Sie sind auf Seite 1von 53

Natural Gas & LNG Pricing

Let’s debate…

 At a fundamental level…Oil is a fungible commodity,


while Natural Gas is not…

Why (?) & What are its implications (?)

 Oil & Gas, birth under similar conditions… Assume


different dynamics; Yet they compete at end
consumption stage…
Oil & Gas - Business of massive uncertainties & volatilities
JCC (Historicals)

160
140
120
100
$/ Bbl

80
60
40
20
0
1 24 47 70 93 116
Months (January 2000 till April 2010)

Henry Hub Gas Prices


16

14

12
10
$/ MMBtu

6
4

0
1 24 47 70 93 116
Months (January 2000 till April 2010)
Gas Value Chain

Supply of NG or Gas is purified & condensed based


Condensate from wells on product specifications &
to processing facilities considering safety/ environmental
& onwards to… regulations

NG
NG Production Well Liquefaction Terminal

LNG

NG Re-Gasification Plant
NG

Mktg. Company

Gas Pipelines
NG NG
Main Transmission/ Inter-State Pipelines (High
Bulk Consumers City Distribution Pressure)
Distribution/ Intra-State Pipelines (Medium
Fertilizer Units Household Pressure)

Power Plants Commercial City Gas Distribution Pipeline Network (Low


Pressure)
Other Industries Automobiles
Gas Pricing Methodologies
Gas Pricing Methodologies

A. Cost Plus
Example Cost plus Pricing of Sui Gas Fields in Pakistan

B. Market Value - Gas to C. Market Price - Gas to Gas


alternative energy
Characterized with well established
Examples multiple Gas trading markets leading to
Price Arbitrage, Swaps & Futures (NYMEX
 Dutch Gas Pricing till
competing with Henry Hub)
recently was indexed
to FO Examples
 Indian APM Gas  Recent UK Gas market evolving around
supposedly linked to competition between domestic Gas and
FO parity LNG

Essential to understand  US natural Gas (Lower 48) in


pricing philosophy of market competition with LNG, imported PNG
you plan to operate (Canada & Mexico) & PNG exports to
Mexico
Cost + approach
 Price determined (by Government, Regulator or Monopoly) based on “costs”
 Capex Investment
 Operating Costs (including depreciation)
 Taxation - either reimbursed or grossed up in return on capital
 Return on Capital - linked to long term Govt. bonds or Cost of capital
 In-built normative parameters - for expected level of performance
 Often imposed on captive gas
 Often chosen for “Waste” Gas
 Developing Gas markets generally follow Cost Plus approach (All developed Gas markets
have at some point of time followed “Cost” Plus approach)
 Texas Oilfields
 Regulated wellhead prices of USA
 Early UK contracts (1966-1970)
 Pakistan (Sui Gas fields)
 Indonesian domestic market
 Many production sharing contracts
 Regulated transportation tariffs
Indexation

 Indexation
 In US - to Capital Goods
 To Inflation
 In UK – evolved around Oil
 Early contracts often fixed price
 Return on Capital “regulated”
 Usual Characteristics
 No price-reviews over contract period
 Costs closely scrutinised
 Strong buyer orientation
Cost + approach

Merits Demerits
 Price known in advance – No  No Competition to supply rare
uncertainties in Price clause in commodity
contract  Gold plating often distorts Capex &
Opex
 No possibility of Price
manipulations provided  Norms not reviewed for technological
methodology is transparent & improvements
dynamic  Early high prices followed by tapering
prices due to depreciation charge
 Normative performance- an
reducing capital employed – does not
incentive to improve, earn rewards reflect impact of inflation on Capex &
on incremental performance & reserve depletion
check on wasteful cost
 Monopolies have very often used cost
 Insulation against buyer or plus approach to rig prices
supplier influencing price  Low prices in later years provide little
 Monopoly rent to producer is incentive to look for more Gas
controlled & under check  Low prices encourage inefficient
usage of infrastructure
Market Value – linked to alternative energy

 Gas is priced to compete with other fuels in market


 Costs are deducted to give prices at wholesale purchase point
 These prices are combined into a formula for long term contract purchases
 First introduced in Netherlands in 1960
 Primary pricing mechanism in EU till recently

Gas is vulnerable…
Indexation in
Gas Pricing is
influenced by
relevant
combination of
consumer
base
Netback Approach in Gas Pricing
Netback Approach – Useful in establishing competitive price

