIII
TheCommitteenote that in pursuance of SupremeCourt order, MoPNGhasbeensupplying natural gas to the industrial units most of which are g1':21ss• bottlemanufacturing units in Taj Trapezium Area, in Ferozabad near Agra since 1996.The allocation of gas for this purpose now stands at 1.7 mmscmd. The price ofthe natural gas charged to these units. are APM price which' has remainunchangedsince 2005.
III
The Committeeare given to understand that the number of factories in thisarea has grown manifold taking advantage of the low priced APM natural gas.The Committee feel that this has defeated the purpose of the Supreme Courtorder which wanted that Taj Area should be preserved from environmentalpollution from the factories in the nearby area. The Committee also wish to
observe that glass units in other town/cities in the country which buy gas at
market related prices are at a distinct competitive disadvantages compared to theblih§ iO€~teaHiTTZ Area.I
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69
II
In view of the above, the Committeedesire the MoPNGto implement theSupremeCourt order and the objectives set out in it in the right spirit withoutcreatingany imbalancesin competitivefactors for other similar industrial units inthe country. Therefore, the Committee recommendthat the MoPN<a'toinitiateconcretecorrective action and supply natural gas at competitivemar,~etpric~totheseunits so as to check the mushroomingof industries in TTZarea':whichare
taking unfair advantageof low gas price.RecommendationNo.8 "1-'
' ..~
Rangarajan Committee on PSC
II
The Committee note that The Production Sharing Contracts are enteredbetween contractors and Government on a host of issues under the NELP.Governmentappointed the RangarajanCommittee,to review Production SharingContract (PSC). Some of the important recommendations of the committeeinclude a' new revenue sharing model, pricing formula for natural gas and taxholidays. The revenue sharing model has been proposed to overcome thepresentsystemof pre tax investmentmodeland cost recoverymechanism.
IIII
The Committeedesire that since Rangarajancommittee recommendationshavewide ramifications on the investments in the E&P sector, i~ needs to beexaminedin greaterdetail before any decision is taken on the implementationasthe E&Pactivities under NELPhas not achieved the desired participation fromadequatenumberof both domestic and internationalcompanies.
III
RecommendationNo.9
GasPrice' formula by Rangarajan Committee
III
The Committee note that the RangarajanCommittee appointed to reviewProductionSharingContract (PSC)enteredbetweencontractors and'GovernmentunderNELPregimehas deviseda newformula regarding the prlce'cf natural gasproduced: hi this regard, its report hasstatedthat' ....the producers-In Indiaget ath~astthe av~raseprice of What producers elsewhereare getting'. "Theproposedforri;ula is a simple averageof two methodologies.In the first method; it takes the~Ae~Hi Importsat hNGinfo liitlia 6~different supplierswhile in th~'E'econd
f". ~,'.
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70
method, the weighted average of prices of natural gas prevailing at Henry Hub
(HH) in USA, National Balancing Point (NBP) in London and netback import price
at the well head of suppliers into Japan in the preceding quarters is considered.
The Committee have noted that during the year 2012, the natural gas prices
in these three selected hubs were around US$ 2.5 to 3.5 per mmbtu in HH(USA),
US $ 8to 10 at NBP and $ 14 to 16 at Japan respectively. However,t·it is to be
observed that the benefit of lower gas prices at HH has been at larg~y diluted by
the inclusion of Japan's LNG FoB prices which includes 60% royaltYj~omponent.
linkage to JCC and host of other factors.
The note prepared by Ministry of Finance for EGoM on the Rangarajan
Committee formula argues that there is no logic in inclusion therein of the
consumption by Japan which is having very high import LNG price and that
nowhere in the world, well head prices of natural gas has been linked to spot LNG
contract basis. The Committee find merit in this view of the Ministry of Finance.
IIIIIIIIII
The Committee further observe that Russia, being the second largest
among the gas producing and consuming countries, exporting 40 to 50 percent of
its gas to Europe at a price of about $8.77 per mmbtu, could be a valuable and
better indicator of gas price. The Committee desire that Russian prtces could be.'
incorporated as one of the reference price in the pricing formula.
The Committee would also like to point out the glaring' omission of
factoring of domestic cost of production of natural gas by Noes namely ONGC
and OIL which was pegged at $ 3.63 and $3.21 respectively during the year 2012-
13. Similarly the cost of production for RIL in 2012-13 stood a~US$ 2.48 per
MMBTUfrom KG-06 field.
The Committee would further like to highlight that the price of domestic
natural gas need not be dollar denominated due to huge volatility in 'dollar vis-a
vis Rupee which often leads to gains to operators for no reasons. and adverselyc:·impact the Government financials. As the present price of $ 4.2iMMBTU at an
excHange tate bf Rs.45J-. works out to be Rs.189/MMBTU and as against
Rs.6'OltJSDi equal$ to Rs.252/MMBTUwhich is 30% windfall gain 'g~crUed due to
tl1l¥~~He~~ltlathlnfr8th ~sJ*5 t'O 60 Against the USdollar. . "
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The Committee taking into consideration all the factors analysed abovewould like 'to recommend that .the.RangarajanCommittee formula for arriving at
. . '. . " f"'...
natural gas price should be thoroughly reviewed and reconsidered. TheCommittee recommend factoring domestic cost of production of gas for arrivingat the price, and fixation of price of gas in rupee terms in PSC,!~,~derN,ELP
regime. , .
RecommendationNo.10
Strategyto attract investments in Exploration and Production sector '
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The Committee is not sufficiently convinced on the efficacy of the strategy
of the Government on deploying the single instrument of price to achievemultipleobjective of incentivizing domestic gas exploration arid production on the supplyside and meeting the huge unmet demands for gas at reasonable cost. Doubtshave been raised in the Committee as to whether a big rise in gas price wouldattract additional investment from within and abroad in the field of' exploration.Data supplied by the Ministry on flow of investment by private/JV ccmpanres inexploration of gas reveal that flow of private investment in exploration hasactually started tapering down every year from 2009-10 onward compared tosimilar investments in 2007-08and 2008-09despite there be substantial jump inthe gas price from 2009 onward and also country's gas out put marked a drasticdecline. The Committee, therefore, recommend a through review of the whole
strategy of price-led investment growth.
RecommendationNo. 11
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Impact of GasPrice Revision on Power/Fertilizer Sector "\
II
The Committee note that under the allocation policy for naturci:fgas, the toppriority has been accorded to gas based fertilizer plants, totlowed by powerplants su,pplying to grid. The allocation of Natural Gas to Fertilizer and Powersector during 2012-13was 40.18 MMSCMDand 42.53 MMSCMDre'sl;ectivelyand
_",'... ; ._<.,"',' _,' ) ',_ . '-',ri- ... C', _ ,"'-" '__, ., •..•.. _', '. - '"i"accoUhtedfdr 29:9%and 31.6%of the total allocation. The Committl;)ehave been,ihf&;tm~d:thM ph:~sentiyfertiliz~r~~ctor is getting Natural Gas at .~.'price of $4.2
~~fMMBfu ahtl i'rl~re~sedf 1LJSd&t'lar per MMl3tUwill result in exttk
27
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72
expenditure of Rs 3155 crore per annum towards fertilizer subsidy. Similarly the
Power Ministry has in its note submitted to CCEA have stated that if base price of
domestic Natural gas is increased beyond US $ 5 IMMBTU, it would be unviable
for power sector.
Considering the above it is clear that in the event of increase in gas prices,
the Government will have to provide more money for the purpose l-bf fertilizer
subsidy. Simultaneously since power is an important input to ,m.ost of the
Industries, increase in its cost will have a cascading impact on the economy as a
whole.
In this regard, the Ministry while justifying the revision of natural gas prices
have informed the Committee that the 12th Five Year PI~m document has the
underlying philosophy of the Government that the energy prices in the country
must align with global energy prices. Hence, as the country is thriving on
imported fuel, the pricing has to be linked to international prices.
The Committee while understanding the need to adopt market linked
pricing of energy in the country also wish to point out that being a developing
nation and having a huge population with very little surplus purchasing capacity,
it would not be advisable to switch to market linked energy prices from aprotected price environment.
The Committee therefore, recommend that the new formula for natural gas
pricing as suggested by the Rangarajan Committee should be reviewed and
reconsidered; the issue of market linked price of natural gas should be dealt and
considered in due consideration of its impact on other sectors I{~:efertilizer,
power etc·.,.including their viability, resources to fund increased sl!~~sidy by the
Government and related issues.
Recommendation No. 12
Pooling of Gas
"-"The Committee note that natural gas is produced from different category of:: ',; -,' "-", .." ;, ,_' .. _', .. ,.., .. , : 'r. "-',." ," ,_ .. .. , .. .-~'
fields like nominated blocks; Pre-NELP blocks and NELP blocks on both onshore~. ',.:,_ ',; ~ .'."',',,;, ••,,, ';.J '. ','.' (" .... ' _ ,_:.' .. ". I .." ...__"'_,.: .._',"'.:) oj, ,:.-,alia offshore fields; However by and large the priority in allocation for gas~H~Htilt~afr6fHHift~feHtfiela~is same.
IIIIIIIIII
73
TheCommitteehavealso noted that the price for gas varies dependingupon thetype of fields from which the gas has been produced. The gas produced fromAPMfields is 'priced at $4.20/MMBTUwhereas from PMTand Ravvaflelds it ispricedat $5.57and $3.5- 6.8 respectively,whereasfor KG- 06 basi'n'it is pricedat $4.2/MMBTU.
