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Let’s debate…
160
140
120
100
$/ Bbl
80
60
40
20
0
1 24 47 70 93 116
Months (January 2000 till April 2010)
14
12
10
$/ MMBtu
6
4
0
1 24 47 70 93 116
Months (January 2000 till April 2010)
Gas Value Chain
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)
A. Cost Plus
Example Cost plus Pricing of Sui Gas Fields in Pakistan
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 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
Country Distribution 25 15 60 10
Taxes 7 3 200 3
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
Trigger Points
Oil Price
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$3.86/MMBTU till 31st March, 2006, then ceiling would cease to
exist.
5. Transmission charges payable to GAIL Rs.1,150/ ‘000 SCM at 8,500 Kcal/SCM. & adjusted for
actual CV of gas supplied
6. Taxes
7. Final price consumer along HBJ pipeline = Landfall price / 4 + 5 + 6
8. Producer price of gas for ONGC/OIL and HBJ transportation charges have been referred to Tariff
Commission
Natural Gas Pricing till June 1, 2010
120 14
100 12
80 10
8
60
6
40 4
20 2
0 0
2008 2009 2010 2009 2009 2009 2010 2010 2010 2010 2010
Jan- Jan- Jan- Apr- Jul- Oct- Jan- Apr- Jun Jul Aug
Dec Dec Aug Jun Sep Dec Mar Jun
LNG CIF Japan ($/ MMBtu) Average Crude Oil Price ($/ Bbl)
Crude Oil Prices & US Henry Hub Spot NG Prices
120 10
100 8
80 6
60
40 4
20 2
0 0
2008 2009 2010 2009 2009 2009 2010 2010 2010 2010 2010
Jan- Jan- Jan- Apr- Jul- Oct- Jan- Apr- Jun Jul Aug
Dec Dec Aug Jun Sep Dec Mar Jun
120 16
100 14
12
80 10
60 8
40 6
4
20 2
0 0
2008 2009 2010 2009 2009 2009 2010 2010 2010 2010 2010
Jan- Jan- Jan- Apr- Jul- Oct- Jan- Apr- Jun Jul Aug
Dec Dec Aug Jun Sep Dec Mar Jun
Europe Avg Border Import incldg UK ($/ 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
Contd…
Retail Selling Price of HSD Rs./ Litre 38.97 38.97 38.97
(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
Net Investment “ 16 16 16
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
Clarity on who will get gas & how much of total requirement other than
fertilizer will be met through allocation