The gas pricing predicament  

Competitive market-based gas pricing could be enabled by a national hub

The policy of non-intervention and market-determined pricing under India?s New Exploration Licensing Policy (Nelp) was the fallout of the dismal performance of oil & gas exploration in the country. The scale on which such exploration had to be undertaken was clearly beyond the wherewithal of the public sector. Nelp, which opened up this sector to FDI, had to ensure that financial opportunities and returns matched global standards, together with guaranteed non-intervention by the government?save matters of transparency, and hence the price discovery mechanism.

Commercial incentives for enterprise are no different from those of entrepreneurship: if risk and reward are not complimentary, one would witness the kind of reluctance and complacency seen in the response of MNCs to the seventh round of Nelp. Consider the case of the Krishna-Godavri (KG) offshore basin. The potential reserves here have been estimated by the Director General Hydrocarbons at less than 2 trillion cubic feet, which if evacuated at a draw rate of 20 million metric standard cubic metres per day (mmscmd), would be fully depleted in 12-15 years. Given the added implications of this reserve being predominantly of high-temperature/high-pressure gas, KG gas could be the most expensive domestic gas ever extracted.  

India is perhaps the only country where pricing of gas still depends on the source of supply. Consequently, there are at least six different price benchmarks, each catering to a different industry segment. Gas demand has been projected at 283 mmscmd by the end of the 11th Plan period?by which time the existing domestic gas sources would be nearly over. To meet the burgeoning demand for gas, the resources in KG basin (under Nelp I) and potential new resources (Nelp II to VI) are critical. The working group for the 11th Plan has estimated domestic gas production (including KG) by 2011-12 at 108 mmscmd and RLNG imports at 82 mmscmd, thus leaving a deficit of 90 mmscmd. The economy would have to depend on LNG to maintain its 9% growth momentum.

The predicament is not one of fixing the price for the gas that we have, but to discover the right global benchmark for the portion which will be imported as LNG. Petronet LNG Ltd would account for almost 90% of the LNG capacity required by 2012. The tribulation through which the gas sector in India has gone through could worsen if a long-term view is not taken. Today, a 1,000-mw gas-fired power plant needs an investment of $600 million, and upstream gas infrastructure would require an investment of over $5 billion, regardless of whether 4 or 40 mmscmd is evacuated, with the attendant risk of reservoir failures.

The Bush administration had made two notable statements on energy policy early in its tenure. The first was that the Kyoto Protocol was dead. However, last month, after Al Gore blew the whistle, President Bush joined the huddled masses outside to announce a bailout of Kyoto, with a new initiative that involves dragging India and China along. During the Kyoto timeframe (by 2012), the US, China and India are likely to build almost 850 new coal-fired power plants. The combined CO2 emissions just from those new plants will be five times the total reduction in CO2 mandated by the accord. Gas pricing policy in India will have to consider the risk of coal-fired plants being stymied.

On the sidelines of a Cambridge Energy Research Associates? Oil & Gas conference in Houston in February 2007, an energy official of the US was asked whether the US government would consider blending long-term LNG prices with Henry hub daily-discovered prices. His response??The US lives short-term internally and long-term externally??is significant. The policy ensures a non-discriminatory pricing regime for all consumers except state-subsidised sectors. It also restricts prices from being determined strictly by demand and supply, and provides a non-discriminatory level playing field for all potential sellers of LNG, with LNG pricing formulae factoring in Henry hub daily movements as well.

Yet, easy predictions cannot be made. The forces which influence international gas market trends have been spectacularly diverse and dynamic, from mother nature to human intervention. What is clear is that LNG capacities will double to 350 million tonnes per annum by 2012-13, and this is already reflecting in a paradigm shift in LNG trade routes. Why should the same dynamics not influence LNG prices offered to Asian and Asia-Pacific buyers? Instead, prices linked to Brent/JCC are still being insisted upon of all buyers east of the Suez.

A solution could lie in the creation of a dual pricing hub, a 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 consumers get a sense of laissez faire supplies.

The author is managing director & CEO of Petronet LNG Ltd. These are his personal views

Source: The Financial Express, New Delhi, 12 July 2007
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