TheCommitteehowever,are of the view that the differential pricing of gasdo not provide clarity and transparency about gas pricing to consumers. TheCommitteedesire the MoP&NGto consider pooling of the entire production and
-.':
then allocateto the sectors as per the priority at a uniform price.The Committee is also of the 'firm opinion that for pooling gas prices,
prices of gas from different fields must be premised on the respective cost of
"., ...
IIIIIIIII
production and this necessitate factoring of domestic cost of production forarrivingat the gas price.
TheCommitteenote that a Committeewas set up under the Chairmanshipof Dr. SaumitraChaudhari,Member,PlanningCommission to examinethe needfor and to suggest a viable schemefor a pooled price for natural gas deliveredtocustomers. This Committee have since given the report. The various stakeholders like Ministry of Fertilizer and Powerhaveexpressed reservations on therecommendations of the Committee. While appreciating the reservationsexpressed by the stake holders, the Committee recommend that the Ministryshould try to evolvea consensuson pooling of gas,so that a uniform price policycan beput in placefor natural gas in the country.
..... "
New Delhi;17October, 201325Asvina, 1935 (Saka)
SOMABHAI GANDALAL KOLIPATEL,Actin!c{Chairman;
Standing committe» onPetroleum & N,aturalGas.
. f..'l·· ..
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. . _ _ .." " -."..__._----_._-_ .. , •.. ,~,~~.. '_"'_M'.'_"""_.....
....
AtJ,N'E~:URE-,£",
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.STAN.DING COMMITTt:E ON FIN·ANti: . ;. (2012 ..13) . .
fiFTEENTH [OK SABHA
MINISTRYOF FINANCE .(OEPARTM:ENt.~FREVENUE) ..
'E:CONOMIC IMPACT OFREVISION OF NATURAL GAS PRICE'
SEVENTY F=OURT'HREPORT'
, .
LOK SABHA SECRETARIAT'NEW DELHI
August, 2013, Sravana, 1935 (Saka)
1
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~....-.-'..-~-...-.---.-
PART·II
OaSERVATIONS I RECO'MMEN·DATIONS
1. TheCommitteebelieve th~t n~tural gas is a nat,ionalresource and a public
asset; and therefore any discou~se on its pricing ..policy should reflect this
principle so that it is used for the larger national good and notfor profiteering. In
the present economic situation with rampant lnflatlon and.a slowdown of the
economy,any increase in gas prices will have a derailing effect on the economy
generally and the downstream core sectors of fertilizer, power and steel, in
particular. TheCommitteenotethat with gas production from the KGbasin fields
falling drastically in the last couple of years due to what the contractor claimed
were "technical problem", the core sector of the economy dependent on gas as
fuel was forced to either use expensive imported gas or operate their plants at
sub-optimal capacities. . As production from KG-06 gas basin continued to
declineSinceApril 2010, pro-rata cuts were imposed by Governmentacross aU
sectors betweenJuly 2010 and March 201.1; in October 2011, supply.to City Gas.
Distribution (eGD)from this basin becamezero and byMarch 2013, the supply to
. power sector also became zero. However, fertilizer sector Was get,ting its
supplies as per priority fixed by Government. The reduction in 9,assupplies
resulted in several gas-basedpower.plants in the Country getting stranded and
becomingNPA. The shortfall in production also resulted in zero supply for the
steel sector. As·regards the impact of gas price increase on prioi-itysectcrs, the
Ministry have admitted that there would be a direct impact on the prices of
fertilizers, as increase in the price of gas by $ 1 per MMBlu results in the
increase in cost of production of urea by a huge Rs. 1384. per M:r~ It is thus
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. . . . . ,..,.,._.••"._.•-r-r--v-__ ._-_..•.----_. __ .:..:..;i;----------.--.., .- _---" __.._---------------
evident that gas pricing has serious repercussions for the economy as a whole,..which'warrants careful deliberations and prudent decisions.
2. The Committee would thus like to bring into focus the foll()wing critical
issues and areas of concern arising out of the government'sdecisloh! to revise
sharply the.natural gas price.
(i) Deploying the single instrument of price to achlevexhe multipleobjectives of lnceritlvlzlng dornestlc gas exploration and productionon the supply side and meetlnq the huge unmet demand for gas atreasonable cost. In this regard, doubts have been raised as towhether a large. rise in gas price would at all attract additionalinvestment from home or abroad and relax the supply sideconstraint. Despite raising the domestic well-head price by almost300% during the period beginning 2005 tnt date (from as low as$1.79/MMBTUto $4.20/MMBTU),private investments in the sectorand the country's gas output haveactually dropped,
(ii) To meet serious challenges that have arisen due to the tendency ofcontractors to manipulate the investment multiple parameter and.controlling production, which adversely affected supply.
(iii) To frame a long-term vision based on geo-political developments in'the energy sector.
(iv) To conduct a scientific cost study in the' gas basins warranting Ijustifying a higher price. It cannot be a mechanism rmly' leading toWindfall I super-normal profits to entities, thereby putting the cost ofprivate profit on society.
(v) The rationale for dollar- denominated gas pricing Whenthe revenues
.are all in rupee and the country has a chronic adverseexchange,rate.
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Any fixing of input price at a lower level than output price \'Jill meanabloating of subsidles: is the government prepared for' adisproportionately higher subsidy outgo in successive budgets forthe fertilizer and power sectors andwhether this has been factoredin the 12th Plan. The extent of its lnftatlonary Impact needs to be
considered. .~.~,_.. .:
(vii) The need for consultations with the State govemtnents in thisprocess, as they may have to significantly increase.power tariffs tocover the higher costs or drastically raise·theirsubsidy expendlture.
. . . , .
I The impact on state budgetsshould be keydeterminantaswell..
II
(viii) The need to consider views of concerned Ministries, PlanningCommission, Industry and expertsbeforearriving atthe. decision.
I(ix) The counter-productlve effect of such large increases in price by
forcing consumers of gas to divert. to less cleaner fuels, thereby .stultifying the.gasprlclng.pollcy itself.
III
3. The Committee are constrained to note that no due diligence was done
before arriving at the decision to revise gas·price. Neither was any cost or
III
Impact study done in this regard. in this context, the Committee would
recommend that the followinq aspects should be taken into account. as an
integral part ofany gas pricing mechanism,which has huge impact on various
sectorsof the economy:
. (i) At this juncture of our economic development,transitioning from a.regulatedto a fully market-basedsystemshould bestaggered.
IIII
(ii) The Government needs' to rethink certain elements in the pricingformula suggested by the Rangarajanpanel, which only serves topush the Indiangas price higher than it ought to be. A morerealistic
24
33
III
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III
(iii)
price formulation better suited to our current prlorltles may be
evolved.
Secondly, there should be a cap on the suggested pr~~~.under theformula and for this purpose; there .shculd be a ceiling price. Itcannot be the case that gas producers will be. allowed to reapunlimited gains in the event of upswing in global prlces at the
expenseof coresectors of the economy.
III
(iv) The Government sho-uld also subject gas producers to closerregulatlon, especially on aspects of cost recovery and .technicalparametersrelatedto production. A comprehensivetechnical studyon cost estimates of gas productlon should be conducted for thls
purpose.
III
(v) The Governmentmust ensure that the contractor responsible for. .
delivering the major chunk of gas from KG-06 gas field supplies,. .
delivers the shortfall he still owes as per the Agreementat the old .price of $4.21 MMBtu,rather than getting the benefit of the new price·forpreviouscommitments.
III
(vi) The important recommendationof the Rangarajanpanelof movingtoa revenue-sharing arranqement with gas producers should beconsidered.. A newProductionSharing Contract (PSC.)modelshouldbe evolved that will do awaywith Incentives to control productionand manipulating Investments,while assuring reasonablereturnstothe producers.. ,
(vii) The governmentneedsto do a thorough impact study of gas pricing
III
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on different sectors of the economy,particularly the GOresectors of..power, fertilizer, steel and small scale. industry specially thoseeffected by pollution control laws/orders. The quantum of subsidyrequiredto compensatethese sectors should be pre;';isely'arrivedatover the medium.term. Similarly, the extent oftrevenue hJSS or
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.foregone' should also be quantified over this period in order to gras·pfully the implications of the price revision on the Union S,u.dget.
(viii) As gas pricing will have' implications for power tariffs ~s well, Stategovernments also need to be consulted and taken on board. Insteadof hurrying with decisions carrying wlder Import and rarylificationsfor the country as a whole, broader consultatlve process)nvolving allstakeholders should be put ln place.
(x) Divergence in views within the government cannot be. ig~ored onsuch, a major issue and therefore, the valid concerns expressed by
key economic Ministries of the government like power, fertlllzer andsteel should be duly addressed before finalizing the policy.
In the light of the concerns enunciated above, the Committee WOUld.strongly recommend the Government to review forthwith its decision- to raise gasprices and come out with fresh pri'cing which is more balanced and hoJistic andclosely related to the a.uQitedcost of production and a reasonable return on the
.. .' ,<,: ....capital invested. .
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NewDelhi;02August, 201311 Sravana, 1935 {Sakal
YASHWANT SlNHA,. Chairman,Standing Committee<on Finance.
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Annexure-V
Source wise Production and Supply of Domestic gas during the year 2013-14:
(MMSCMD)
PRODUCTION AND SUPPLY OF DOMESTIC GAS DURING 2013-14
Source Production % of Total Supply % of TotalProduction supply
ONGC 63.79 65.76 50.58 63.2
OIL 7.19 7.41 5.73 7.16
NELP 13.84 14.26 13.53 16.9
PRE-NELP 11.73 12.09 9.85 12.3
CBM 0.45 0.46 0.34 0.42
Grand Total 96.99 80.02
Source: Ministry of Petroleum & Natural Gas
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»zZmXC:::0mI<
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No, L-16016/2/2011-GP ,G6v~rnment of lndio
Ministryof Petroleum &;Natural G.as'" ...* *
, __,.ANNE~UQt~ ~
Shcstri Bhawan, New D~lhiDataq'the JulyS, 2.013
To
1., TheChairman s,Managing -airector,O'NGe, New DeIhL, 2. The Chairm.an 8.Managing l1irector, GAIL, New Delhi.3. The Chciirman &. MClndgihg Directiir. ca.New Delhi.
