Issues And Marketing Strategies Of Natural Gas In India

ISSUES AND MARKETING STRATEGIES OF NATURAL GAS IN INDIA

Submitted by: Shankar Deo Rajpal (MBA Oil & Gas) Date: 25 /07/09

University of Petroleum and Energy gy Studies, Dehradun

University of Petroleum and Energy Studies

Acknowledgement It gives me immense pleasure to be attached with Niko Resources Limited, Hazira which has provided me a very unmatched training in my summer Internships. I place special thanks to the Chief General Manager Mr. Amar Jha for helping me in deciding my topic. I heartily thank my training Heads Mr.M.P.Karan and Mr.Ravi Sharma for guiding me throughout my training tenure. I also thank Mr.T.Shreekanth and Mr.Shammy Prahladan for extending their support during my training. Special my project mentors Mr. L.C.Ram and Mr.Peeyush Gupta for helping me throughout my project “Issues and Marketing Strategies of Natural Gas in India” and discussing details pertaining to the same.

Thanking you Shankar Deo Rajpal University of Petroleum & Energy Studies, Dehradun,Uttrakhand.

Date:

Index 1.Introduction

1

2.Government initiatives

2

2.1. NELP Regime

2

2.2. PNGRB

2

3.The Growth of Gas Infrastructure

3

3.1. Reliance proposed gas pipelines

3

3.2. Route and Length of Proposed Pipelines

3

3.2.1. Kakinada-Hyderabad-Goa-Uran Ahmedabad pipeline:

3

3.2.2. Jamnagar - Bhopal - Cuttack pipeline:

4

3.3. Gujarat Gas Grid Project: 4. Gas Pricing :

4 5

4.1. Gas pricing 1956-1986

5

4.2. Gas Pricing : 1987-1992

6

4.3. Gas Pricing : 1992-1997(Kelkar Committee)

7

4.4.Gas Pricing : 1997-2002 (Shanker Committee)

7

4.5.Gas Pricing: 2002 onwards (GoI)

11

4.6. Gas Pricing w.e.f. 1.7.05.

12

4.7. Briefing on the PSC as follows:

13

4.8. The summary of Gas Price evolution in Indian Market

14

4.9. Gas Pool Account

16

5. NELP: 5.1. Provisions relating to attracting Investment

17

5.2. Investment Multiple (IM)

17

5.3. NELP PSC Provisions related to Gas Prices

17

5.4. Principles for Valuation of Natural Gas

18

5.5. Pricing of Gas under the PSC

19

5.6. Option to take Profit Gas of the Government in Cash or Kind

19

5.7. Perspective on taking Profit Gas in Kind

19

5.8. Issues in taking profit gas in Kind

20

5.9. Issues in Gas Pricing under NELP

20

6. Proposal of RIL 6.1. Bid Process Steps

21

6.2. RIL Gas Price Formula

21

6.3. Rationale of 112.5*K

22

6.4. Rationale of linkage to Crude

22

6.5. Expected Delivered Gas Price

22

6.6. Profit Petroleum Sharing for D-6 block

23

6.7. IM Comparison of Gujarat NIKO fields

23

6.8. RIL – RNRL gas mega spat

23

6.9. Value addition from Natural Gas

24

7. Gas Marketing Strategies 7.1. Basis of MGL Pricing:

24

7.2. Domestic segment

25

7.3. Commercial A segment

26

7.4. Commercial B segment

26

7.5. Commercial C segment

27

7.5.1. Working formula

27

7.6. Commercial AC segment

27

7.7. Industrial segment

28

7.8. CNG segment

28

8. LNG

8.1. Import of LNG

29

8.2. Pricing of R-LNG

30

9. Potential other sources of natural gas: CBM

31

9.1 Contractual & Fiscal Terms

32

9.2. CBM Rounds

33

9.2.1. CBM I

33

9.2.2. CBM II

33

9.2.3. CBM III

33

9.3.Current CBM E&P Activities

34

10. Gas Hydrates

35

11.Gas supplies and prices as of Dec 2007

36

12.Conclusion

38

13.References

39

Tables: 1. Route and length of proposed RIL pipelines 2. Gas prices linkage to fuel oil 3. APM price in 2005 4. PSC for PMT&RAVVA 5. JV gas price table 6. RIL bid process 7. RIL gas price expectation 8. Profit petroleum sharing for D-6 block 9. IM comparison of Gujarat Niko fields 10. Basis of MGL pricing for CGD 11. LNG regasification proposal projects

12. CBM resources in India 13. CBM activity table 14. CBM: Past, present and future supply data 15. Gas supply and prices as of Dec 2008.

Figures: 1. Gujarat Gas Grid 2. Pipeline to link any source to any market 3. Existance of Gas Hydrates in the world

Annexure

Abbrevations APM ARA BCM CBM CIF CNG Comm Cu.Mtr. CV D-6 DGH E&P EGoM ER EWPL FOB GAIL GOI GSPA HBJ HOEC HSFO IM JCC JS JS&FA JV Kcal KG D-6 Kgs Km LDO LNG LPG LS/HS Mcf MCM MGL MGO Mkt MMBTU MMSCMD MMTPA MoPNG

Administered Price Mechanism Arachidonic acid Billion cubic Meter Coal Bed Methane Cost Insurance Freight Compressed Natural Gas Commercial Cubic Meter Colorific value Dhirubhai-6 Director General of Hydrocarbon Exploration & Production Empowered Group of Minister Exchange Rate East West Pipeline Free on Board Gas Authority of India Ltd. Government of India Gas Sale and Purchase Agreement Hazira Bijaipur Jagdishpur Hindustan Oil Exploration Company Limited High Sulphur Fuel Oil Investment Multiple Japanese Crude Cocktail

Joint Venture Kilo Calories Krishna Godavri Dhirubhai-6 Kilograms Kilo meters Light Diesel Oil Liquified Natural Gas Liquified Petroleum Gas Low Sulphur/high sulphur Million cubic feet Metric(thousand) cubic meter Mahanagar Gas Ltd,Mumbai Master Gas Offtake Marketing Metric Million British thermal Unit Metric Million standard cubic meter day Metric Million Tons per Annum Ministry of Petroleum and Natural Gas

MSCM MW N.E. NEC NELP NG NTPC OIL ONGC PMT PNG PNGRB PSC PTIM RGTIL RIL RLNG RNRL Rs. SCM TNEB USD VAM w.e.f.