Oil Gas

How strange? Path followed in Gas Pricing more complex than oil- Even though
birthplace of both may be in same well !!
Netback price analysis - Illustrated
Natural Gas Sales Category
Firm Interruptible Residential/ Feedstock
Industrial Industrial Commercial
Fuel Type (Reference) LSFO HSFO Gas Oil LSFO

Ex-Refinery Price ($/ MT) 105 85 195 105

Country Differential (?) (7) (3) (3) (7)

Country Distribution 25 15 60 10

Taxes 7 3 200 3

Delivered Price 130 100 452 111

$/ MMBtu (Energy 3.31 2.46 10.48 2.85


equivalence)
Premium Factor 1.05 1.00 0.85 0.86
Netback price analysis - Illustrated

Natural Gas Economics


Firm Interruptible Residential/ Feedstock
Industrial Industrial Commercial

Fuel Type (Reference) LSFO HSFO Gas Oil LSFO

Delivered Price - $/ MMbtu 3.48 2.46 8.91 2.12


(GHV)

Delivered Price - $/ MMbtu 3.13 2.21 8.01 1.91


(NHV=GHV X 0.90)
Taxes - - (2.00) -
Town Distribution - - (2.00) -

City Gate Price 3.13 2.21 4.01 1.91


Market Share 35% 10% 50% 5%
Cost Reflective Pricing of Natural Gas

Globally Achieved Long-back


EU Electricity & Gas prices
Natural Gas Prices for Industry for Selected Countries U.S. Dollars per 107 Kilocalories - Gross Calorific Value
Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 • Energy end-use
Belgium C C C C C C NA 559.8 417.4 354.9 prices including
Bulgaria NA NA NA NA NA NA NA 381.2 396.6 381.7
Canada 108.8 125.3 210.1 223.7 291.1 272.0 216.1 352.3 172.6 160.1 taxes, converted
Chinese Taipei (Taiwan) 288.5 271.6 302.1 336.9 387.4 413.8 475.6 648.5 525.6 600.9 using exchange
Croatia 235.5 281.4 330.6 386.2 391.4 400.8 436.7 388.7 420.0 520.4 rates
Czech Republic 155.9 173.6 203.5 217.4 292.5 402.3 391.7 614.1 528.0 530.5
• To convert US
Denmark C C C C C C C C 752.1 NA
Estonia NA NA NA NA NA NA NA 449.9 392.2 423.9 dollars per 107
Finland 126.0 126.9 158.7 170.3 190.2 248.1 267.9 372.2 332.8 350.4 kilocalories to
France 197.1 182.5 241.8 262.2 330.2 412.2 414.1 607.3 438.9 484.4 U.S. dollars per
Germany NA NA NA NA NA NA NA NA NA NA
Greece 184.4 181.0 221.5 232.3 312.4 NA 441.4 643.9 441.2 517.6 million British
Hungary 123.2 143.7 235.7 287.7 345.6 451.1 584.2 753.0 611.4 NA thermal units
Ireland 143.5 183.8 232.7 291.7 374.0 465.9 C 616.2 483.5 431.2
(Btu), multiply by
Israel NA NA NA NA NA NA NA C C C
Italy C C C 300.4 351.8 454.2 491.1 646.5 557.7 483.0 0.0252.
Japan 406.5 357.2 384.8 392.3 401.5 435.5 454.0 NA NA NA • NA = Not
Kazakhstan 34.3 30.9 34.4 45.3 47.6 62.4 67.2 74.5 76.1 74.4
Korea NA NA NA 341.8 392.3 495.3 550.8 499.5 479.5 610.3
available
Lithuania NA NA NA NA NA NA NA 574.5 392.4 460.3 • C = Confidential
Luxembourg NA NA NA NA NA NA NA 437.7 464.4 449.7 • - - = Not
Mexico 163.4 122.7 205.3 300.7 357.1 343.2 347.1 433.1 NA NA
Netherlands 175.6 164.5 222.4 NA NA NA 446.6 537.6 502.6 413.9
applicable
New Zealand 81.5 93.6 142.3 176.9 222.7 242.5 278.3 239.6 231.6 234.0
Poland 173.3 173.1 175.9 179.4 224.7 294.2 375.0 531.7 432.7 454.8
Portugal NA 238.1 287.6 285.8 340.3 399.0 428.8 547.9 484.1 555.5
Romania NA NA NA NA NA NA NA 379.9 265.9 255.2
Russia 20.8 25.5 34.6 43.7 53.5 62.2 76.6 99.3 85.3 108.9
Slovakia 106.6 132.8 220.6 243.0 287.5 379.0 420.3 622.4 516.7 534.7
Slovenia NA NA NA NA NA NA NA 655.5 570.9 600.2
South Africa 212.8 NA 255.8 261.0 323.8 NA NA NA NA NA
Spain 176.0 165.5 204.0 215.6 254.2 354.9 380.3 486.6 433.8 390.4
Sweden NA NA NA NA NA NA 609.3 776.5 585.4 662.7
Switzerland 296.4 279.2 320.3 352.4 402.6 487.6 576.6 745.4 704.3 661.6
Thailand 119.1 117.8 136.4 132.3 171.8 217.5 230.0 306.8 289.6 286.8