SubJect:~,Allocation of domestic 9'05, from small/isolated fields,****
Sir,
In supersession of this Ministry's "Guidelines for Selection ofCUstomers for Allocation of Domesflc Gas from' Smoll{lsol,ated Flelds~''forwarded With this MinistrY'sletter of even nlHnber dated '16,.1,2012,please find enclosed herewith the reVi$eQ "Guid'elines fOT se.rection ofCustomers fOT' Allcoation of Domestic Gas from SmOllilso.latedFields "..Further, necessary oeflon for alloco'ting gos' to .customers from s6ch 'srnoll/lsolored' fields may be taken In' accordance with 'these revisedguidelines and such gas allocated to various customers may beinformed to thisMinistry. .
2. These revised guidelines haVe the approval of Minister forPetroleum &;Natural Gas.
IP .K.Singh)"Joint Secretary to the GoVernme'ht of fndia
. TeLNo;23382418
Yours faithfu\ly,,··
~ . " .
Copy to.- Technical DIrector (NIC) for hosting the gui'¢l~iines:intheMlni.stry'swebsite. ' . .
37
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, . MlNISTRY O:F, P:ETR(JLSUM ~N'D NATURAL GAS, GOVERNM£Nl 'OF I~J:I)IA
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'GlJU)'E,LU~JjE.S,r-O'R SELECTION :Q"F.,C·USTOMERS, :FO·RD~OMEstIC 'GAS AVAfLAS:lE FROM SM:A.LLilS();:LA1i,D ,i
F'JELDS "
'.
Date: 8t~July, 201'3
Page,jl
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Guide'll)les for selection of custo~ers for domesticgas ay~ilitblefrom silialll tsoJatedfields
'Governm.,ent had come out with guidelines for selection of customers for domestic gasavailabie from small! isolated fields on 16.01.1,012.The guid~1ineshad 'been issued witha provision to review the PClliCy after one 'ye,ar. , Several r:epresentaijoIis have been;eceived :fromvarious quartei:s for reviewing the policy. Based on tlie ~xperlen:ceafter' issue of guidelines and the issues raised.by vmous stakeholders as well as 'keeping inta~the inhihl goal ofthe policy aimed at early monetizatio~,of gas, the guidelines 'havebeen'reviewed.
2. Derlll;itiQ~ o:f.the Fields to which these guidelin~s will ap.ply
'The Fields thatWill be covered by this POlicywill be the existing,produoing or new fields, from n.Oro.io~tedblocks satisfying one of the followjng'two ¢oncli.tions:
"Fields whose peak pro4u~tion is less than 0.1 J:ru:nscl;lJ,d,and they are situated more than. . ".. .... .10Kmawa,.y nom the gasgrid;.
ORFields whose peak:production is less than 0.1 IDIil~cmdand have a gas pressure which isless than the grid pressure"
, These fields,Will be ,called sm~ and isolated fields heteafte~;. '.~',
3. Methodology to be followed for allocationof Gas fro:m Smal1JIsolated Fields:
1. Supplies to exi.s.tingcustomers from small/isolated fields sliall,eotilitiue as per. th¢i;r APM allocations.or the fhllback non-APM allo~atiollsOr 'both.:an4s~, , be restri~tedat aIevelequal to the a-verage~pply made to Stich~toll!ers .~. the'last,six months. Revised Gas Supply Agreement for these quantities shallbe finalized by the NOes witbi.n 30 days. Gas supplies'Sh<ill be made to th.e 'existing customers based 'on this ,level SUbject to availability ,of g~. 'NOesshall charge the notified APM Pri.c~for SUppliesmade against APM aIktation
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11.
and at ~on-APMprice, as notified by the Go-v_ent froin ~e to.tane, forthe balance supplies (supply level frozen now minus the supply ofAP~ gas)..Incase of additional avail~b.ilityof gas after providing for gas supplies to theexisting customers as indicated at 3 (i) above, and for ari'j new pr()~u.cti()n.from the small I isolated fields. s'Upply of gas will be.decid,ed'tbr6ugh open
. • . L, ,
competitive bidding.iii, There shall be no sectoral priority and the exi$tirig as wel1 as new ~~t()mers
. ~. ,.Shanbe treated equally. ". '. . . . . ... ~ V' ..
iv. The bids shall be based on the price an.d shall be awarded to Uie' .lUgllestbidder. In 'order to ensure higher ·:i:il6Iietization NOes shall ,fuCa ~trtn
reserve price eqlial to the price of Mn...APM gas for the particular region; asnotified by the Goveri¥nelit from time to time.
v. An advertisement I NIT .ande-Tender Will'i:>e'brought ~ut :t:or'such.additionalquantitr of gas available from sina.u and isolated:fiel~£rom' Noes meil'iionedin 3 eli) abov~ in at Ieast otie local language daily & one na.ti?,nal &lilymentioning inter alia the quality. tentative. date of availability, co~pressio:ncharges (if any), duration of availability, quantity, location and delivery point
of the gas field. Detailed information on the evaluation criteria ~,qngwith.. ., .," . .'
,btoa~ salientfeatures 'of GaSSale/l'ransj>ortatioD. Agr~ero.ent(as appl,ic~ble)tobe executed shall also be made known,
vi. In view of limltei;l'life of ;the field.the prospective cusronrers snail also be'advised to explore maintenance of dual fuel c~P~hllity,if~o.warrant~d,.
. . .
.vii. In addition to the price 'bid, the bid submitted by the applicants shall alsoindicate the quantity of gas required and date Of off take of gas,
viii.. .Applicants may be .a$ked to fun:tish other. firumciaIloperational!c,onlUlercialdetails as deemed fit.
ix, NOes shall also fumish all information sought by iipplicants durlP.g ,the·pte-. .. \ .bid conference.
x, illorder to ensure early monetization, only such projects shall be ~~je';;tedthat. ", I'
are ready to offtake gas witbih 90 days from the; date·of readiness ii:!.di.catedby• . '! .1':. .,
. the NOCs.. ''''j
.,._' '" Page 13
..
. .." (~
40,
IIII
xii.
IIIIIIIIIIIIII
xi, In case of m:u1tipleapplicants quoting the same price, the gas will be first fullyallocate:d to the applicant who' indicates the earliest date of offtake. If motethan one appliCalitindicates the same date of offtake, it will be allocated to all
. such applicants inproportion to their reqUirement. A11ocati~n lotters will be.. ...
issued to such appllcants and:Gas Supply !\:greementS Will be concluded with .. . . . '. . '.. .,'~~.~~.'~.:" .' ',,::.
·su¢c.essfulapplicants... If any surplus .gBS is left after ~ch. allocation then .•. . . •.1......,>~pp.iicantswith second bigh~ pnce·bi'd can be considet'ed. ·ancl·tlie process·shallbe repeated \lIltil all the gas is exhausted,All applicants, without relaxation of any kind whatsoever. are to furnish.Security Deposit (SD) as part of the Bid to cover .rninimimr sixweeks GaScost. inform of either:
·a~Unconditional Irrevocable Bank Guarantees (BGs) (sii sepatate.~Gseach covering 1 week of cost of gas allocated)
ORb. Irrevocable Letter of Credit with iastructions which ·allow the. .
beneficiaryto perform multiple part encashmerrt,Such SD shall be issued by a s~heduled/na1ioiialized bank: The. Security. -. ~,Deposit/a should be valid for at least one year fiottd:b:e'dat~of opei:1ingof
. .,',
bids or for a periodof six IIloiiths.b'ey~nd the promised'ciate of.offtake.. .
whichever is later. It should be ensured that ~&. can be ~e~lis~4on a .weekly basis in the event of delay in utilizarien-of gas as per the offtakedate stated by the customer in the bid documeat. The delay should be
attribuiable to' delay 'on the part ofthe castomer, After.tetairu:ng the prorata amount for. the aetual nutnbet of days .delaY¢d.fro.m the ~m~ount;: '.' .',... _. :'
the balance amount shall he te:fu:ttdedto the .cust6.til.Cr..In case of~ocation.lesserthan that required by the a:pplic~~this S1:> :shanb~ 1i1~c~eratedto the .actual allocation level. The copy of 3D shall also he COmID1.'.ili:cated. to thebanker. (of the customers providing the SD) to ensure thai SD is m order.These pr()Visions shall be adequately ~9. a priori. be e:x~)!r'linedto thecUstomers arid written consent for th~se conditions :wi11be t;;·btainedf-.om .the customers.
Page'.I4
...',.f.'
........ ,
.' ~.'": ..
I.IIIII1,1.
III ,
IIIIII'IIIII
Xl11. In: case of delay by customer beyond six weeks; the allocation need not be
cancelled provided the customer prevides additienal SD fer a further period of6 weeks on the same terms and conditions as in para 3(xii). In ease it is net
, .
provided withiIl seven days from th~expiry. of the fitst 6 wepk P~rl,9d,theallocation to'.that customer .shan stand cancenedand gas can be aliQ~e4~~"theap.plicantwithsecond highest .price bid,ot a neW bid can be invite4 ifi'r!ovalid
,I ••
prior bids are available .. XlV. . The final allocation·of gas made 'shall be hostedon.the company' s webs1t~and
. . . .'. .