Million Stabdard Cubic Feet Mega Watt North East One of Cauvery Blocks New Exploration License Providers Natural Gas National Thermal Power Corporation Oil India Limited Oil and Natural Gas Corporation Panna-Mukta-Tapti Piped Natural Gas Petroleum and Natural Gas Regulatory Board Production Sharing Contracts Pre tax Investment Multiple Reliance Gas Transportati Infrastructure Ltd. Reliance Industries Limited Regasified Liquified Natural Gas Reliance Natural Resources Ltd. Rupees (Indian Currency) Standard Cubic meter Tamil Nadu Electricity Board United States Dollar Vapour Absorbtion Mechanism with effect from

EXECUTIVE SUMMARY This report focuses on the evolution of the Indian Natural Gas market right from 1960 to 2009. There has been major crest and troughs throughout this tenure along with the improper and unfounded government decisions. But as the Indian Oil and Gas evolved, government was keen to take up the responsibility and started the New Exploration Licensing rounds called NELP. This report also provides the details of NELP and some major provisions covered. A major achievement of the Natural Gas regulatory was the formation of the PNGRB. Recently PNGRB has issued a draft regarding the regulation of the Natural Gas distribution in the country. One of the major initiatives taken up by the government is the proposal of a network of natural gas grid throughout the country. The main purpose involve is to transfer the gas from any source to any destination within India. This report contains the brief idea about the pricing and the decision taken by the government regarding the pricing of the natural gas both in the past and in the present. Kelkar committee and the Shankar committee report are also covered in this report. The literature provides an idea about the pricing determined under PSC and NELP. The PSC provision like IM (Investment Multiples), profit in Kind and valuation of natural gas are included in this report. Pricing details of one of the major Natural Gas suppliers RIL which has started its production from the KG D6 block recently is also included along with the formula and the rationale behind that formula. A small comparison of the IMs of RIL and NIKO fields are done here. This report also provides an analysis of the RNRL-RIL conflict regarding the Gas allocation and it’s pricing. This report also holds an argument about the proposals of whether importing natural gas is a good investment. Whether IPI and TAPI projects would be a good step forward as presently there are claims for large gas reserves even by GSPC in KG basin. The CGD (City Gas Distribution), Gas Pricing principles of MGL (Mahanagar Gas Limited, Mumbai) is considered. The report covers the guideline principle regarding the pricing principles for the different sections of the users categorized under domestic, commercial, industrial and automobiles. The report also contains about the Indian LNG scenario. The LNG projects proposed both by the government and the private sectors and their respective locations are covered in this report. CBM has been taken as a potential Natural Gas sources in the future. Presently India is into the 4th rounds of CBM blocks allocation.

1.Introduction One may consider Natural Gas a very uninteresting gas – it is colourless, shapeless and odourless in its pure form. But it has huge energy producing potential when burnt. A typical composition table is shown below: Methane CH4 Ethane C2H6 Propane C3H8 Butane C4H10 Carbon Dioxide CO2 Oxygen O2 Nitrogen N2 Hydrogen Sulphide H2S Rare Gases A,He,Ne,Xe Typical composition of Natural Gas

70-90% 0-20%

0-8% 0-0.2% 0-5% 0-5% trace

Natural Gas can be produced from fossil Natural Gas reserves (oil fields, gas fields & coal fields), biogas and gas hydrates. A wide use of Natural Gas has made it a very important commodity in the energy market. Natural Gas is used in power generation, domestic fuel, transportation fuel, fertilizer, aviation, hydrogen production and petrochemicals. As on date natural gas has not yet acquired a significant position in the Indian Energy Basket. As per the present situation natural gas consumption is 8% while the consumption of crude oil is nearly four times (31%) of it. A lot of capital deficit is being faced by the Government Exchequing as 70% of the crude oil demand is met with imports. As per the Government of India Hydrocarbon vision 2025’ there would be a lot of development in improving the natural gas infrastructure in the country. So far natural gas market has evolved very slowly with estimated just 0.5% of the world’s total natural gas reserves. The production of natural gas in 1976 from Bombay High, western coast has changed the situation dramatically in the past as far as Indian Gas market is concerned. This was soon followed by the South Bassein free gas field in 1978. The major consumers of this gas were the power and fertilizer sectors and gas being transmitted by Hazira-Bijaypur-Jagdishpur (HBJ) cross country pipeline. Government approved New Exploration License Provider (NELP) in 1997 to allow the participation of foreign companies in production and also approved the PNGRB Act in 2007 for the structured marketing of natural gas. Under NELP the natural gas find in KG basin was the largest gas find in 2002. The gas production of KG basin is likely to touch 80 mmscmd in its full stream bring oxygen to the fuel starved existing power and fertilizer sector. LNG has also been a major focus from the government. So far India has only 7.5 MMTPA capacity with only two LNG terminals operational. There also has been an attempt to import gas through pipelines from Iran, Myanmar and Bangladesh. From Iran it was the IPI pipeline. IPI talks were almost nearing its conclusion regarding of the gas pricing before the political 1|Page

conflict seems to put it into a permanent halt. On the other hand GAIL failed to gain the victory in the bidding process in Myanmar for LNG and no forwards of the pipeline also seems to be in the news. But so far it seems the Indian natural gas potential is such that the country not only needs any import of gas but in the due future it will start exporting gas in LNG based upon the demand and supply scenario of energy starving nations at a reasonable price. At the end of NELP VII rounds there has been 206 contracts signed and 8 hydrocarbon discoveries are made. Under NELP VIII 70 blocks are offered. And CBM IV too underway with 10 blocks being offered. The last date for the bid acceptance is 10th of August’09.