Turkey 200.4 215.4 229.0 230.3 304.5 352.7 440.8 572.9 467.6 407.3
United Kingdom 140.3 146.5 164.6 202.7 298.8 383.5 333.0 446.0 323.7 303.3
United States 198.6 154.4 223.8 252.0 325.2 302.0 293.8 371.3 202.8 207.4
Natural Gas Prices for Households for Selected Countries1 U.S. Dollars per 107 Kilocalories - Gross Calorific Value2
Country 2001 2002 2003 2004 2005 2006 2007 2008 2009
Austria 368.5 379.3 590.6 686.2 729.6 785.0 936.5 1,024.3 1,060.3
Canada 294.1 236.2 339.8 361.4 429.6 481.6 487.0 512.7 NA
Chile NA NA NA NA NA NA NA NA NA
Chinese Taipei (Taiwan) 372.5 253.2 278.6 310.3 360.1 385.7 435.7 538.5 NA
Colombia NA NA NA NA NA NA 361.2 437.8 NA
Croatia 235.5 281.4 332.3 386.2 391.4 400.8 436.7 NA NA
Cuba NA NA NA NA NA NA NA NA NA
Czech Republic 233.0 274.7 322.4 352.6 429.1 543.5 577.6 848.9 NA
Denmark 709.2 720.0 895.1 1,052.9 1,252.6 NA NA NA NA
Finland 221.1 201.6 251.0 269.8 298.1 352.3 383.6 520.6 NA
France 402.7 425.6 521.6 544.3 590.5 706.9 785.7 920.4 NA
Germany NA NA NA NA NA NA NA NA NA
Greece 258.2 303.3 392.1 423.6 600.8 NA 1,000.2 1,214.2 NA
Hungary 150.0 175.8 243.5 224.6 245.1 298.4 615.4 748.8 732.5
Ireland 353.0 376.2 503.5 570.0 657.7 917.0 1,099.4 1,033.9 NA
Italy C C C 778.3 823.4 936.6 NA NA NA
Japan 1,168.4 1,086.8 1,194.8 1,270.9 1,245.6 1,238.9 1,236.9 NA NA
Kazakhstan 46.8 48.6 52.3 55.8 58.3 66.7 73.6 82.7 NA
Korea, South NA NA NA 454.3 527.8 641.5 712.6 634.0 NA
Luxembourg 300.2 272.7 342.5 367.7 477.5 558.7 NA 869.3 NA
Mexico NA NA NA 545.9 631.9 622.2 631.5 736.1 NA
Netherlands 401.4 457.1 602.4 682.5 800.4 899.7 1,031.3 1,239.9 NA
New Zealand 332.2 338.5 570.6 751.4 830.6 778.6 1,244.1 NA NA
Poland 304.0 336.9 339.9 369.5 443.2 554.5 688.5 933.3 NA
Portugal NA 651.1 794.0 909.1 963.5 1,018.3 1,075.0 1,066.4 NA
Romania 76.9 106.3 127.7 179.9 NA NA NA NA NA
Russia 10.9 12.8 17.7 22.6 NA NA NA NA NA
Slovak Republic (Slovakia) 115.3 125.7 228.9 351.5 419.2 553.7 657.0 785.6 NA
Spain 507.9 496.9 594.2 643.3 684.7 756.9 867.9 1,026.8 NA
Switzerland 490.5 494.7 562.5 613.0 670.7 765.3 866.9 1,093.5 NA
Turkey 242.6 254.6 265.4 260.2 362.0 415.4 519.6 659.2 NA
United Kingdom 286.5 317.2 351.6 423.3 481.8 643.3 753.7 825.8 NA
United States 369.1 303.8 365.5 412.8 492.1 528.2 500.7 525.1 NA
1Energy end-use prices including taxes, converted using exchange rates
2To convert U.S. dollars per 107 kilocalories to U.S. dollars per million British thermal units (Btu), multiply by 0.0252
NA = Not available
C = Confidential
- - = Not applicable
Source:
International Energy Agency
Natural Gas Prices for Electricity Generation for Selected Countries1 U.S. Dollars per 107 Kilocalories - Gross Calorific
Value2
Country 2001 2002 2003 2004 2005 2006 2007 2008 2009
Canada 145.5 144.7 174.9 171.9 225.2 NA NA NA NA
Chinese Taipei (Taiwan) 244.7 252.1 258.6 281.0 326.2 348.5 400.8 499.3 NA
Czech Republic 151.7 168.7 197.8 NA NA NA NA NA NA
Finland 109.0 109.0 136.2 145.6 165.4 223.0 240.5 340.1 3NA
Hungary 155.5 188.9 216.8 251.4 285.9 391.9 494.1 623.7 527.1
Ireland 127.0 150.6 168.3 C C C C C C
Korea, South NA NA NA 292.9 367.0 477.0 490.0 675.6 NA
Luxembourg NA NA NA NA NA NA NA NA NA
Mexico 163.4 122.7 205.3 275.0 363.8 339.6 316.0 422.9 NA
Portugal NA NA 194.1 242.0 291.8 355.1 371.4 519.3 NA
Russia 20.0 23.7 31.6 NA NA NA NA NA NA
Slovak Republic (Slovakia) 106.3 131.8 220.6 243.0 287.4 378.9 NA 622.7 NA
Turkey 197.1 214.4 222.9 227.9 301.3 349.3 438.8 572.0 NA
United Kingdom 111.1 106.2 129.6 162.1 214.6 275.0 NA 358.8 NA
United States 176.3 140.5 213.1 235.7 325.9 274.6 282.3 362.4 NA