. also conunu,mcated to' MoP&NG... xv. C~~S not covered under these guid~Unes, if .any, may be 'r~fene.d to' "
Govemment f.ot a decision.XVI. In case gas production frem a field exceeds 0.1 ,n:unSCJ;i1O-after the initial
allocation, the matter shall be breught to the notice of MoP&NG fcr further
orders.xvii, .The applicants shall be info~ed that ih case the overall produetion from the
~1[Isolated field increases beyond' 0.1 mmscmd and the field ~ets
connected to the grid at a later stage,~the existing customers shall, be as,Sut-edof domestic gas supply .oniy for. a,period of one Ye.a'rnom such cOll;O.ectionto ., the grid, Th'ereafter,.the gas shallbe alle~a~ as per prevailing 'g~ utilisationpolicy QfGoyenunent of India, inease there:is \lDfulfiile4 ga-sdeql~d from a
higher prierity customer on the gridxViii. In case the production incteas~s to a higher level .than initially. . . .
. expected/advertised as part'ofthe buiJd'qp (but reD:iallis 1e$8tb.ari{}.l ttm:lSGmd),and is expected to remain So' en a SUstiined basis, the.addltional,gas can beoffered to' existing allottees up to' the requirement indicated intheir bids, andthereafter offered to others.
, xix, In Case of decreasein production fron). a particular field, supplies would be cut. .' I, • ,.•..,; :' .
on a pro-rata basis for all the, customers being sUpplied fiOi11 that particUlar. field.'
xx; In case' of reserVoir failute, the request fQt ,~pply. 'of gas to 'c~meIs oftb4t'reservoir shall be given prierity in the bidcUng process for· supt1i-y of .new".' . " . . ::.;:..,
Page 15. ~.
,I
I·. .. .
III,IIIIIIIIIIIIIIIII
additional gas from a nearby field. Such exi~g customers may participate. inthe bidding process or match the highest price ih. th~ bidding. process, Sucb.existing 'customers shall also give an undertaking to lay :the.pipeline and, any~t1ier'reqUir~d~eture at their 'own expense for' taking..gas from $e
.. n~by·:field. "' ',.xxi. In case .ofrevislon inprice ofNoIi-APM gas..in·future to a level.hi~~ ~an
what is being paid by customer/s, the NOes shall revise the priee .and chat~ethehigher notified non~APMprice from the date 'of Suchrevision. '.' .:
xxii. NOes s~l regularly send a status report to MoP&NG on ·the~ei~:~~t areproposed to be allotted before and after th~ allotment and MoP&NG.reservesthe right to allot gas outside this policy..
xxiii, The ~gUi:delinesfor selection of customers for dQJl1esti¢gaS available fr6msm'alll isolated fields dated 1~.O1.2012win be supersed¢d 'from the date of.issue of these guidelines.
':.~
.~....•.
< •
Paee.16
_, 1 1
»zZmXC:::0mI<
I ..I·, . r
I e
IIIIIIIIIIIIIIIIII
..._ ... -_.- _. __.. ... '-"'_"_'_' .. _'~. __'__ .._~.~ 'o_.'"··_' '_' _
-'___.-r
ANM\~ru~t'':' ;[!.I
Gas Rules 1959 and. the Articles of the Production Sharing
Contract referred to above.
52) 1;'.~..~;g.*:..~~.::~l~:~,'.';q:.~~l:l"i~·1:~f'm$,.~,[~~\~.~a$..Utilitis,ti6n.~fjli'e~
and the Procl:uctioti ..Sharing Coniraetj Governm€,nk .iIib;.,th~,..
capacity as art·····Executive'" 01..the Ufiion ¢an;..,.,~l~~~t~l.;/~~J~;';;,. i .
distribute the. manner of )3.<Jl~ gf ,)N';a.tural....Qaa thto·ll§h·
allotments····and"
53)
, ·~~·h~;·1:.v;;.J '1 •
Application nor is'f'' ',~~":~issuewhich arises ~'8:t of the,~oi1_'~~ I ,
impu~~~ judgment. 'tlJ;~·t~"JA>i"'! .'lJri~..,;eonslit1kt;t;~9;;k;: .~~~~,d,i~g.., If
where §ll1Ycl}~g§pgy1:l;:l.;~~~.:'~.;, ~~Qti)v¢rnmentHoliey, price'~'~""':',_1~ t7:r~'".~1{~;i\..}~ .~.",/
f1X1ati0ti;!g.~~.•tJW.lt~~·;';··:"~·:·?~;':,'~;i:Fu.· ··r. her without such a•....,,:" '",' "" .···.·",_;.'·'}8 ,_--:":".:, ""·'··:··l'l~'··l"~" '" I' i :. ,-,fi::\J '. . '. ,
_~' '/:'\".,..., ._. .<i_ .._...1 -., "_. ~J ~- ¥, .~~:.. I j '," ~ .proceeding in existence and WtirJJlx!fW~'KNI!~Gda~m.,i','#~.~~"f::li;~;i;~';;,iU'f:;:tla.e..
. ..~~.,", -,y·~.j.~~(').;!·~~.~~'::t:',~,:,~"..~~'i;7;~"
pres,¢nt ·]?,£,29:~~8,~g§,.·~jt -.issue toudhlbg" tfpOIl th-~,:'-v~idit¥, .of
pn;¢e;,.··f~~~t~$i,~r.~~~.~!f&;l?mttla:Q.:d(e:$:i,~i~;t~i$~~
54) The) p'Ple'e of $ 4,.20/in:rnbtt.i i~ !(gase-d.,();h;>'tne;,:f(l~lii;~a
approved by the Government under ..its.powers pursuatl.l.tQ -the ...
84
44
t~rt:nS of the esc. Tlle ."''11'", .. , ,., . ..,". ,.' ..," , ".,.,. .,.;,' pOley of th~ GQ~~.mm~,G:t."i§",.n~t~11g,~r"..
• ;lIf~v~i;ItMB~til_r;•• ji~,,;~.~.,~.. g"'i
5$) Mr. Gopal Subramanium, learned Solicitor General
explained that up to early 1990s, prior to NELParid pre~NELP
years, gas was being produced only fromthe fields operated by
the Government companies, viz., ONGe and OIL,out ofblocks
which were given to t the Government on
. primarily by.the needs
gas was administeredn.omination b/.
, the fields , " e given on
condly,
of the Government.
IIIIIII
get the g?is a.:,~ G\OJea,'tl~~~. . i-\:r:p.~refore,the basis {or. .' 1'~ 1~ I ""d g .J ~~,...,,.:~N,. ~ .~ ~ !.\
Administered Price Mechanism (APM)pricing l:1i~~~,~i't~iflll:lis.i_.~.r.
Cost of production plus marginal profits as may be determined
by Government was the sale price. Fields were given to
Government-owned companies on nomination basis till early
1990s. There was, however, the problem of augmenting the'(:';
production. Exploration and Production was at the core of
85
II,I.IIIIIIIIIIIIIIIIII
,'.,'..
energy security and hence it was decided to open the fields to
Private Sector investment. During mid-1990s, known as pre-
NELPyears, private investment was sought 011 competition
basis and certain blocks were awarded to them under a
Production Sharing Contract.
departure from a cost It was thought
, e place. Pre-
of oil and gas is associated with considerable risk and no
investment would have come if product prices were subjected
pricing regimeprovides for arm's length price which is another
name for market price. But since the gas market is n;:}tfully
86
4b
------- - . - . - . ----------
II,I.IIIIIIIIIIIIIIIIIII
v ,~.--,.,-~--.-.,-~~-..-' .. "_,.... ".-..-.....--,,~~,----
developed unlike markets for crude oil,~I;t!.;~a_~m;;ti'i';
PSC that. there ..will he a formula or .oas1s fo·t ."the~eterfuin~~i~,~-.1"""""":"\"-";".,,,- .. ,:; ••,',,-,,,,,._,,.,,:·,·;'."i.(."""·"·'
pf the ptiges wbi.ch shall be ,~pprQy~.g:bMth.e G,Q~ettlment prtE>t
to sale~g.: {QJ; .graAtiijg. ffiis approval, .Q,Q.~~m~~fit.;;~oo:n~$jJ~e·
arbitrary "but"shan t~~ ..into ~~G.Q."\:llnt,th~\.~[~¥:~_;.f~~U~y,:j..~.,lIany, on priclng of natural gas, inoluding.an.y;,lili~ag~s)~th,
which guide tIt
,,..gof KG D-6 gas, are
NELP-l
the provisionthe Contract .
Contract as follows:
(a) or flared.With the.ected or' sold. to21.4.5 shall be
(c)
?·{:·[fW~i_l·i·· ie--""":~'i,:)b...•._ !.~'•.-." .•
87
41
II·IIIIIIIIIIIIIIIIIII
---:',:"'-- -.. -.-~~-;",.-~,----.-~-..-~'---------
It is further pointed out that in accordance with this approach,
Government asked the Ct>ntrac't:or.·••.!Gi.:SUim~t>i,.~,24~!_l~~;[,~~:~M../
EGOM was constituted 9Y the(:.