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2.Government’s initiatives The Government approved NELP in 1997 to attract risk capital and technologies in the E&P sector. The NELP Policy also emphasized on providing freedom to market oil and gas in the country at market related prices. So far a total 206 contracts signed under seven rounds of NELP and 68 hydrocarbon discoveries made so far under NELP. In NELP VIII (under bid acceptance process) there are 70 blocks offered and under four categories. Type-S (10 blocks), 8 onland, 24 deepwater blocks and 28 shallow water blocks. Large gas discoveries were made on East Coast ( World's largest gas discovery in 2002).Two gas discoveries by RIL in D-6 KG deepwater block are almost developed and production has started in March 2009.

2.1. NELP Regime Involves upfront commitment of risk money by Contractor without any liability on the Government.. • It ensured full exploration/Development cost recoverable in event of discovery • Cost Recovery limit & Profit petroleum sharing split are supposed to be negotiated and became biddable parameters. • Royalty is first charge on Contractor take. • GOI Profit petroleum escalates rapidly after full cost recovery.This is determined by the Investment Multiple (IM) in the PSC (Production sharing contract). • Hence, financial accrual to Government depend upon discovery size and prices obtained. •

2.2. PNGRB Formation of the Petroleum and Natural Gas Regulatory Board (PNGRB) draft has been the most encouraging initiative taken by the government for a structured Indian Oil & Gas market. Its objective is to regulate refining,processing,storage,transportation,distribution,marketing and sale of petroleum,petroleum products and natural gas excluding production of crude oil and natural gas so as to protect the interest of consumers and entities engaged in specified activities and to ensure uninterrupted and adequate supply and to promote a competitive markets.

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3. The Growth of Gas Infrastructure With the increasing development of the new gas fields there has been a considerable expansion of natural gas pipelines across several parts of the country.The existing are about 6300km mainly operated by GAIL .The planned are around 8400 kms integrated network to link any source o any market.

3.1. Reliance proposed Gas pipeline: •

Reliance has set up a Special Purpose Vehicle, Reliance Gas Transportation Infrastructure Company Limited (RGTIL) to build, own, operate and transfer pipelines and terminals for marketing and distribution of natural gas.

•

RGTIL approached the Ministry of petroleum and natural gas for issuance of notifications for Kakinada-Hyderabad-Uran-Ahmedabad gas pipeline projects originating from Jamnagar to connect the proposed regasification terminal at Jamnagar RIL’s block in Saurashtra and Kutch region and east coast blocks (offshore).

•

RGTIL proposed the following three pipelines:




Kakinada-Hyderabad-Goa




Jamnagar-Bhopal-Cuttack




Hyderabad-Uran-Ahmedabad

3.2.Route and Length of Proposed Pipelines Route Kakinada-Hydrabad-goa Jamnagar to Cuttak Phase-I Jamnagar to Bhopal Phase-II Bhopal to Cuttak Hydrabad – Uran – Ahmedabad pipeline

Length (km) 1121 1650 828 822 1079

Table.1

3.2.1.Kakinada-Hyderabad-Goa-Uran Ahmedabad pipeline: Sources of gas supply to the proposed pipeline are: • • 4|Page

Gas from KG D-6 Likely gas from adjoining exploration blocks of the Reliance on the Eastern Coast

•

Gas from blocks on Western coast.

3.2.2.Jamnagar - Bhopal - Cuttack pipeline: •

LNG import at Jamnagar [currently at hold]

•

Reliance exploration blocks in Kutch and Saurashtra region

•

CBM blocks in Madhya Pradesh

•

NEC-25 block offshore in Orissa

3.3.Gujarat Gas Grid Project: •

Envisages transporting indigenous natural gas from production centers and LNG from terminals to demand centers all over Gujarat through a high pressure Trunk Pipeline.

•

Total length of the gas pipeline planned is 1200-1500 km. Project shall be implemented in two phases. Phase I, from Vapi to Vadnagar at an estimated cost of Rs. 12 billion and Phase II mainly in the Saurashtra region at an estimated cost of Rs. 13 billion

Fig.1 : Gujarat Gas Grid

To cover up the whole country,the map in the next page details the existing and planned integrated Gas Grid.

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Fig.2

4. Gas Pricing: 4.1. Gas pricing 1956-1986 Supply of natural gas by Oil India Limited (OIL) started in February 1959, in Assam, and by the Oil and Natural Gas Corporation (ONGC) in Gujarat in December 1964. During the 1970s, the price charged by ONGC was based on V. K. R. V. Rao committee and was Rs 50/MCM exclusive of sales tax, royalty, etc. The price was valid up to March 31, 1971. The price of gas for the period April 1 , 1971, to March 31, 1976, was fixed at Rs 66/MCM by the Governor of Gujarat and Minister, MoPNG.The price was exclusive of royalty, sales tax and transportation charges and applicable for gas from Cambay and Ankleshwar in Gujarat.

6|Page

OIL charged a gas price of around Rs 9/ MCM in the Upper Assam region, exclusive of royalties, duties etc. In the late 1960s, OIL supplied gas at the rate of Rs 52.5 per MCM exclusive of taxes, duties and transportation charges. In 1969, ONGC started supplying gas in Assam and adopted the same price. In 1976, ONGC decided to revise the gas price based on alternative fuel parity. ONGC started supplying gas to new consumers and old consumers entering in new contracts on the basis of thermal equivalence based on coal. This resulted in increase in gas price to Rs 210/MCM. In 1977-78, the price rose to Rs 350/MCM inclusive of royalty but exclusive of transportation charges. In 1978, ONGC started supplying gas to consumers from Uran, Maharashtra charging gas prices to consumers on the basis of thermal equivalence of alternative fuels used by the consumers viz. coal, naphtha and furnace oil. The prices therefore, varied from consumer to consumer and use to use. A study on gas pricing by Chief Cost Adviser recommended gas prices of Rs 185/MCM, Rs 250 MCM, Rs 320 MCM for Assam State Electricity State Board, Hindustan Fertilizer Corporation Ltd & other consumers and tea industry, respectively. Exclusive of royalties, taxes, etc. and the transportation cost. OIL adopted these prices for the supplies made in Assam. On January 1, 1982, ONGC decided to adopt the principle of thermal equivalence in determining prices of gas for Gujarat and prices were in the range of Rs 2100/MCM to Rs 2,500 MCM for fertilizer and other industries and about Rs 850/MCM for power plants. The prices in the Eastern Region, which had lower industrial infrastructure facilities, was much lower than in the Western region. Consequently flaring was much higher in the Eastern Region than Western region. This resulted in multiple pricing of gas varying from Rs 92.50/MCM to Assam State Electricity Board in the Eastern region to as high as Rs 2,940/MCM for offshore gas supplied by ONGC in the Western region.