1Energy end-use prices including taxes, converted using exchange rates


2To convert U.S. dollars per 107 kilocalories to U.S. dollars per million British thermal units (Btu), multiply by 0.0252
NA = Not available
C = Confidential
- - = Not applicable
Source:
International Energy Agency (IEA)
Fundamentals of Gas Pricing
Must have clarity on Price

Illustration: Louisiana Gas Producer / New York Customer


 Crude Oil Gas Price
Price is
 What is being
generally
Priced?
fob
 Gas only?
 Petroleum
products  Gas +
prices are Transportation?
often ex-
 Price at what point
Refinery
of Gas Value Chain
 Producer to/ into
Pipeline?
 At Border?
 Delivery at City
Gate?
 After Tax?
 For whom?
Key parameters in long term pricing

 Indexation – Reference points


 Triggers – Occurrence of events calling for review in price
 Re-openers – Review from time to time
 Base Price – Price on which review is carried out
 Must freeze basis of defining Price
 Currency type
 Volume terms {SCMs (EU) / Cf (USA)}
 Energy terms {Joules (French) / Therm or BTU (UK) /
Calorific Value (USA)}
Familiarity with Gas measuring units Critical – Mmbtu is million British Thermal Units
but Mcf is not Million (but Thousand) Cubic Feet
Selection of Index (1.)
Index must be
 Independent of both buyers & sellers
 No manipulation
 Broad based
 Less open to gaming
 Relevant
 to Gas market (internationally Oil related indices still prevail; Whereas Petroleum product
based indices are prevalent in EU, but with time, FO usage has come down - so these
are loosing linkage & hold)
 Wide acceptance (2.)
 must be agreeable to buyers, sellers & investors
 Continuous & consistent
 if discontinued then alternatives must be agreed
 changes of index definition may trigger reopening

1. JCC Index being followed transparently since 1970s’ – It represents weighted average actual importation
cost of crude oil & petroleum products
2. May recall few years back PLATTs was being accused of manipulations. Consequently in case of crude oil,
contracts are being increasingly linked to NYMEX instead of PLATTs Rotterdam Index
Selection of Index

Base Price

Price after Indexation

If Indexation is with reference to other energy, conversion into energy


equivalence must be done (example, Price of Naphtha in $/ MT when
compared with Gas is converted into $/ Mmbtu by dividing by 44 (1 Ton
Naphtha = 44 MMBtu)
Application of Indices- Multiplicative & Additive Formula

Converted for Energy equivalence

Multiplicative Indices would yield new Gas prices at levels higher


than that by Additive Indices
LNG Pricing
“S” curve – Multiple Indexation Paths
Gas Price

Base Price for Crude


Oil is important – from
Buyer’s perspective set
indexation with crude
price at lowest possible
level

Trigger Points

Oil Price

 Producer Safety Zone is Floor & Buyer Safety Zone is Cap


 Curve is redone for oil price variations beyond agreed Triggered
points
Trigger & Review clauses