Government of India in Au 007 which looked. into the
pricing and
examif
approVed. a newly: .' .w:futb;;c;",~~;wtw.Q...,.~.I..t.··. r·)l'-···· f\ 1~..-.'f· r ;
:m.,.:.. o.•-iI.·..·ifi'Catfofi~,·on 12fJJ.•·~.·12'01.: 0'7. ?r ¥Yiel;....m· •.• ,..l..,.r:..••.... :.;,.,. ,·.,1 A ,h:~ flU' ~~< .""',;.j~i,;I'll,:lif~~:~~\;~~,.:
the EdoM which is tobe applicable tUliror:mly:to.a4tsectoFs'"is .:>
56) It is further pointed out that the said exercise was
of mind and gbverh:rri.~htdlffer~d f:ro:rB.'t§e"~Qn:tf,a~thlfl~:;;*~..
88
II"I.IIIIIIIIIIIIIIIIII
itl:~t~.adof $4.~g Glaim~d by the ee,ntl'arQ,~~+n~,This formula is
valid for 5 years as per the EGOMdecision. According, to the
formula, the price may vary between 'i~I;"~!l:k(iJi.a~],~;u;~_t,f.j;i'J'
2,~'51mrnt8tuaUrlij,g a pefi6d' of :5/~,~~$.., With crude prices of
us $ 60jbarrel or more, the price will be US $ 4.2/mmhtu; for
US $ 25/barrel, The formula,
4.2/mmbtu.
EGOM
57) of this Court th_~f~EGOM
Affairs Minister), ~ho was
a very senior Minister . , , ,Ministers, Ministers of
the consuming sectct)SV,~",Sl,}<;h" il\,'.a~IiE~,rtrtJ,ltzer and Power), the~ ~ t ~ 1~ ,;''til l r\..j ~' ,~ .. ,",,-~ 1L ,J "'" ~ { 4i "" ,1 '; i
Minister from producing Sector (i.e., Petroleum & .Natural
Gas), and the Ministers in charge of Ministry of Finance, Law
and Corporate Affairs, besides Planning Commission..'_ ..
58) The pricing formula/basis as per the PSC has to be:
a) Firstly on arm's length basis;
89
II'I.
IIIIIIIIIIIIIIIIII
b) Secondly, to the benefit of the contractor as well as the
Govemment;
c} Thirdly, having linkages with traded liquid fuels, and
d) Fourthly, Government will have to perform Regulator's
function till one is appointed for the purpose.
59) The followingtable will indicate the pricing prevalent in
India in respect of (excluding, of
, fields) which
. .~I !~'"l{"''' \i~~.:~~~rI'60) The fixation of] :pFi@(}·t atl.Yse1lbelfoTe~the. EGOM only in
~~:st, ···2@:@o/(··'wn-en:tne> prree"fSrml::tltf Wars;\V'&~iT§'1~~ed;~As
,Contractor had asked the Government to"}~~i~¥:~*,!~t,,,r~iJlHS~..
tn 2006, but the Q(q¥,@)(u;:rneatreJ~'~t~<ijt.:as~.it.,,,"Wa.~jH~§;\\ir~~~t\,t,
90
II'I,IIIIIIIIIIIIIIIIII
t rti 'Ar"ms length S·· ales' .has been defined Inparty ransac Ion.
Article 1.8 of the PSCas follows:
"ArmsLength Sales" means,;~"',4"~;
~~-!~~!!f~;;;;t..a;Jni.~l·.'.';·liQ·,.·,.·.·~ii1r.eiM· •'.§'lt~,···.~~~~l1,§;,,, ~~,::,: ~Jf~~~~~...,."".~l~."",~,rp;..=~::~~~;~~J~>,~~:i\i, ',r.': ·".,:,,:,,:,;;t':·r"'~Jltf.~·;~,J:~;#.b'l't;i!f-;;•.~~."" .•'~'~~}\,'i(~"1ti.l~ •.~~"I!i;:1':i;:tlt...'.•n~:o:~~;; .,,~,:n,~ ,re·a'S~a;Si\'!,1.l\!W'...!t;aj.t¥w~, ,I;;~ ."~iI'::,Ii.JiY¥~lIi._,\l"")P.~~,.~a~~."."i1\"'1~i~~~ .•,;;.!,~·"' .. ,.
's""'~;¥t"ri?"(lfftWr""'"~i'~~"·.:····,~~Gl1;liQ:e.i,··srues.;···.··,~wftit<h~l'./fiil~ti1i1i,;;,.JDt.'.:Ilctl" ,. " ' . . ""', . , ".,_\~"._.!. : .... ': . ,,':'~\~'j'';:'',,-i·''L::'~ }'+,j;(_~';f'~.";~~'<; -"!~~'-"" __"'-'-'
61) r",,:r.·Q·T"""'. th~t...,tbi;~,"§~. $§:~~~:~•..,
E&~~'l">';'.pr¢J1J;~i~e.JQ;. t;@ttstand
of the Government VIS ·also witn0ut,.~~.(:'J~!2lt,Q~......,... ,lllr)(::,}?\I\I~:r~J'l'...... . ". , .....i •to tL1~S:l.lhmISslOntHat th1S CQurt' 1,S .ndt called.""Up"Q.ll.,:l14,J(b~
'lll~·~ij;;t••.;ii~~II.gsi:I~~'Ii~~r~~j~,.~i~,.;.ii~\···'
62) In the case on hand, Price formula was approved by
Government in September, 2007 when it was expectt;:~jthat
gas would be produced from the basin in June, 200{ The
utilization of 40 mmscmd of gas was decided upon ;in the
months of May, 2008 in terms of sectors and units to which....
91
II,I. gas would be supplied, As the production stabalized and
'''-~~'- .-.- ...,•...,....,.,~..~,~---..-•..-,......-.--,--_.._....-.--",..-.,-.,--,-.--.---.-~-.--.'~...----------c~.........._....---..
IIIIIIIIIIIIIIIIII
further volumes of gas were known to become available, the
government recently decided on the utilization of ~ further...
volume of 19.826 (+0.875) mmscmd on firm basis + 30.00
mmscmd on fallback basis in October, 2()09.
has been
Contract'
Gover
63) The position is that
Article 21.6.2
statesthatnotwithstit~f,e;Ml~~r~rlgas is soldnotto the
Q9yernmerit or its n@minee.".it '.'must be·..sold .:':Qn..)~~"j,p:~i,§.i§k,)Qf...... .
"sompetitiv,e arm's length sales in the s;;.tegio.n.fe,t simil~:;(seles.:. . ~ .
that the basis on which such prices are to be determine-d shall. . . ~
present case, the formula submitted by RILwas Iooked-jrito by~;';,
92
- - - - - -----------
II'I.IIIIIIIIIIIIIIIIIII
ltGOM and examined by the Committee of Secretaries and
PM's Economic Advisory Council. Due to this, the price was
, , ,,". .,,"" ,,": <f:. 4' 00·'· ..'..., th •..1.:- ;', of ~he-iGt,mul~,,; -j;i\ride~~t~rllun~tl.·tobe ...!,p, , .i'4r; .pn., ,_,~,14~S!lSJ"" __""'" " " ", " ,~r '
54} Another important consideration to be kept in mind is
that the PSC overrides any other contract which may be
'-l;:' ...:,.tif1C:ll
entered into for the 'su .s principle flows from
the competent power ~1ff~v",.~~ r~~b~ ~~!9h 0.9no,t. accrue .to.< "'.' . / . i~,.,_,s' t "'./~""-~1 ~/ ~t ! '''''l. • -,
l~:J.lltl~Q:er'it~e·i'~~'O. --"
65) One of the main "putpos,e~i.QI,.t~§;,~i~:::('i§.".:).jt.ir~I.\1';.:f.il,/~~,:;t~~",',7,:i,:~":;u.·,.,,tl,.·,:":;,Q.,,':;!J,,.,···.:,:,,'.,,'.'·'0!, ;,f",,;f.i-:,@;,'.•••,s,',.Thouhthere is '~lhr:ei;))3i";:;';·',' ,";'~}2'~:a~e!'within_'~ g, ,"...''','',~:Q:;p.J;;L,Q;~·_~ilt,~
, . ,
the PSC, but this freedom is exercised by the contractor
tnrough "~'tr.arl.§pareqt Ridding process ancl.non~.mtetfer{:nQe,af
II,I.IIIIIIIIIIIIIIIIII
ca,$'t~rmil:'le ttle valuation formula as w~U..·.~~i •.••;}i~~~'I:'..f~~@~~
Therefore, keeping these considerations in mind, the
OQyernrnenl'§; inte.rpretation of th~..PSG as has geen ...luoi41y
QernQn$tt~t~dby the learned Solicitor General is JZa1idK., ' I~~:":.
tfie Gbv¢fI1m~fl!...1iGt$ .U}y p0W.~.r:-.t9..9;~~.~;:;m~p.:~..x.~lM.iti,.gn,~s;.w~l1
question that
rnment rsc to
e valuation a pricing is the .g price
price only for th€i"~. ;mination of the s~~ of the
Government or is it the pric~)~ \'! " ich RILmust sell e gas toif;;" '1~1t t»:
RNRL. The Division ~:._~_. __~h Court has held that
~venif the price is tOJtJ1Sl:1Vft I~e Government, there
IS no reason why RIL cannot sell the gas to RNRL at a lower
price than that. This position is unsustainable for two
reasons:
1) Tn,~ p;ow:~r,of iQ,e"G~y¢i1j;mejM;t:Biiti(ftigp: :tm.e,·;~ai:i~~~;~.~~r1;/
~{r-~~j)~j1~;'~i,J;'~J;~~'~~~~~:\~'~ilJ!I~}'i'ii~1~fe7~!lI;&t~fJ.r~~~~;;~~.;.. :'~~'
94
III,IIIIIIIII'IIIIIIIII
g~~~~~rlatf£i.Ofl.•.•(iJt .p;ri'~e···.•'0f;'.s\fi"~1'TIH1:0:@~~~~~DfJ2:::~_;;.,~
det~lt:lfliiism'a1zj;m'PJi:."'·(1lfJ,•.··.t'he:;Sma$elF':ei;~li@<!"{~~"."8'1i~m(reifl6
~~i;...;~itI~.i;,Q,,~M.~{mm~nt.~li~:~lR~~~~~;r~~~!,t_~lttl;"§~'
the .l?£Q. i;s ~~nd" ~twpuld-.'~;~~"i~~;';;~fl~.f]f.,~tt~",'_' ~:' "0 -:.,:':"_-':-_\"((':)''..'.:'_'--.:,~: <':"::;\(-:'_ :<?~~.~:;y~';f.";~t;>/Z,(:-,,:,.,-<.:, ~~\. ,":0::.: ;;:""' ..:.:-/,.: ....,:,.:~ ';:- ,j '-~:,:l\;'-",';'"" _.". - -. . ;, ", .