4.2. Gas Pricing: 1987-1992 (GoI) A Committee of Secretaries is subsequently called, the Empowered Group of Ministers. Committee determined a pricing structure to put gas on parity with other competing fuels in the key industrial sectors, with differentials to reflect transport costs. The exception was for gas sold for fertilizer use where a flat tariff was charged. Fixed uniform gas price based on long-term average cost of production, regardless of the end use and the location of consumer along HBJ pipeline from January 30, 1987 was as follows:

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•

Offshore gas at landfall point and onshore gas - 1400/MCM

•

Transportation charges for Gas sold along HBJ pipeline - Rs. 850/MCM

•

Gas sold in North-Eastern States (with further concession/discount in the price up to Rs 500 /MCM on a case to case basis).

The above prices were applicable for gas with calorific value ranging between Rs. 8500 to Rs.10, 000 Kcal /cubic meter. For gas supplies with calorific values beyond this range, there was a discount premium based on the mid-point of the range i.e., 9,250 Kcal/cubic meter.

4.3. Gas Pricing: 1992-1997 (Kelkar Committee) Price of natural gas was fixed by Committee headed by Dr.Vijay Kelkar w.e.f. January 1, 1992 were as follows: • • •

Offshore gas at landfall point and onshore gas - Rs.1,550/MCM w.e.f January 1, 1992 to be increased each year by Rs.100/MCM till it reached Rs. 1850/MCM Transportation charges for Gas sold along HBJ pipeline - Rs. 850/MCM Gas sold in North-Eastern States (with further concession/discount in the price up to Rs 400/MCM on case to case basis).

The prices were exclusive of royalty, taxes, duties, etc •

The producer price payable to ONGC was kept fixed at Rs 1 ,500/MCM and the difference between the producer price and the consumer price was credited to the Gas Pool Account - an account set up to compensate gas producers and the transmission company for the increased costs of producing gas from the North-East.

•

The subsidized price in North-East India was decided because the law and order situation was not conducive to industrial activity and a significant amount of gas was being flared.

•

By 1990, the demand of gas far exceeded availability, requiring GOl's intervention for gas allocation through the inter-ministerial Gas Linkage Committee.

4.4. Gas Pricing: 1997-2002 (Shankar Committee) Shankar committee recommended following pricing options: •

Gas prices were so far been fixed on a cost plus basis. Gas prices as fixed for the next pricing period have to take into account the possibility of imports of natural gas/LNG. The policy of moving towards market-determined prices has also to be taken into account.

•

Introduction of import parity prices or market-determined prices with immediate effect would steeply increase the existing gas prices and were a not a feasible option.

•

There was a significant difference between the cost of gas production between ONGC and OIL. This difference is due to factors such as gas field geology and is not due to mismanagement on OIL's part. A higher producer price has, therefore, to be allowed to OIL.

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•

The option of equalizing transportation cost along the HBJ and the other smaller pipeline systems in Gujarat, Assam, etc., was not considered feasible.

•

The transportation cost should be calculated separately for each pipeline so that the viability of each pipeline can be assessed separately.

•

The option of introducing distance-related transportation charges along existing pipelines such as the HBJ pipeline was not feasible at present as investment decisions have already been taken and units already come up all along the pipelines based on the assurance of uniform transportation charges.

•

Distance related charges were introduced along new pipeline systems and potential customers should be notified in advance.

•

The consumer prices would be the sum of producer prices and transportation charges and a contribution to the Gas Pool Account which will be Rs.250/MCM w.e.f. 1 April 1997 and would increase by Rs.200/MCM every year.

The recommended gas price is as follows: •

Producer price of ONGC - Rs.1 ,800/MCM

•

Producer price of OIL - Rs. 1,900/MCM

•

Transportation charge along HBJ - Rs. 1150/MCM

•

Contribution to Gas Pool Account and increased by Rs.200/MCM every year Rs.250/MCM w.e.f. 1.4.1997

•

These prices refer to gas with the calorific value of 10000 K Cal/Cu.Mtr. and the transportation charge along the HBJ refers to gas with calorific value 8500 K Cal/Cu.Mtr.

•

Concessional price for the North-Eastern States from Rs.l000/MCM be increased to Rs.1200/MCM and the current discount of Rs.400/MCM be reduced to Rs.300/MCM.

•

The discount was extended to all new units set up within the pricing period for the first five years.

•

There is no uniformity in the Minimum Guaranteed Off-take (MGO) to be agreed by consumers with GAIL/ONGC/OIL.

•

The Committee recommended that the MGO be fixed at 80 percent of the forecast for a month to be given by the consumer two months in advance.

Along the HBJ pipeline, transportation charges was to be payable to GAIL on the quantity short-lifted with reference to the MGO. 9|Page

•

“ONGC and OIL have so far not agreed to any penalty for short supply owing mainly to the low price of gas compared to alternative fuels.”

•

“Appropriately, higher gas prices linked to the price of alternative fuels may be charged in such cases. “

•

“Sales Tax on natural gas varies among the states. The variation is from nil (Delhi) to 19 percent (Gujarat). The Committee felt that the proposal of bringing natural gas within the meaning of "declared goods" under the Central Sales Tax Act should be pursued so that a uniform tax at the rate of 4 percent is chargeable in all states. “

•

“A discount of 15 percent is allowed on the gas price for supplies from developing fields. This discount may be extended to all isolated fields which cannot be economically connected to the existing gas grids.”

•

“In September 1997, GOI while accepting the numbers, related it to the price parity with fuel oil, announced the pricing policy as a percentage of the fuel oil parity in different years.”