 Handle through Indexation clause what is short term (which is


more foreseeable)
define elements, structure & restrictions
 Handle through Review clause what is long term (which tends to
be unforeseeable)
 What may Trigger a Review?
At any time both parties can agree to review anything
Trigger clauses are meant when one party wants a review & not
other
How often resorted to? (generally 3 to 5 years cycle)
 Review limited number of clauses – (Price, delivery, etc.)
 Market change clause could also be set for a review - Important in
developing Gas markets
LNG FOB Price Formula (A Case based on assumed numbers)
FOB Price in US$/ MMBTU = Average Annual Crude Price ($/Bbl) X Multiplier + Fixed Element
Where,
Average Annual Crude Price US$/Bbl > 30 Floor
Average Annual Crude Price US$/Bbl < 45 Cap
Multiplication Factor 0.058 Assumed as linked to Conversion factor from Crude in Bbl to gas in MMBTU
Fixed Element $/ MMBTU 1.00 Assumed Exploration & Production Cost
Resultant
Avg. Crude LNG FOB
Price Price
Year US$/ Bbl US$/MMBTU
2006 31 2.80
2007 32 2.86
2008 34 2.97
2009 35 3.03
2010 28 2.74 Trigger for Floor
2011 29 2.74
2012 30 2.74
2013 40 3.32
2014 41 3.38
2015 42 3.44
2016 43 3.49
2017 46 3.61 Trigger for Cap
2018 44 3.55
2019 45 3.61
2020 46 3.61
Global Gas Pricing Approaches
Oil & Spot gas dominate gas price indexation
 Asian LNG
 Delivered crude oil prices – main
index JCC
 Continental Europe
 refined products prices – gas oil &
heavy fuel oil
 crude oil netbacks for Algerian LNG
 limited coal – inflation linkages
 some spot gas trading hubs
emerging
 periodic price re-openers a key
contracts feature
 USA and UK
 USA spot gas – Henry Hub in USA
& NBP in UK
Pricing of Natural Gas in India

Domestic (APM, pre-NELP, NELP & MDPM)

LNG (LT & Spot)


APM gas prices - till July 20, 2005
% of basket of fuels
Rest of India North East
Oct 97 – Mar 98 55 30
Apr 98 – Mar 99 65 40
Apr 99 – Mar 2000 75 45
Floor for Landfall Price (Rs./ ‘000 SCM) 2,150 1,200
Ceiling for Landfall Price (Rs./’000 SCM) 2,850 1,700
Note
1. Fuel oil basket consist of
a) Italy medium sulphur (1%) on fob basis
b) New ARA (1% Sulphur) on cif basis
c) Singapore HSFO 180 cst (3.5% sulphur) on fob basis
d) Arab Gulf HSFO 180 cst (3.5% sulphur) on fob basis
2. Producer Price = Landfall price (-) Rs.2.5 billion contribution to Gas Pool Account (-) Difference in
international price paid to JV Gas fields & landfall price (-) Royalty at 10% of wellhead price
(being re-defined now)
3. Transmission charges payable to GAIL Rs.1,150/ ‘000 SCM at 8,500 Kcal/ cubic meter &
adjusted for actual CF of gas supplied (?)
4. Taxes
5. Final price consumer along HBJ pipeline = 2 + 3 + 4
APM gas prices – w.e.f. July 20, 2005
Rest of India North East

Floor Price (Rs./ ‘000 SCM) 2,150 1,200

Ceiling for Landfall Price (Rs./’000 SCM) 3,200 1,950

Note
1. Fuel oil basket consist of
a) Italy medium sulphur (1%) on fob basis
adhoc increase of 20% allowed
b) New ARA (1% Sulphur) on cif basis pending Tariff Committee’s
c) Singapore HSFO 180 cst (3.5% sulphur) on fob basis Report
d) Arab Gulf HSFO 180 cst (3.5% sulphur) on fob basis
2. Producer Price for APM gas = Landfall price (-) Rs.1.5 billion contribution to Gas Pool Account
3. APM rate applicable only for Fertilizer, Power and other specific end users committed under court
orders/small scale consumers having allocations up to 0.05 MMSCMD
4. All other consumers to be charged the producer price depending on the market determined price
of JV gas subject to ceiling of US$3.86/MMBTU till 31st March, 2006, then ceiling would cease to
exist.
5. Transmission charges payable to GAIL Rs.1,150/ ‘000 SCM at 8,500 Kcal/SCM. & adjusted for
actual CV of gas supplied
6. Taxes
7. Final price consumer along HBJ pipeline = Landfall price / 4 + 5 + 6
8. Producer price of gas for ONGC/OIL and HBJ transportation charges have been referred to Tariff
Commission
Natural Gas Pricing till June 1, 2010