2)
.t~~f_'W.:::i:~t\~j~:~~,~~ilmu~.
The arrangement in pursuance of Clause 19'\of the
Scheme must e shareholders of R1L
t· .Government, t'
also the grievance of RILthat the Court must take into
account the fact that the PSC provides for the
legitimate rights of the Contractor to earn certain
profits. If these profits are reduced to such a degree, it
'wouldaffect the interest of the shareholders of Rj:L.
95
IrI.IIIIIIIIIIIIIIIIII
provide complete protection to the natural resources as a
trustee of the people at large.
86) RIL's right of distribution is based on the. PSC~'.which
itself is derived from the power of the Government u~det the
constitutional provisions. Thus the very basis of RIL'smandate
is the constitutional concepts that have been discussed by
expl6ra.fion~
. RL are
now, including Article and 39(b) and the
domain qtg()y~x:p.Il(le,,~.. ":~~1;~1.t,.~,edut}{,t~{·.t.b(:;.Uniona ~~:+,.,,-j~ill." ,:,'! ,~~!!(-& , : .,., j ···t~' I-
to make sure that tllese. resources ..are used for tn!~'1Benefitof. .'_;:, ', <':';.;: .: -:-.';:·.<:!,\:0;;r:,::-::/-~'-::":.·':.;. -,.'" .'::c'i. "'-" :-. -, _,.:,-;~-..-.,. '",,:., _" - - ,._.- ',.:: -'.', - . ,.> _:,,-;':::.::,;,:::~,,,:::;.:~'.;)f;'~;.1',;.""" ' '.. ;. "'-~,' ,. ,". ~'. ',., . .' .
technical know-how, the Government has privatized such
activities through the mechanism provided under the PSC. It
would have been ideal for the PSUs to handle such projects
exclusively. It is commendable that private entrepreneurial
109
. r-b
II'" "I.IIIIIIIIIIIIIIIIII
'" ...._ ...." ....._ .._._---,,-_ ...... _._--.__ .._. ._--
efforts are available, but the nature of the profits gained from
such activities can ideally belong to the State which is in a
better position to distribute them for the best interests. of the
people. Nevertheless, even if private parties are employed for
such purposes, they must be accountable to the constitutional
set-up.
88) The statutory sch f natural resources is
ds (Regulation
Rules,
89)
90) It has been argued by RNRLthat the decision of the
EGOM (EmpoweredGroup of Ministers) does not apply to the
tights of RNRLunder the Scheme. This argument is based on
the text of the decision which states that the pricing .:iecided
upon by EGOMis "without prejudice" to the rights .of the':-l
110
C;-7
II·I,IIIIIIIIIIIIIIIII,
.. '._ ...--..-, -_ .....•'..- _.,__-.-- -...•-..--..,---".---~-~-..-.-.-.- ..-------'0', """-""",,,,,,,;~.... ,,,.,.,,;,\.,,,,,,,... ,~,...,_.,,,,_,,>,;,, ... ,,,, •. ",""'_~"'"",,",~., '_......-_- ...•"j.:.-,,,~ ,"'-~~_.':.:'<I<.<..._tlf!lM.~ ;:11,_ •
parties in the two cases pending before the Bombay High
Court, i.e. RILv. NTpCand RILv. RNRL.This is contested by
both the Government and RIL. This position' or RNRL is',. """-.
unsustainable. As pointed out by RIL the right interpretation
of "without prejudice" in the EGOM decision is that even
though EGOM intended it resolution on pricing to s:pply to
~'heme or the interpre
f the parties accruingRNRL,it left the questi
of PSC to the
words, the/ft
has the pow!_',
'on and
the gas. This d""; ation by the co~~': is not
y the EGOMdecisi "i:·~sit would depend s(;lely onz.•••
/(;~~''';' '" (~~~i\~
the interpretation of th¢;;:P,~Q "f~r.:~thePSC itself. But once''\.:-''.,_,,<.;:,~1;:'"} M~'i~~':"A' .;-..,.f/
._. ~-- "'-'."";0.......,...•".;, ......-."'_'"'~,j..",••"....._......,.~,,,.,:..rl~~"
it is determined that ~\by ~i~y:e;rrrpin~~ l~' h !\'i'~ s-r;' ~\-'-"'~: ~" ,,,,)( "\ -.,._..~} ~ri. f...'
determine the price/lof gas, EGOM's
0fS have the p,0wer to~'
decision regarding the"
price would be applicable. The same goes for the general gas
utilization policy and the policy of the Government with regard\;-_
to pricing. Therefore, once the PSC is read to give power to the.:":.
Government to determine the price of gas, these policy
statements will be applicable.
111
II·I,IIIIIIIIIIIIIIIIII
/91) From the above analysis, the following are the '1IR~,£t
su~taj,1:l6\:Rl~..§()~911l:'~~~~~;:,~~~2.~.;.';'~~'~'::'i,)JR:~,; .~:~j;Jy~:afrcirfi ...•th&
p~;siit.~il!h'i¥.ik·W.~~':
1) ]:~I·;';ii~it~~M'~~~';~~I:$~:~'.!~~I~~~;j~'l~I.'!~~~'!tm~¢ht
,':,
as~':;a;;~i~~~t?Qi;'~,&q§:$V·t~·.·~~[~;;;_~;~f~_~;"_~2li"f?I~l1ra.
T1fj;j~s~~.·.·;t~.·.··.d;,s;,··.~~.~;;~ill~m~.·llitifiy.;i;}~~i"m~:t~~~,~?rt'tJ;&'~'@i~;i'~·
2)
eEp..;J.,el1y ·~~~1~_.,'lit."':I'."i.~
N~'1ijl!{~ai .~mr$lS'Ir':'~:"~'J", " 'f, ,"~~'..~:st;' .' j'L;i~, ,.",,,;g'Q.(i',' lil; ';:lJJI¥?;§I,':.Ii - ~ , "~ . '." ~frf,l~~'"'~/H~~)i,t; . 'I!'!f"!w~\. f·
~,_.·a. -" :if ! 'V' aint&;r.:~~:t~J,~tj1t~e".!!l0~'-m,tT;ail$!I!J;~~)i'i\~I·ilif:rMr~~~Q:'$~1f~gL0'1 '$'";;·'1"'4~,;;r~lth .1 ~', '/' ' ~c ' ~iJ:,'" ~ - ~~), 'o')~~~~ ,~,~:1t~~_~:,.; ~,~,~ ......
3) T~~;>J~toader.'c®nsti~u1fi,Q:tia1..p~n(ijl~lF~s:~."tfi~""~t~t1:titdfy"-"..:.
§;~bl\~~ea:$w~lf;~&.;·ti~~-;F4~~l>'~'~~.~~~~~i~ftJ.i:i!~~;'clt::t~;j~~~'.
naa~d~1te's,'llh;(,f ~'®'Memmeiitl;* '1(;>, w" ,.,j../:l'::' I7:\f': ';"y'\.t.;.}J. fi··,'" ", ,'. "; ","', ,,' ''',-", ......, """"..' .,.,.:!,f,,'\:..." '" ,.,. ."l\' ·I:,":~~,,,,,;.:;,,,.w·.:..).:".::,;~ ,: ":(.;;";};";"<:';".')":~'~:L~:/;;.'~"': _;'-i:
t~:~~~~mlC~;¢m:~\te.i;tt'..ls•.:,g:tJi~~~1f~i:i:'::Ii9~'~@i~~'(5Pfi¥~~~~£._:.%j'.
112
II"IIIIIIIIIIIIIIIIIII
4) tfit~·J~~~*~~.~;~,,.~b~,..Q.2.¥,i.~imJ#;§~$,;".""i~~1~~~·;~t1,e""t1~f;l.s~~
U·{f~'::;Jt\tfll:i:i:T.;~"·;';~;!;;mJi!i.!Iii.!!~~';''''''~',J;;l;''')iIi!~~j",,~..;Ji~;;';,}'~ilr.)L'TlI~';iI,l\;(""~Q..Q.,M,,,M4~.l1,<l,dK,,)a,~)j;~!'W~;~~~~~<-::-·:~:\Y~J,:,;:·dt::ll1J{Q:"';t:k ~·-'---':·":~~~~H,S4~~~~IIii:.:..:.i~_~4~:if~r
5)
~.'~.i.0fl1.Jii;;~~~(llfgii.~{1(~lf•• J.I;';;~~#,?"
Thc~i<i~i't:tm.~iP·:~.ilt!1;tf;llI~:f;_tl"l!,~•• %_'__ ;,:%
p.q,w~r:sto;'W~~~~t~;t~.~;.~!W:B~l~b~,~;I~~~i§.lI~\~~;~~\tr"iii,~}'··
RNRLfile e Companies
erne of
«,'~'iand 394. Therefore, CO~fF
the CompaniesAct is wide enough to make necessary s(i}anges
for working of the Scheme. This power is specific to the facts.',
and circumstances of the case at hand. Nevertheless, this:...
power does not extend to making any substantial or
substantive changes to the Scheme.
