News Release Details
The predicament of gas pricing in India
New Delhi 18-Jul-2007
<i>Issue is not of pricing the gas we have, but of discovering the right benchmark for LNG imports. </i> The policy of non-intervention and market-determined pricing under the National Exploration and Licensing Policy (NELP) is fundamentally a fallout of the dismal scenario in oil and gas exploration in India. The scale in which exploration had to be undertaken was clearly beyond the financial/ technological wherewithal of oil and gas public sector undertakings. Therefore, the NELP, which opened up this sector to foreign direct investment for the first time, had to ensure that financial opportunities and returns matched global standards, together with guaranteed non-intervention by the government, save and except transparency; hence the price discovery mechanism. Commercial provocations/ incentives for enterprise is no different for Indian entrepreneurs either - if risk and rewards are not complimentary, one would witness the same reluctance and complacency in KG development - as is being witnessed vis-a-vis the response of MNCs' to the 7th round of NELE Consider the plight of the other prospector in KG Basin, where the potential reserves have been capped by the director general of hydrocarbons at less than 2 trillion cubic feet (TCF), which, if evacuated @ 20 million standard cubic meters per day (mmscmd), would deplete in 12/15 years. Given the added implication of this reserve being predominantly of high temperature and high pressure (HT/HP) gas, it could turn out to be the most expensive domestic gas. India is perhaps the only country where pricing of gas is still pursued based on source of supply. Consequently, there are at least six different prices & benchmarks, each catering to a different industry segment. Gas demand has been projected at 283 mmscmd by the end of the llth Plan period - by which time the existing domestic gas sources would have started depleting rapidly. Therefore, to meet the burgeoning demand for gas, the resources in Krishna Godavari Basin (NELP I) and potential new resources (NELP II to VI) are extremely critical, and will have to be harnessed with a long-term vision. The working group for the XI Plan has estimated domestic gas supply (inclusive of KG) by 201142 at 108 mmscmd (56%) and RLNG at 82 mmscmd (44%), thus leaving a deficit of 90 mmscmd. Therefore, dependence on LNG (over 50%) would play a significant role if GDP growth is to be sustained at 9%. The predicament, therefore, is not of fixing the price for 50% of gas that we have. The issue is to discover the right global benchmark for the other 50%, which will have to be imported as LNG. Petronet LNG Ltd would account for almost 90% of the LNG capacity required by 2012. The trials and tribulations, which the gas sector in India has gone through, would perhaps get worse if a long term view is not taken. Whereas, a 1,000 MW gas fired power plant needs an investment of $600 million - upstream gas infrastructure would require a minimum investment of over $5 billion, whether 4 or 40 mmscmd is evacuated, depending upon the size of the reserve, with the attended risk of reservoir failures in future. The concern, therefore, is that even at a landfall $4.5 million British thermal unit (mmBtu), there would not be significant accretion in availability - except that a few of the Bombay-club of power and fertiliser companies would walk away with the first mover advantage, whereas lesser mortals would have to make do with expensive LNG and spot purchases. The Bush administration had made two notable statements on energy policy early in its tenure. The first was that - "the Kyoto accord, as negotiated was dead." However, last month, after Al-Gore blew the whistle, President Bush joined the huddled masses outside as he announced bailout of the Kyoto Protocol, with a new initiative that involves dragging India and China along. To understand - during the Kyoto time frame, i.e. by 2012, USA, China and India are likely to build almost 850 new coal-fired power plants. The combined CO<sub>2</sub> emissions just from those new plants will be five times the total reduction in CO<sub>2</sub> mandated by the accord. Gas pricing policy in India will, therefore, have to also consider that, going forward, carbon emission from coal-fired plants could face severe international road blocks. On the sidelines of CERA oil and gas conference in Houston in February 2007, an energy official of the US government was asked: How would the government reckon blending long-term LNG prices with Henry Hub (daily discovered prices)? Side-stepping the issue, he said, "US lives short-term internally and long-term externally." <b>This statement is extremely significant, as the policy ensures:</b> <li>A non-discriminatory pricing regime for all consumers - save and except such sectors, which are subsidized by the government post-market Restricts price to be determined strictly by demand and supply, considering supplies for the day from Canada & US' own domestic production; and </li> <li>A non-discriminatory level playing field for all potential sellers of LNG, with LNG purchases pricing formulas factoring Henry Hub movements. Forces that influence international market trends have been spectacularly diverse and dynamic (from mother nature to human intervention), which, together with LNG capacities being doubled to 350 million metric tone per annum (mmtpa) by 2012/2013, is already reflecting in a paradigm shift in LNG trade routes. Why, therefore should the same dynamics not influence LNG prices offered to Asia and Pacific Buyers? Instead prices linked to Brent/ JCC are still being insisted upon for East of Suez buyers. The solution, therefore, is to cause the creation of a dual pricing hub, the platform for which, the National Commodity and Derivatives Exchange, already exists. The hub price should be a pooled price of all domestic production and LNG imports, and also reflect influences of other international hubs, so that gas pricing in India is competitive - and the consumers would have the privilege to deter mine laissez-faire at the market.</li>