APM/ pre-NELP gas NELP gas


 APM gas supplies to be maximized  Expected to be market
to customers whose output is determined
controlled (power, fertilizer)
 Determination of price at
 Basic market price (subject to cap “arm’s length” (RIL KG gas)
of $3.86 (*) /MMBTU to be charged (#)
from customers whose output is
freely priced  Govt’s gas utilization policy
may effect free gas pricing
 Determination of producer price for
ONGC/ OIL – to be referred to tariff
commission Re-gasified LNG
 For interim period – adhoc  long-term contracts (Petronet
increase from Rs.2,850/ MSCM to LNG & Gorgon LNG wef 2014)
Rs.3200/ MSCM (#)
 Shell’s merchant terminal at
 supplies to north-east at Hazira
concessional price
(#) Price formula:
(*) Revised to $4.76
(#) Revised to Rs.4,300/ SCM Rs.112.50/ MMBtu + (Brent Crude with ceiling of
$60/ Bbl less $25/ Bbl as Floor)^0.15 + K (Bid received
from selected power units at Rs.10/ MMBtu)
Delivered price of R-LNG vs. RIL KG-6
Cost Elements $/ MMBTU

R-LNG LT Qatar RIL KG basin

Fob price/ ex-land fall 5.30 4.20


(Now high at around 7)
- other costs would vary
Ocean freight 0.25 0.00
Customs duty 0.29 0.00
Regasification charges 0.60 0.00
Ex-terminal price 6.44 4.20
a) Pipeline charges 1 0.00 1.30
b) Pipeline charges 2 0.60 0.60
c) Interconnect charges 0.00 0.02
Pipeline total (a + b + c) 0.60 1.92
Service tax 0.06 0.20
Total 0.66 2.12
Marketing Margin 0.20 0.135
CST @2% (taken in calculations or VAT @12.5%+) 0.14 0.13
Grand total 7.44 6.58
Current Natural Gas Prices
(Till May 31, 2010 & effective June 1, 2010)
Quantity Price (*)
(MMSCMD) $/ MMBtu

APM: priority sectors (through GAIL) (Rs.3520/ M SCM) 38.00 2.06


APM (small scale consumers & CGD) (Rs. 4235/ MSCM) 3.50 2.45
Non-APM (other than priority sectors & small scale / CGD) 9.00 4.75 / 3.56
Ravva 1.10 3.50
Ravva Satellite 0.85 4.30
Lakshmi / Gauri – GPEC / GGCL 2.90 4.75
GSPC – Niko Gas to power producers 3.30 4.30
PMT JV Gas to GAIL 5.27 5.75
PMT direct marketing (by consortium members) 4.08 4.76 to 5.76
R–LNG ex-Dahej (pooled price): Long-term contract with Ras Gas, Qatar 22.90 5.20
R–LNG ex-Dahej (Spot) 7+
R–LNG (Spot Hazira) 6.00 to 9.00 5 to 6
RIL ( KG Basin) 40.00 4.20
Total 137 to 140

(*) At land fall point/ ex- terminal (long term contract)


Effective June 1, 2010 all APM Gas price revised to $4.20/ MMBtu, except from new fields
under nominated blocks at non-APM rates to be fixed by Govt.
Global trends in Natural Gas Prices
Crude Oil Prices & Japan LNG

120 14
100 12
80 10
8
60
6
40 4
20 2
0 0
2008 2009 2010 2009 2009 2009 2010 2010 2010 2010 2010

Jan- Jan- Jan- Apr- Jul- Oct- Jan- Apr- Jun Jul Aug
Dec Dec Aug Jun Sep Dec Mar Jun

LNG CIF Japan ($/ MMBtu) Average Crude Oil Price ($/ Bbl)
Crude Oil Prices & US Henry Hub Spot NG Prices

120 10
100 8
80 6
60
40 4
20 2
0 0
2008 2009 2010 2009 2009 2009 2010 2010 2010 2010 2010

Jan- Jan- Jan- Apr- Jul- Oct- Jan- Apr- Jun Jul Aug
Dec Dec Aug Jun Sep Dec Mar Jun

US Spot NG at HH ($/ MMBtu) Average Crude Oil Price ($/ Bbl)


