Pricing of Natural Gas

Dr. Anthony Barker

03 October 2008

Taking upstream to the next level

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Agenda

• Gas pricing benchmark – where are we?

• Gas pricing drivers

• LNG prices in India – linkages to the global market

• Power sector pricing scenario

• Key challenges / questions

• Conclusion

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Gas pricing benchmarks

• APM – ONGC produced / GAIL marketed gas– Producer price ~2/mmbtu

• PMT JVs– All gas to Govt. nominee @ PSC price

• Pre – NELP– Mutually negotiated prices

• NELP – Through price discovery and Govt. approval

◦ Price of D6 gas @ $4.2/mmbtu

• LNG– PLL Term price to rise from Jan 2009 - ~$12/mmbtu by 2014

(Ex- Dahej (NCV) – Spot prices @ $21/mmbtu - $25/mmbtu

Multiple pricing , segmented market - clarity?

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Gas price drivers

• Factors affecting domestic gas prices– Cost of supply plus a return– Investors friendly policies – Demand of gas at a price acceptable to bulk consumers– Price of substitute fuel

• Factors affecting LNG prices into India – Global supply demand situation– Price offered by JKT market – Crude prices – Re-gas capacity

Domestic pricing also subject to global influences (coal)

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W. Africa

Australia

S.E. Asia

Middle EastAlgeria

Trinidad

LNG

Pipe

Markets

Source: BG Group

Global gas trade – the recent past

Industry evolution: from three main trade regions …

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W. Africa

Australia

Middle East

N.Africa

Trin / Ven

Norway / Russia

S. America

Egypt

Sakhalin

Source: BG Group

LNG

Pipe

Markets

Primary (>20 mtpa)Secondary (<20 mtpa)Possible

Existing & proposed LNG trade routes

(by 2015)

S.E. Asia

Global gas trade - evolution

… to a globalising gas industry – India choice of sources

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Spot LNG prices - Hazira

Source: JCC prices

India has accepted LNG spot pricing

9.48.6

7.9 7.8 8.0

10.2

13.5

14.7 14.4

20.0

20.5

18.0

15.5

9.0

13.8

17.9

13.1

61

6872

76

9195

108

127

108

0

5

10

15

20

25

Jan-07 Apr-07 Aug-07 Nov-07 Feb-08 Jun-08 Sep-08

$/m

mb

tu

0

20

40

60

80

100

120

140

$ /

bb

l

Spot LNG Prices - Hazira - Pre-Regas (Ex-Port)

JCC

Linear Trend JCC

Linear Trend Spot LNG Prices

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Power - gas displacing imported coal

Source: ICF International 2006

Gas competes withimported coal

Gas competes withdomestic coal

Gas Volume (mmscmd)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

60 120 180 245

Fu

el

Co

ns

um

pti

on

in

20

15

(T

BT

U)

Coal-Domestic Coal-Imported Gas

Lower the prices higher the potential utilization in the sector

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Gas vis-à-vis coal-fired power plants

• Indigenous gas to compete with imported coal

• Flexible mid-merit and base load operation for gas

• Optimised generation portfolio supports increased share of gas at affordable price

• There is a viable price point for gas-fired generation

Low gas price does not sustain E&P activity

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4

5

6

7

8

9

10

2010 2012 2014 2016 2018 2020

Year

$/m

mb

tu

Ex- Kakinada Ex- Hazira

Evolution of gas prices in the power sector*

*assuming overall 45% available supply to power sector

Generation capacity shortfall, gas priced at a premium

Power supply/demand in balance & adequate transmission infrastructure -

Gas competing with imported coal

Power system equilibrium by 2015?

Source: ICF International Power Sector Study 2008

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Long term gas supply/price sustainability

• India supply short until at least 2020

• PSC regimes can drive a short plateau outcome

– gas infrastructure stranded after 6 years?

• Need to consider

– Unambiguous market pricing mechanisms

– NELP stimulus – don’t pull back, it’s just beginning to bear fruit

– PSC extensions – incremental investment to increase output

Stranded gas infrastructure investment?

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Key challenges / questions

• Balancing stakeholders’ interests

• Implementation of Gas utilization policy

– Impacts overall price realization to a player

– Ensuring fair treatment to existing producers and future

producers

• Uniform or Multiple pricing

– Different for priority and non priority sectors

Manual intervention can lead to unforeseen outcomes

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Conclusion

• To stimulate adequate supply - shift to market based

pricing for domestic gas

• Transparent, adequate and clear policies to develop

the natural gas market and infrastructure

• Adopt portfolio based approach in planning and

pricing for the power sector

Continue the reform process – do not pull back

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Thank you