•

“Government also did not differentiate between producer price and the consumer price.”

•

“From October 1, 1997 to March 3, 2000, the consumer price of gas at land points would be linked to the price of a basket of LS/HS Fuel Oils as shown in the table below:”

Year

General price

1997-98

55%

1998-99

65%

1999-2000

Concessional Price for the North Eastern State

30% 40%

75%

45%

Table.2

• •

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“General Price would vary between the floor price of RS.2, 150/MCM and the ceiling price of Rs.2,850/MCM.” “The concessional price for the NorthEastern States would have a floor price of Rs.1, 200/MCM and a ceiling price of Rs 1,700/MCM.”

•

“A discount of Rs. 300/MCM would also be available for existing consumers in the NorthEast on a case-to-case basis for new units in these set up during 19972002 for a period of five years.”

•

“ The consumer price of gas would be linked to a calorific value of 10,000 cal/m3.”

•

“The existing linkage between price and calorific value would be retained till gas prices can be denominated in terms of calories would be expedited in consultation with ONGC, OIL and GAIL.”

•

“The consumer price of gas will be reviewed at the end of the first three years (1997-2000) with a view to achieving 100 percent Fuel Oil parity prices over the 4th and 5th years.”

•

“ Over the period October 1, 1997 to March 31, 2000, the transportation charge payable to GAIL along the HBJ pipeline would be Rs. 1,150 MCM.”

•

“ The transportation charge will increase by 1 percent for every 10 percent increase in the consumer price index.”

•

“This increase will be paid to GAIL out of the Gas Pool Account. The transportation charge will be linked to the calorific value of 8,500 k cal/cu.mtr.”

•

“In addition to the price as fixed above, the transportation charges and royalty, taxes, duties and other statutory levies on the production, transportation and sale of natural gas will be payable by the consumers.”

•

“Out of the consumer prices collected by GAIL, GAIL will retain the amount required to pay for the higher cost of gas purchased from the JVs.”

•

“An amount of Rs. 250 crore per year will also be deducted by GAIL from the consumer prices collected and credited to the Gas Pool Account to continue to compensate OIL for concessional gas price in the NorthEast.”

•

“This will enable it to continue providing a marketing margin to GAIL; compensate GAIL/OIL for increases in the operating cost on account of inflation and for utilization on R&D for exploration and exploitation of small fields.”

•

“Any balance amount left in the Gas Pool Account after taking care of the above requirements would be transferred to the Central Exchequer.”

•

“ To compensate OIL for concessional gas prices in the North-East, the producer price of OIL will be Rs.1900 MCM which will be increased by 1 percent for every 10 percent change in the consumer price index.”

•

The Gas Pool- Account may be administered by a Committee with the following members:

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•

JS&FA, Ministry of Petroleum and Natural Gas - Chairman

•

JS (Exploration), Min. of Petroleum and Natural Gas - Member

•

Director (Natural Gas) Min. of Petroleum and Natural Gas - Member

•

“GAIL shall pass on to ONGC and OIL in proportion to the gas supplied by them, on a net back basis the entire proceeds of sales of gas of ONGC and OIL, after making deductions under paras above.”

•

“Consumer Price was, subject to a ceiling of Rs.2,850 per MSCM and a floor of Rs.2,150 per MSCM.”

•

“Consumer price of gas was intended to be reviewed after 3 years with a view to achieve 100% Fuel Oil Parity pricing over 4th and 5th year, i.e. in 2000-01 and 2001-02.”

•

“ However, this did not happen and the price of Rs.2,850/MSCM continued till 30.06.2005, which was about 34% of the then fuel oil prices.”

4.5. Gas Pricing: 2002 onwards (Gol) In October 1999 the price reached this ceiling. But as international oil and gas prices continued to rise in 2000, plans to achieve full import parity were abandoned, and the gas price remained unchanged up to May 2005. The price of APM gas of ONGC and OIL was revised effective July 1, 2005. The salient features were as follows: •

ONGC and OIL produced about 55 MMSCMD APM gas from nominated fields.

•

Consumer Price was, subject to a ceiling of Rs.2,850 per MSCM and a floor of Rs.2,150 per MSCM.

•

Consumer price of gas was intended to be reviewed after 3 years with a view to achieve 100% Fuel Oil Parity pricing over 4th and 5th year, i.e. in 2000-01 and 2001-02.

•

However, this did not happen and the price of Rs.2,850/MSCM continued till 30.06.2005, which was about 34% of the then fuel oil prices.

•

Consumer price of APM gas was increased from Rs. 2,850 per thousand SCM to a fixed price of Rs. 3,200 per thousand SCM on an adhoc basis.

•

All available APM gas would be supplied to only the power and fertilizer sector consumers against their existing allocations along with the specific end-users committed under Court orders! small scale consumers having allocations up to 0.05 MMSCMD at the revised price of Rs. 3,200 per thousand SCM.

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•

This price is linked to a calorific value of 10,000 kCal/m3.

•

The gas price for transport (CNG), Agra-Ferozabad small industries and other small scale consumers having allocations up to 0.05 MMSCMD would be progressively increased over the next 3 to 5 years to reflect the market price.

4.6. Gas Pricing w.e.f. 1.7.05. •

Under Gas pricing order dated 20.6.05.

•

The consumer price was revised to Rs.3,200/MSCM for the following categories of consumers. It was also decided that all the APM gas (estimated at around 55 MMSCMD) will be supplied to only these categories. a. Power sector consumers b. Fertilizers sector consumers c. Consumers covered under court orders d. Consumers having allocations of less than 0.05 MMSCMD.

• Price of gas supplied to small consumers and transport sector (CNG) increased over the next 3 to 5 years to the level of the market price. • With effect from 06.06.2006, the APM gas price to small consumers and CNG sector has been increased to Rs.3840 / MSCM. • It was decided that the gas price to other consumers, which were hitherto getting gas at APM price through GAIL network, would be market determined. The table below sums up the price of APM gas in the country: S.No.