Crude Oil Prices & Europe Average Border NG Prices

120 16
100 14
12
80 10
60 8
40 6
4
20 2
0 0
2008 2009 2010 2009 2009 2009 2010 2010 2010 2010 2010

Jan- Jan- Jan- Apr- Jul- Oct- Jan- Apr- Jun Jul Aug
Dec Dec Aug Jun Sep Dec Mar Jun
Europe Avg Border Import incldg UK ($/ MMBtu)
Average Crude Oil Price ($/ Bbl)
LNG Price trends
18

16.00
16
14.40
14 15.00
12.80
13.50
12 11.20
12.00
LNG ($/ mmbtu)

12.00
9.60
10 10.80
10.50
8.00 9.60
8 9.00
6.40 8.40 Slope to
7.50 7.20 Crude
6
6.00 6.00
12%
44.80 15%
16%

0
40 50 60 70 80 90 100
JCC ($/ bbl)

At JCC $70/ Bbl, LNG $11.9 MMBtu, FO $10.5 MMBtu & Naphtha $13.8 MMBtu
At JCC $90/ Bbl, LNG $13.5…Spot currently hovering at $15+ post Tsunami Japan…
Netbacks in Gas Pricing in India
Typical Netbacks in Gas Value Chain: Wellhead to Burner tip…
$/ MMBTU Rs./ SCM Sales mix
Netback for producer 4.33 7.40
Royalty 0.43 0.74
Wellhead price 4.76 8.14
Transmission cost (Transporter’s Netback) 1.00 1.71
VAT 0.72 1.23
Price at city gate 6.48 11.09
CGD Network tariff 4.00
Online compression charge for CNG 3.00

Weighted Average Netback for CGD entity (at 90% of current RSP) 7.61
PNG domestic 0.38 5%
PNG Commercial 11.86 10%
PNG industrial 3.55 55%
CNG 14.84 30%
RSP of Alternative products
LPG domestic 17.18
LPG commercial 29.94
FO 20.71
Diesel 36.59
Assuming domestic natural gas supply in a medium sized CGD network
Current End-Consumer Pricing
Discount to alternative fuel (Not cost-reflective)
 Industrial Consumers – Discount to HSD, Fuel oil & naphtha
 Automotive users – Lower than delivered price of petrol & diesel while
ensuring pay-back of CNG kit expenditure
 Residential consumers – Lower than LPG domestic price (currently being
subsidized by Govt.)

Merits De-Merits
 Approach useful in  To reduce revenue shortfall, local state
promoting inter-fuel Governments may levy sales tax on CNG
substitution as long as (currently exempted) or increase rates on
delivered price industrial/ commercial/ residential
differential between consumption – pass through may become
liquid products & natural difficult
gas remains at a high
 No co-relation with cost of putting huge
level
value PNG & CNG infrastructure – Cross
subsidization approach may not be
beneficial in long-term
View on CCGT Economics… Gas Price Pooling a must…
Equity 30% 16%
Debt 70% 7.97%
Capital Cost including IDC Rs. crore/ MW 4.50 WACC 10.38%
Plant Load Factor 95% 1 1.00
Fixed Operating Cost Rs./ Kwh 0.12 2 0.91
Auxiliary Consumption 3% 3 0.82
Station Heat Rate Kcal/ Kwh 1,850 4 0.74
Annuitisation Factor at Cost of Capital 10.38% 8.22 5 0.67
Price of Fuel used 6 0.61
Delivered Gas Price (Assuming R-LNG ex-
Kochi is blended with domestic gas) US$/ MMBTU 13.06 7 0.55
Exchange Rate USD/ Rs. 46.00 8 0.50
Calorific Value Kcal / SCM 8,500 9 0.45
Gas Price Rs./ Kcal 0.024 10 0.41
Cost of Generation 11 0.37
Capital Cost Rs./ Kwh 0.75 12 0.34
Fixed Operating Cost Rs./ Kwh 0.12 13 0.31
Cost of Fuel Rs./ Kwh 4.32 14 0.28 12% debt
cost net
Less : CDM Credit Rs./ Kwh (0.33) 15 0.25 of tax
Total Cost of Generation Rs./ Kwh 4.86 8.22 shield
Option 1 Option 2 Option 3