113
IIIIIIIIIIIIIIIIIIIII
\~:!';":", "':~:;,":~:;,U-', , _
')1~ -"'''','' "':\ ' ~;,.' - \.
, ~/:r< ,~
.;\.: '~ ~,~"_'_,>, ,A~ ~;,
an arrangement must be suitable for the interests :of the
shareholders of RNRL as reflected by the MoU, and RIL; the
obligation of RIL under the PSC; the national policy on gas
including the decisions of EGOM and the Gas. Utilization
Policy; and the broader national and public interest.
D. Proper Interpretation of the PSC
T.he 99j~St.!y~9fthy .PS, '.--- ," _' .. -." , .
such
resources in tp.:tst. I,I~gf:l.ll¥, th~refqJ;¢,the Qq¥~U.fl;m~:qt.9}Yg~'" ,"'.' .',' ",',",' , . ._,' . ".,.",;:,'';.,,-.'
such assets for the purposes of developing them in the.; :'.: :._-..": .. <.- ,.".,,.:. :_.::, ',: •.>......_:..:'._..'.,:.:,:";.r~,)".>,., ..:-,-'-,,.!'~.<,:__",',-'".>\' .:-'..:-:.,.,,:~\ '. '".:._.-- ,';.,;'_, _,~".'0:":-;, 'I:' ,>
, .
115
",
II'IIIIIIIIIIIIIIIIII
A mechanism is provided under the PSC between the
Government and the Contractor (RIL,in the present case). The
PSC shall over-ride any other contractual obligation between~:
the Contractor and any other party.
F. Relief
Though the Contractor (RIL) has the marketing freedoma)
to sell the product fro a to other consumers,
approv that it
vitiate ' . "i,pprovedby the go~hment.
1 RNRL
b)~I~g
The EGOM has already set the pnce of gas for the
IL.I...,'
purpose of the PSC. The parties must abide by this, and other~:"
conditions placed by the Government policy. The GSMi~/GSPA
deeply affects the interests of the shareholders of both the
companies. These interests must be balanced. This balance
cannot be struck by the court as the court does not have the
116
III"IIIIIIIIIIIIIIIIII
--- -- _. - - -----.--- ..--..---..--~--.--------
power under Sections 391-394 to create new conditions under
the scheme. In view of the same, RIL is directed to initiate
renegotiation with RNRLwithin six weeks the terrnst-of the
GSMAso that their interests are safeguarded and finalize the
same within eight weeks thereafter and the resultant decision
be placed before the Company Court for necessary ordet·s.
c) While renegotiati GSMA, the following
. e an over..ridi
',-
an~\;ttional
3) The parties shou{~:~, i i. ~t(:t:~~~countthe MoU, even':..... ;t , ~ "'·~~'~".~,q_,~,~>_:~~~::~.~·~!::,.~2,~~~~"·~.
though it is not l~gr."!l~,9in...~i..:Q..~,..~.·,t.iSaacommitment whichIt..;l"H. I l\/\ t. l''''~~ . .reflects the good interests of both the parties;
d) The parties must restrict their negotiations within the
conditions of the Government policy, as reflected inter alia by
the Gas Utilization Policy and EGOMdecisions.
" ;~.
117
1- _
.. - - - - - - - - - - - - - - - - - - - >-
,,,,-, s:.1'~/j.~;,., ,~~ _;,
.>.•...._~T
............00
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iii t,' PC eMF,••
.'II//I,IIII'Ie)III
'.
Foreword :...•
TIle report 011"Wholesale Gas Pl1CCFOlUUtiOIl", l.rstpublished in 2012 for IheWorld Gas Confm:ll~in Kuala LlU11ll.\U; has now been updated with 201.3 <.gures byStudy Groul) 2 of the 100 Sinlt~ti ..Committee (pGCB)~
We have decided to ccntinue the publientiou oftllis IGU Aagship I'CPOltas nresult of the greatintCl'~;lt .ill tile extensive research all(l analysis contained in the fonner reports. The 2012 lind 2013 editionsof the report can be clov.'111oaucdat no cost from the IGU website - www.ign.org.
')'.'.
Historically, gas prices have not been in the news to the!same extent as oil prices, nus is changingas the share of gas ill global eneJ-gy COOSLUUptiOllcontinues to increase. volumes ofintema1ionally.traded gas arc gl'eatcl' than ever before aud different price: formation mechanisms have. had seriouscommercial implieatiens both fl)1'produculg nnd CoilsuoUllg nations.
The rapid growth ill shale: gas pro duotion ill North America and nimlalllqltal shifts ill LNG supplypllttellls across the global gas market continue to impact the illtercontillcnlnl trade, as w~las globalsupply, dQU8UdII1ldprice.
NlIllb-m gas is Iillabundllllt l'Csonrc.e:,itis envirollmentally fiienclly andcost-cOIllpetitivc. and shou1<!therefore play au impo11atlt role in thc mitigation of climate change in eVC1Yregion of the wOI'I(i.However, the way wholesale gas prices will be dde11lUncd in till: future will have II .sigmZcan;inA\~nce on sustainable market growth, especially in the power sector, .
Promoting international lU1cli:rstao<ling ofuamral gfls pl'iciug and wholesale gasprice fOJtu.1tioll1l'eud;..is impottant for tile futnre success of tile gas industry in bcth aew and established gas regions. It ismyhope lhat this publicaticn will continue to serve as :111example of bow we all call bcnc<,twlienvital illfonilatiou is cnrefiuly gathered. IInlllysed rule!slwed,
AllY qilcStious tQ tius report can be addressed to the Chair of Study GI'OllP 2, Mike F\uwood c:iNexlillt [email protected]·m.
May 2014
TOl'SteillhulreboSecl'etary General ofIGU
......._----'._--_.._-_._-------_ ..._._._.__ .._--_.__ .._ .._."---_._._--- .._ •..-..~..-------.-----.--
In looking at the different price formation mechanisms, the
Iresults have generally been analysed from the perspective of 3.1 INTRODUCTION, the consuming country. Within each country gas consumption
can come from one of three sources, ignoring withdrawals from This section covers the results of the 2013 survey and comprises'(and injections into) storage - domestic production, imported three parts: , ' "
I,by pipeline and imparted by LNG. In many instances, as will • Results at the World level for the differ~tcategories -,.: be shQ\\'ll1;>elpw"dom,~sti9production, which is not exported, domestic production, pipeline imports, LNG imports, total
is priced differently from gas available for export and also from imports and total consumption;
Iimported gas whether by pipeline or LNG. Information was • Results for each individual region for total consumptiorq
" collected for these three categories separately for each country and 'ffand, in addition, pipeline and LNG imports were aggregated • An analysis of wholesale price levels by region, price
"
" to give total imports and adding total imports to domestic formation mechanism and country.production gives total consumption. For each country, therefore,price formation could be considered in 5 different categories: ~-' ' ,• ~omestic pro,duc"tion (consumed within the country, 3," WORLD LE',VELRESULTS
I i.e. not exported) " ' , ',:, • Pipeline imports ' 3.2.1 Domestic Production '
• LNG imports Domestic productionin 2013 accounted forsome 72% of total• Total imports (pipeline plus LNG) world consumption - around 2,495 bern.I .Total consumption (domestic production plus total imports)
I1,2.4 ANALYSINGTHE RESULTS
IEach country was then considered to be part of one of the IGUregions, ~ described above, and the 5 categories reviewed foreach region. FinallytheIGU regions were aggregated to givethe results for theWorld as a whole. '
I As well as collecting information on price formation mechanismsby country, information was also collected on wholesale pricelevels in each country. Comparisons of wholesale price levels,however, need to be treated with caution. As noted above, the
,wholesale price can cover different points in the gas chain ;_wellhead price, border price, hub price, city-gate price - sothe comparison of price levels is not always a like for likecomparison.
I.II
25 'REPO'RTLAYQUTSection 3 of the report covers the results of the 2013 survey andlooks at the World level for the different categories=- domesticproduction, pipeline imports, LNG imports, total imports andtotal consumption. Results at the individual regional level arethen analysed followed by a discussion and analysis of wholes aleprice levels byregion, price formation mechanism and country.SectionA of the report provides a comparison ofthe results acrossall " ve surveys to identify key trends and, similar to Section 3,covers the World level for the different categories, the individualregional level, changes in wholesale price levels, concludingwith a special analysis of changes in the GOG category.
IIIII
IGU - WHOLESAFE GAS PRICE I, FORMATION
2013 tntematonal Gas Union13
Section 3. 2013 Survey' Results
tt·"
Figure 3, I. WorldPrice Formation 2013- Domestic Production-------.---------.~---.--..,
'-t.~l. (.,
~------;__~----~--,,'~--------'--GOG has the largest share in domestic production at 44%,totalling some 1,108 bcm, WithNorth America accounting for784 bcm - ahnostthree quarters of the tote': The next largestshare is in the Former Soviet Union; when: the sales of gas in'Russia to the large eligible customers by e~tiI~rGazprom or theindependent producers is classig ed as GOG,(see the sectionon Former Soviet Union in the regional inlalysis for furtherdiscussion), accounting for some 186 bcm: The balance is inEurope 'at 79 bcm - principally the Netherlands and UK, AsiaPacig c at 39 bem ., Australia and New Z;(;aland, and LatinAmerica at 20 bcm - mainly Argentina. ;:;'
'f·'
,..