Customer Category

Price (Rs/MSCM)

Price (USD/MMBTU)

1

Power & Fertilizers

3200

1.98

2

City Gas & Small Consumers up to 0.05 MMSCMD

3840

2.37

3

Power & Fertilizers - North East

1920

1.19

4

City Gas & Small Consumers up to 0.05 MMSCMD -North East

2304

1.42

13 | P a g e

Table.3

Note: Prices are @ 10000 Kcal/SCM Exchange Rate is SBI TT Selling rate on 28.05.07 i.e INR 40.76/USD •

In May 2007, the Tariff Commission recommended a revision of the APM gas prices as follows: •

Revised the producer price to Rs. 3600/MSCM for ONGC

•

Revised the producer price of OIL to Rs. 4040/MSCM for which it will sell at 60% in the North East region.

PSCs contain the following pricing provisions: JV

Price formula

PMT

Price linked to a basket of international average 2.11 of preceding 12 months Fuel Oil prices (Cargoes FOB, Med basis, Italy (1% sulphur); Cargoes CIF, NEW basis ARA (1% Sulphur); Singapore, FOB, HSFO 180 Mid est (3.5% sulphur); Arab gulf, FOB, HSFO, 180 Mid est (3.5% sulphur))

Floor Ceiling Price Price

Ravva Price linked to average of Fuel Oil for preceding 12 months (3%/3.5% Sulphur residual fuel oil of Singapore, FOB. Rotterdam Barge and Med FOB)

1.75

Commencement of gas supplies

3.11

June'97-Tapti Feb'98Panna-Mukta

3.00

Apr'97

Table.4

In terms of PSC for PMT, the ceiling prices are to be revised to 150% of 90% F.O. basket (average of the preceding 18 months), after 7 years from the date of first supply.

4.7. Briefing on the PSC as follows: •

PMT sells 4.8 MMSCMD of gas themselves.

•

The balance quantity of about 6 MMSCMD, GAIL paid @ $3.86/MMBTU during 2005-06 and is paying @ $4.75/MMBTU w.e.f 1.4.06 based on counter-matching the price offered by prospective consumers in response to the bid floated by the consortium.

14 | P a g e

•

This gas is being supplied by GAIL to power and fertilizers sector consumers along HBJ at APM price and adjustments being made through the gas pool account mechanism in terms of the pricing order of 20.6.2005.

•

This pricing order states that owing to the existing supply linkages and operational requirements, it may well happen that the customers entitled for APM gas get physical supplies of gas produced by the joint venture or from suppliers other than ONGC/OIL at market price and vice versa.

•

To operationalize the aforesaid decision, the Gas Pool Account mechanism would be utilized, with the inflow into the pool account coming from APM gas sales to consumers not entitled for APM gas at market price and outflow would be for purchase of non-APM gas to supply to the consumers entitled for gas at APM price. This arrangement would be subject to the ceiling of existing available APM gas from ONGC and OIL (about 55 MMSCMD).

•

In case of Ravva, the revision of ceiling price is due after 5 years from the date of supply and the revised ceiling price is to be negotiated between the Buyer and the Seller in good faith.

•

Price revision for Ravva was due w.e.f. April 2002. The price revision has been effected w.e.f. July 1, 2005 and GAIL has been paying @ $3.50/MMBTU since then.

•

The share of this gas going to APM consumers is being charged by GAIL at APM price, with adjustment through gas pool account mechanism. The total quantity of this gas is around 1 MMSCMD.

4.8. The summary of Gas Price evolution in Indian Market APM Gas Pricing 1986

APM Gas Pricing Prior to 1997

APM Gas w.e.f. 01.10.1997

15 | P a g e

Important Aspects Govt. fixed the price of natural gas on cost plus methodology in 1986 and fixed a price of Rs.1400/MSCM w.e.f. 30.01.1987 Dr.Vijay L Kelkar Committee recommended natural gas price to Rs.1550/MSCM w.e.f. from 1.1.1992 with provision of increase by Rs.100/MSCM per annum Rs.1850/MSCM till 1995. Shri T.L. Shankar Committee recommended to shift gas pricing methodology from cost plus basis to import parity pricing w.e.f. 1.10.1997 and link to the cheapest Fuel Oil Basket with progressive increase in fuel oil

Gas Price (USD/MMBTU) 0.86

0.95 to 1.13

1.32 to 1.75

parity as given below : Year

%

of Fuel Oil Parity (other than N.E.) 1997-98 55% Consumer price has a ceiling of Rs. 2850/MSCM and floor price of Rs.2150/MSCM 1998-99 65% 1999-2000 75% Price review intended after 3 years to achieve 100% Fuel Oil Parity pricing by 2001-02. However, above ceiling price continued till 30.06.2005 at about 34% of then fuel oil prices. APM Pricing Mechanism w.e.f. 01.07.05

APM gas price was revised by pricing order dated 20.06.05 to Rs.3200/MSCM for Power, Fertilizer, consumers covered under court orders and consumers having allocation less than 0.05 MMSCMD.

1.97

2.36

Natural gas pricing for CNG and other small consumers revised w.e.f. 06.06.2006 to Rs.3840/MSCM – Pricing for these sectors would be increased in next three to five years to the level of market price.

Pricing of Gas Under Pre-NELP Production Sharing Contracts – PMT

Pricing of Gas under Pre-NELP 16 | P a g e

Gas prices to other consumers, which were hitherto getting gas at APM price through GAIL network would be market determined. Price linked to a basket of international average of preceding 12 months fuel oil prices (with a floor of $2.11/MMBTU and ceiling of $ 3.11/MMBTU.

2.11 to 3.11

3.86 The ceiling price were to be revised to 135% (150% of 90%) Fuel Oil basket (average of preceding 18 months) after 7 years of commencement of supply. It was revised in 2005-06 to $ 3.86 /MMBTU and further to $ 4.75/MMBTU w.e.f. 01.04.2006. Price linked to average of fuel oil for preceding 12 months (with a floor of $1.75 to $ 3.0 / MMBTU).