New Delhi 18-Jul-2007
<i>Issue is not of pricing the gas we have, but of discovering the right benchmark for LNG imports. </i> The policy of non-intervention and market-determined pricing under the National Exploration and Licensing Policy (NELP) is fundamentally a fallout of the dismal scenario in oil and gas exploration in India. The scale in which exploration had to be undertaken was clearly beyond the financial/ technological wherewithal of oil and gas public sector undertakings. Therefore, the NELP, which opened up this sector to foreign direct investment for the first time, had to ensure that financial opportunities and returns matched global standards, together with guaranteed non-intervention by the government, save and except transparency; hence the price discovery mechanism. Commercial provocations/ incentives for enterprise is no different for Indian entrepreneurs either - if risk and rewards are not complimentary, one would witness the same reluctance and complacency in KG development - as is being witnessed vis-a-vis the response of MNCs' to the 7th round of NELE Consider the plight of the other prospector in KG Basin, where the potential reserves have been capped by the director general of hydrocarbons at less than 2 trillion cubic feet (TCF), which, if evacuated @ 20 million standard cubic meters per day (mmscmd), would deplete in 12/15 years. Given the added implication of this reserve being predominantly of high temperature and high pressure (HT/HP) gas, it could turn out to be the most expensive domestic gas. India is perhaps the only country where pricing of gas is still pursued based on source of supply. Consequently, there are at least six different prices & benchmarks, each catering to a different industry segment. Gas demand has been projected at 283 mmscmd by the end of the llth Plan period - by which time the existing domestic gas sources would have started depleting rapidly. Therefore, to meet the burgeoning demand for gas, the resources in Krishna Godavari Basin (NELP I) and potential new resources (NELP II to VI) are extremely critical, and will have to be harnessed with a long-term vision. The working group for the XI Plan has estimated domestic gas supply (inclusive of KG) by 201142 at 108 mmscmd (56%) and RLNG at 82 mmscmd (44%), thus leaving a deficit of 90 mmscmd. Therefore, dependence on LNG (over 50%) would play a significant role if GDP growth is to be sustained at 9%. The predicament, therefore, is not of fixing the price for 50% of gas that we have. The issue is to discover the right global benchmark for the other 50%, which will have to be imported as LNG. Petronet LNG Ltd would account for almost 90% of the LNG capacity required by 2012. The trials and tribulations, which the gas sector in India has gone through, would perhaps get worse if a long term view is not taken. Whereas, a 1,000 MW gas fired power plant needs an investment of $600 million - upstream gas infrastructure would require a minimum investment of over $5 billion, whether 4 or 40 mmscmd is evacuated, depending upon the size of the reserve, with the attended risk of reservoir failures in future. The concern, therefore, is that even at a landfall $4.5 million British thermal unit (mmBtu), there would not be significant accretion in availability - except that a few of the Bombay-club of power and fertiliser companies would walk away with the first mover advantage, whereas lesser mortals would have to make do with expensive LNG and spot purchases. The Bush administration had made two notable statements on energy policy early in its tenure. The first was that - "the Kyoto accord, as negotiated was dead." However, last month, after Al-Gore blew the whistle, President Bush joined the huddled masses outside as he announced bailout of the Kyoto Protocol, with a new initiative that involves dragging India and China along. To understand - during the Kyoto time frame, i.e. by 2012, USA, China and India are likely to build almost 850 new coal-fired power plants. The combined CO<sub>2</sub> emissions just from those new plants will be five times the total reduction in CO<sub>2</sub> mandated by the accord. Gas pricing policy in India will, therefore, have to also consider that, going forward, carbon emission from coal-fired plants could face severe international road blocks. On the sidelines of CERA oil and gas conference in Houston in February 2007, an energy official of the US government was asked: How would the government reckon blending long-term LNG prices with Henry Hub (daily discovered prices)? Side-stepping the issue, he said, "US lives short-term internally and long-term externally." <b>This statement is extremely significant, as the policy ensures:</b> <li>A non-discriminatory pricing regime for all consumers - save and except such sectors, which are subsidized by the government post-market Restricts price to be determined strictly by demand and supply, considering supplies for the day from Canada & US' own domestic production; and </li> <li>A non-discriminatory level playing field for all potential sellers of LNG, with LNG purchases pricing formulas factoring Henry Hub movements. Forces that influence international market trends have been spectacularly diverse and dynamic (from mother nature to human intervention), which, together with LNG capacities being doubled to 350 million metric tone per annum (mmtpa) by 2012/2013, is already reflecting in a paradigm shift in LNG trade routes. Why, therefore should the same dynamics not influence LNG prices offered to Asia and Pacific Buyers? Instead prices linked to Brent/ JCC are still being insisted upon for East of Suez buyers. The solution, therefore, is to cause the creation of a dual pricing hub, the platform for which, the National Commodity and Derivatives Exchange, already exists. The hub price should be a pooled price of all domestic production and LNG imports, and also reflect influences of other international hubs, so that gas pricing in India is competitive - and the consumers would have the privilege to deter mine laissez-faire at the market.</li>