Il OPE has a relatively sm,alishare in domestic production a!~%,
totalling some q6 bern,with 58 bcm in Asia =Paklstan, Chinaand India, 35 bcm in Asia Paci., c - mainly Thailand, 17 bcm
I in Latin America, - Br,~~il.and Colombia, 12 bcm in Europe- mainly some residual contracts in the UK·plus Germany,.Norway and, small amounts elsewhere, and under 4 'bcm inAfrica, mainly Tunisia.;
I The regulated categories - RCS, RSP and RBC - in total accountfor almost halfofdomestic production, with RCS principallyin Asia and the Former Soviet Union, RSP principally in the
I,Middle East and Asia Pacil, c and RBC in the Former SovietUnion, Africa, Latin America and the Middle East. A more
I,detailed breakdown of the regulated categories is contained inthe regional analysis sections.
3.2.2 Pipeline Imports
IPipeline imports in 2013 accounted for Some 19% of totalworldconsumption - around 671' bern,
Figure3.2. WorldPrice Formation 2013 - Pipeline ImportsI r---
IIIII 1 ,.. _-_._-' ---
I Pipeline imports are split betweenjust three categories - OPE,GOGandBIM;
OPE isjust under half of all pipeline imports, totalling some 339bcm, mostly in Europewith some 186 bern -Turkey, Germany,Spain, France and Italy being the main contributors. TheFormer Soviet Union accounts for SOme58 bern - principallyUkraine and Russia, with 30 bern in Asia - China, 18 bcm inI Asia p,acil,c -:-Singapore and Thailand, and 1.8bern in Latin.America - mainly Bra,zil and A,rgerttina.. There are also smallquantities in other reii~ms, apart from North America, includingcountries such as Iran and Tunisia. . '
I
IGOG has a 44% share, totalling some 294 bern, with Europe~t 186.bcm and ~0:th America the rest. Most of the gasimporttng countries in Europe, have some element of GOGII
·;"·f
_-- ':~?
pipelineimports with the top four countrie~'~eing Germany,.UK,France and Belgium. '
BIM has the balance of 8%, totalling some 56 bern. This is ..almost all in the Former Soviet Union and the Middle East 'and is largely just two routes - Russia to B~tflrus and Qatar .to the UAB. .". .
'4',:
~.~i3.2.3 LNG Imports __LNq imports in 2013 accounted for some 9% of total worldconsumption=- around 314 bcm. ..lrFigure 3.3. World Price Formatlon Ztlli -,LNG Imports-----.~.--
r,
LNG imports are split 71%'OPE and 29% d:,,)G.
OPE at some 224 bern is mostly Asia PacilG +Japan, Koreaand Taiwan, followed by Europe - mainly Spain, France andItaly, and Asia - China and India.
GOG totals some 90 bcm and can be dividedi;lto imports intocountries such as the UK, USA, Canada and Mexico, wherethe domestic market pricing mechanism is G~_/G,and all othercountries Which are importing spot and short ;X'nn priced LNGcargoes, which is almost every other LNG Ilu;:>ortingcountry-Japan and Korea taking the largest shares;';' .
,;'::;:"
/t ,~..
3.2.4 Total Imports . .." ,Total imports in201Z accounted for SOme2f'Yo of total worldconsumption - around 963 bern, XF: .
I
III 3.3 REGIONAL LEVEL RESULTS
3.3.1 North AmericaNorth America consumption in 2013 was some 26% of totalI world consumption - around 911 bcm.
Figure 3.6. North America Price Formation 2013
II
I
Nfl1'A
I GOG clearly dominates the North American market with fullyliquid trading marketsin the USA and Canada and the wholesaleprice in Mexico being referenced to prices in the USA. Thesmall amount ofNP is in Mexico where Pemex uses the gas inI rel, nery process and lor enhanced oil recovery.
I, .~
3.3.2 Europe ,,European consumption in:Wl3 was some 15% oftotai worldconsumption - atounct 534 bern. ,
II
, ,
...,
Figure 3.7. Europe Price F~rmatiofl 2013
r.
GOG is now the largest share in Europe, standing at 53%,totalling around 280 bem. SOIne79 bcm is clOlriesticproduction,mainly Netherlands and UK.with some 186i:x;tnbeing pipelineimports, predominantly all the northwest Europ:ean countries,but also increasingly the central Europeari countries of Poland,Czech Republic, Slovakia, Austria and Hungary. LNG importsaceount for some 14 bern, over half of which are into the UK. 'with the remaining quantities being largely spot cargoes intothe more traditional LNG importing 'countdes.
:: .,.j:.~),;.
OPE is now down to 42%, totalling arouni.li:27 bern, and ispredominantly pipelineimports (186 bcm};:,;;to almost everyEuropean country; apart from the UK, Netherl¢'4s, Denmark andIreland, foilowed by LNG imports, (29 bcm)'u:';") Spain, France,Italy, Turkey, Portugal and Greece, with don',:~sticproduction(12 bern) in a variety of countries principall~J~:;;rinany, Norwayand the UK legacy contracts, :,.
,,;,: 76
III
IIIIi,
~I
IIIIIII
. .
3.4 WHOLESALEP~CE LEVELS
In consideringwholesaleprice levels across regions, countriesor price formationmechanisms, itshould benoted that thewholesale price can cover different points in the gas chain -wellhead price, bqrder price, hub price, city-gate price - sothe comparison of price levels is not always "like for like"..Comparisons, therefore; should be treated with caution and'taken only as a broadindication,
3.4.1 Price Levels by Price Formation MechanismThe l,gure below shows a snapshot of Wholesale prices for2013 by price formationmechanism - a comparison over thesix surveys is shown in section 4.
Figure 3.14. Wholesale Prices in 2013 by Price 'Formation _Mechanism
The highest prices, by some margin, are in the OPE category,at almost $11.00per MMBTU,more than double the price of$5.27 for the GOG category,which is only slightly above theRes category. The price level in the GOG category is heavilyinAlencedbytherelativelylowpricesin2013 inNorthAmerica,althoughthey were above the 2012 levels.
In the regulatedcategories, it can be seen that the prices in theRCScategoryarehigher than those inRSP and, in tum,RBCwhichWerethe lowestatjust under$1.50perMMBTU in 2013.
_'"."_'__ '_''''-' ~'_''~•..';-v-.....~'...._=_~..__ "·"'''''''''=f
I.,>
. ,Figure 3.15. Wholesale Prices in 2013,:4yRegion
..1.·.., .
Wholesale prices can obviously vary .signi; candy from yearto year, butthe top two regions are Asia Pacil,c followed byEurope - bothwith average prices over SIl.00. OPE remainsthe primary pricing mechanism inAsia Padl, c and still a key. emechanism in Europe. Despite increasing, prices in NorthAmericaare still below those in Asia, Latin America and theFormer SovietUnion. OnlytheMiddle East andAfrica,whereprices are often held down to the cost of production or belowas a subsidy,'are average prices lower than hi NorthAmerica.Theseconclusionsare furtherreinforcedwhenwholesalepricesare viewed atthe country level. The l.o~re below includesallcountrieswith consumption greater than 8 bern in 2013. '
The highest wholesale prices in2013 were found in the largelyLNG dependentcountries inAsiaPacil,~':::..SouthKorea, JapanandTaiwan- plus Singapore. Thesewe;;?followedby awholehost of European countries including Turkey, France, Italyand Germany. Prices in the UK arid ~EeNetherlands werelower than in the main gas importing countries in Europe, <',
butslightly above those in China, where.prices increased lessthan in previous years. Spot prices in the USA, Canada a~dMexico remained lower than in a whole range of countries,where prices had previously been well belowNorthAmericanprices. These included countries such r;~India, Indonesia andMalaysia. Prices in Russia were slightjy below prices in theUSA, having been above them in 2012;:At the.bottom of the '.chart were generally countries where wholesale prices weresubject to some form of regulation -!rlf,gelyMiddleEast andAfrican countries- and often belowthecost of productionandtransportation. .
1/
.. - .. - - - .... ... -
........
- - - - - - - - - - - - - - - - - - _. - -
»zZmXC;0mI-x
II~.K.JaipuriyarIFrom:
SentTo:ISubject:
Kapur,Atin <[email protected]>Monday, June2, 2014 3:00 PM'[email protected]'; '[email protected]'Re:GCVVs. NCV
IDear sir,Ican confirm that Platts usesGCVfor HH, NBPand Japan.IKind regards,
Atin Kapur
IPlatts, ADivision of McGraw Hill FinancialMobile: +6591838500
. "".,. __ .~."",,,_,,, ..,.~,_. _, , _,_ ~_,_ .._.~,",. ~.·" _'''-.n ..'_~' .•, .., ,'.. ,,' _., ,._ ,_ .._.0..•.__ «" ",.,,,.,,"_, .'__-"'_"",,,,~~,".'.__.'_.~h.._'~.'." ,'." ""''' _· v·''''_,..,_-.,,~,, __ •· .. '. ".,' ..,., .. ,.":"" , "'., " - .. ~ .. ,._.""" ' ,- , .•'''' "" ~ - ~•. ,..~,.', '. ,.,,~ ' '".,..- •. " ,' ~..-. ',
IFrom: R KJaipuriyar [mailto:[email protected]]Sent: Monday, June 02, 201404:54 PMTo: Kapur, AtinISubject: GOI Vs. NCV
DearAtin,
IAs discussedplease confirm about the Pricesof Henry Hub and NBP,whether these are on GCV{GrossHeating value) onNCV{Net Heating Value) basis.
IPleaserespond immediately.
IWith regards,
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