4.75

1.75 to 3

Production Sharing Contracts – Raava JV Gas Pricing of Gas Under Pre-NELP Production Sharing Contracts – Ravva Satellite

The revision of ceiling price was due from commencement of first supply and effected w.e.f. 1.7.2005 to $3.5/mmbtu

This gas was priced at $ 3.3/MMBTU till September 18th 2006 and was revised after that at $4.3/MMBTU in term of the provisions of the PSC.

3.5

3.3 4.3

Table.5

4.9. Gas Pool Account •

In 1992, the Government established the Gas Pool Account in order to encourage the development of the gas industry in India and to compensate the companies involved in the exploration, development and marketing of gas for the low margins on the development and sale of gas at prices fixed by oil ministry. The landfall price and producer price is credited to the gas pool account.

•

GAIL maintains the Gas Pool Account on behalf of the government.

•

Under the current pricing mechanism, GAIL collects Rs. 2.5 billion every year from natural gas consumers on behalf of the gas pool account.

•

This sum is used for the following purposes:

1. Payment of higher international gas prices for the new joint-venture companies; 2. Compensation to Oil India Limited (OIL) for subsidizing prices in the North-East; 3. Compensation to GAIL/OIL for increases in operating cost; and 4. Exploration and development of smaller fields. The balance is transferred to the Central Exchequer. Gas Pool Account has now been dismantled.

17 | P a g e

5. NELP: 5.1. Provisions relating to attracting Investment • • • • • •

Contractor free to bid exploration inputs and opt for any additionality in work programme until discovery stage. Mandate of Management Committee under chairmanship of Government nominee, shifts to approval mode after discovery. Appraisal/Development Plan submitted by Contractor to be approved to the benefit of all parties and not in any single party’s Interest. Marketing/pricing provisions assure returns based on free marketing market price driven provisions with the only caveat of sales in India. Profit share ratio/split to be determined by pre tax Investment multiple (PTIM) formula, which rewards the Government in higher ratios only at higher levels of revenues.

5.2.

Investment Multiple (IM)

IM = Cum. NCIP / Cum. ED NCIF = Cost Pet. + Profit Pet. + Incidental Incomes - Production Costs - Royalty Payments. ED = Exploration Costs + Development Costs (NCIP: Net Cash Inflow)

5.3.

NELP PSC Provisions related to Gas Prices

Article 21.3: For the purpose of sales in the domestic market pursuant to this Article 21, the Contractor shall have freedom to market the Gas and sell its entitlement. Article 21.6.1: The Contractor shall endeavour to sell all Natural Gas produced and saved from the Contract Area at arms-length prices to the benefits of Parties to the Contract. Article 21.6.2: Notwithstanding the provision of Article 21.6.1, Natural Gas produced from the Contract Area shall be valued for the purposes of this Contract as follows: (a) Gas which is used as per Article 21.2 or flared with approval of the Government or re-injected or sold to the Government pursuant to 18 | P a g e

Article 21.4.5 (flaring in case of Associated gas) shall be ascribed a zero value; (b) Gas which is sold to the Government or any other Government nominee shall be valued at the prices actually obtained; and (c) Gas which is sold or disposed of otherwise than in accordance with paragraph (a) or (b) shall be valued on the basis of competitive arms length sales in the region for similar sales under similar conditions. Article 21.6.3: The formula or basis on which the prices shall be determined pursuant to Articles 21.6.2 (b) or (c) shall be approved by the Government prior to the sale of Natural Gas to the consumers/buyers. For granting this approval, Government shall take into account the prevailing policy, if any, on pricing of Natural Gas Including any linkages with traded liquid fuels. and it may delegate or assign this function to a regulatory authority as an when such an authority is in existence.

5.4.

Principles for Valuation of Natural Gas

MoPNG had set-up a Committee under Chairmanship of JS&FA to lay down Guidelines for approving Gas price/ formula for the purpose of determining Govt take under NELP contracts. The summary of main recommendations of the gas pricing committee is given below: 1) Where valuation of natural gas has to be necessarily done by the Government, it may be done based on the most recent competitively determined price in the region duly indexed to the present. 2) The indexation shall be as per the provisions of market determined contracts as each market determined price has a contract which sets out various terms and conditions of supply of natural gas 3) Typically, long term gas contracts have a clause for periodic gas price reviews. If price is reviewed as per the contract, that may become the new reference price. For interim period, it may be linked to percentage increase in price of Furnace Oil (FO). As it is not only the cheapest liquid fuel, but has also shown least price volatility. • Above valuation methodology may be applied in cases where actual supply has commenced but price could not be discovered through market mechanism. • If the actual price at which any producer supplies to any consumer happens to be higher than the one arrived at by above methodology, then the higher price shall be reckoned for the Government take.

19 | P a g e

5.5. Pricing of Gas under the PSC • •

•

•

As per the PSC contractor is required to sell the gas at competitive arms-length price to the benefit of the . parties (i.e., the Government and contractor) The Contractor is required to get the price formula I basis approved by the Government for the purpose of valuation of entitlements of the Government and the contractor. Any lower gas price reduces the Government profit petroleum and royalty and may also delay in reaching the investment multiple tranche where Government gets progressively higher share. For D-6 block, the Government share increases from 10% in the first IM tranche to 85% from fourth tranche onwards. Imposing a lower gas price on the contractor, apart from being against the provision of the contract and NELP policy, may send wrong signals to the investor particularly, at the time when NELP-VIII round has started.