Economics of CNG in Kerala R-LNG Domestic


Pooled Kochi KG-6
FOB Price $/ MMBtu 11.60 4.20
Boil-off Gas " 3.00% 0.35
Ocean Freight " 0.83
CIF Price " 12.78 4.20
Customs Duty " 5.15% 0.64
Re-gasification charges " 1.83
Ex-Terminal Price/ Land-fall pt. price " 12.18 15.25 4.20
Marketing Margin " 0.19 0.19 0.14
VAT 12.5% for R-LNG/ CST @2% " 12.50% 0.24 1.91 0.08
12.61 17.35 4.42
Pipeline Tariff (Inclusive of service
charges) " 10.30% 2.76 1.43 2.54
Delivered Price at City Gate " 15.37 18.78 6.95
NCV to GCV " 6.26

Say Rs./ MMBTU 691.45 845.14 281.83


Say Rs./ SCM 24.89 30.43 10.15
Contd…
Delivered Price at City Gate (B/f) Rs./ SCM 24.89 30.43 10.15
Add: Network Tariff " 3.00 3.00 3.00

Price of Gas inclusive of Network Tariff " 27.89 33.43 13.15


Rs./ Kg 32.85 40.17 13.40
Add: Online Compression Charge (CC) " 4.00 4.00 4.00
Price of Gas inclusive of Online CC " 36.85 44.17 17.40
Add: Excise Duty " 14.42% 5.31 6.37 2.51
CNG Price inclusive of Excise Duty " 42.16 50.54 19.91
CNG Price inclusive of Marketing Margin 47.84 57.49 22.23
VAT on CNG net of VAT on R-LNG 12.5% 5.03 4.41 2.41
RSP of CNG 52.87 61.90 24.64
Mileage per Kg of CNG Kms 4.20 4.20 4.20
CNG Cost per Km Rs./ Km 12.59 14.74 5.87
(A) CNG Fuel & Maintenance Cost per Km " 0.50% 12.65 14.81 5.90

Contd…
Retail Selling Price of HSD Rs./ Litre 38.97 38.97 38.97

Mileage per Litre of HSD Kms 3.50 3.50 3.50

Fuel Cost per Km Rs./ Km 11.13 11.13 11.13

(B) HSD Fuel & Maintenance Cost per Km Rs./ Km 0.50% 11.19 11.19 11.19

(B)-(A) Savings in Fuel & Maintenance cost/ Km Rs./ Km (1.46) (3.62) 5.29

Running over useful life Kms 475,200 475,200 475,200

Savings over useful life Rs./ Lakh (6.94) (17.20) 25.14

Cost of New CNG Bus “ 40 40 40

Less: Capital subsidy under JNNURM @50% “ 20 20 20

Less: Residual value after 8 years @10% “ 4 4 4

Net Investment “ 16 16 16

Investment Payback for KSRTC -43% -108% 157%

Assumptions

1 Changes in price of natural gas, VAT/ Excise duty & price of HSD is a pass-though in CNG price

2 Passenger tariffs cover the cost of CNG fuel, maintenance and fixed cost of CNG bus
Gas Utilization Policy
 Gas producer can supply gas under NELP regime to consumers in agreement
with priorities determined by Government
 Establishes priority for how gas will be supplied across different sectors
 Priority allocation of gas is independent of price discovery, as ideally all
customers should participate in the price discovery process
 Priority is established separately for existing plants & green-field facilities & latter
includes expansion of existing sites
 Greenfield considered to be any facility not operational by March 2010
 Current utilization policy is broad directive on how allocations from new supply
will be governed & will be in effect for 5 years through 2012

Priority Existing Plants Greenfield plants

1 Fertilizer (urea) Plants Fertilizer (urea) Plants


2 LPG & Petrochemicals Plants LPG & Petrochemicals Plants
3 Power Plants City Gas Distribution
4 City Gas Distribution Refinery
5 Refinery Power Plants
6 Other Industries
Gas Utilization Policy

Long term policy of allocation needs more clarity

 Price and allocations fixed for 5 years - thereafter?

 Uncertainty over applicability to new production from other fields

 Clarity on who will get gas & how much of total requirement other than
fertilizer will be met through allocation

 Uncertainty in allocation makes it difficult to make investment decision on


downstream infrastructure & user industry

 Allocation also determines value of gas for producer


Issues relevant in Indian context

 Should NG prices be subsidised? If so, which sector be


subsidized? Fertilizers or Power Generation or both?
 Should dual pricing continue – Domestic NG prices to be
cost plus or linked to basket of alternative fuels?
 NELP gas be market-linked & LNG find its own market?
 Should Price be uniform for all sectors based on a weight
average pooled NG & LNG Prices versus sectoral price
pooling?
 Price Pooling at what level considering transportation &
sales tax
 When are we going to have Gas-to-Gas competition?
 Importance of Gas in achieving double-digit GDP growth?

Quick Resolution - A must….