5.6. Option to take Profit Gas of the Government in Cash or Kind Under the NELP PSCs, the contractor has freedom to market the gas. The Government has a right to take its share of· profit petroleum including gas in kind. PSC provides option to take in cash or kind to be exercised on annual basis with option to be exercised by 30th June for the subsequent year. As per the PSCs, gas price for valuation of entitlements of the parties is to be determined on the basis of competitive arms-length prices. The Contractor is required to propose gas formula / basis for valuation purposes for approval of the Government under the PSCs

5.7. Perspective on taking Profit Gas in Kind In the past, companies have brought out operational and marketing difficulties in case the Government exercises its option to take Profit Gas in Kind • Quantum of Profit gas is dependent on several parameters such as exploration, development and production costs (on an on-going basis), gas price, gas reserves, gas profile, any additional development of discoveries in future, and any other investment under the PSC in future. Hence, the profit gas is uncertain and difficult to predict. • It will be very difficult for contractors to tie up markets / consumers as the quantum of gas of both the contractors and the Government, if marketed separately, will be more uncertain. • The Government has so far taken its entire profit gas share in cash under all the PSCs. Undertaking total sale of the entire quantum of gas helps the contractor to realise better value for the parties and also in entering stable gas sales contracts due to larger volumes. In case the gas specification and delivery pressure of the Government share of profit petroleum is 20 | P a g e

different than the customers of the contractors, it will involve additional costs and will reduce the value of the project. The option to take profit gas in kind by the Government may be perceived as unfriendly and may deter inflow of investment in the E&P Sector, especially for gas due to Governmental interface at the production and sale stages. Any distortion in consumption pattern of a natural resource by artificially suppressing price may result in inefficient use of the resource. The cost of replacing the used up reserve continues to increase, and, hence needs to be provided for. As per estimates, there could be wide variation in the Government share' of profit petroleum on year-to-year basis and the Government nominee needs to prepare the marketing plans to address this situation. Consequently, substantial volume of gas may have to be sold on spot basis leading to sub-optimal realization of gas price.

5.8. Issues in taking profit gas in Kind By choosing to take its profit gas in kind, the Government will have consequential legal obligations to lift the gas and provide infrastructure / facilities synchronous to the contractors' development plans / facilities .Government's ability to sell its gas at market price may be hindered looking to ground realities in comparison to the contractor. This would impact on Government revenue and lead to huge financial loss. The estimate of Government share of profit petroleum depends on several parameters. It would be quite difficult to estimate the share. There could also be wide variation on year-toyear basis. This will have implications in planning infrastructure and capacities by the Government or Its nominee. In case the gas specification, delivery pressure, etc, is different for different set of consumers, it will involve additional costs leading to reduction in profit petroleum.

5.9. Issues in Gas Pricing under NELP Government is under contractual obligation to allow pricing of natural gas at arms length principle to the benefit of all Parties to the Contract. • For gas valuation purposes, for determination of government take, Government is committed under the contract to adopt competitive, arms length sales. • Lower price would depress total revenues and delay triggering of higher profit share for the Govt. • Lower cash flows owing to lower prices may leave smaller kitty for distribution of profit petroleum with the Government. • Any state intervention in price discovery may be perceived as investor unfriendly and deter investment in the prospective deep water blocks which are big ticket investments. Future gas discoveries globally are expected more from deeper and ultra deeper offshore areas and hence costly. • Any violation of contractual provisions may result in legal disputes delaying production. 21 | P a g e

• Any subsidization of price would have to be extended across the board to all kinds of consumers irrespective of their pricing exigencies.

6. Proposal of RIL 6.1. Bid Process Steps 1

2 3

4 5 6 7

Milestone Issue of Invitation to Quote letters to customers along with GSPA Term Sheet Last date for receipt of clarifications Issue of clarifications along with revised GSPA Term Sheet and price formula Receipt of all the bids Evaluation of Bids Submission of application to MOPNG for price Approval Target date for Signing of GSPA Term Sheets with customers Table.6

6.2. RIL Gas Price Formula SP (Rs/mmbtu) = 112.5 x K + ER x (CP-25)^0.15+ C Where, SP is the Sales Price of Gas in Rs/mmbtu (NCV basis) CP is annual avg. Brent crude price for the previous FY with a cap of $65/bbl and a floor of $ 25/bbl, ER is the avg. US$/INR exchange rate for the previous FY, K is 1 for ER between 25 and 65, or ER/25 when ER is less than 25 or ER/65 when ER or more than 65 C is the premium in Rs /mmbtu (positive integer) quoted by customer 22 | P a g e

Time line 9th April 2007

26th April 2007 4th May 2007

11th May 2007 14th May 2007 18th May 2007 15th June 2007

6.3. Rationale of 112.5*K Rs 112.5 / mmbtu (or $2.5/mmbtu @ Rs 45/US$) provides a floor to the price in case crude price falls below US$ 25 /bbl • Floor price of $2.5/mmbtu represents conversion factor of 1/10 at crude price of $25/bbl • 'K' factor provides correction to the floor price in case of run on the Rs/US$ exchange rate Rs 65/US$ or below Rs 25/US$

6.4. Rationale of linkage to Crude Oil Globally gas prices have generally tracked oil prices • Energy conversion factor from crude to gas ($/bbl to $/mmbtu) is '1/6' • However, to reduce volatility of crude prices: - an inverse exponential power has been used to dampen the linkage to oil prices - linkage to previous year's average oil price further implying single gas price for entire year - cap of $65/bbl insulates the customer from very high oil prices

6.5. Expected Delivered Gas Price

A

B

A+B

Andra Pradesh

Maharashtra

4.33 0.12

4.33 0.12

4.33 0.12

4.33 0.12

12.0% 0.52 4.85

3.0% 0.13 4.46

3.0% 0.13 4.46

3.0% 0.13 4.46

Transportation EWPL GAIL Service Tax Total Transportation

0.17 0.14 0.04 0.35

0.93 0.30 0.15 1.38

0.93 0.30 0.15 1.38

0.93 0.60 0.18 1.72

Total Delivered

5.20

5.84

5.84

6.18

Commodity price Basic Price Marketing Margin Sales Tax Rate Sales tax Total Commodity price

Gujarat

$fmmbtu

Table.7 Basic Gas Price at ER 01 Rs45/US$ and Brant Price 01 $651bbl Mkt Margin of Rs 54/mmbtu converted at ER of Rs45/US$ EWPL tariff _ indicative tariff 01 RGTlL for East West Pipeline GAlL Tariffs based expected reduction tariffs on account of higher capacity utilization

Expected Delivered Price $ 5.2 to 6.2 / mmbtu depending on location and taxes

23 | P a g e

HBJ/Price

6.6. Profit Petroleum Sharing for D-6 block Invest Multiple(IM) tranche

Government share of profit petroleum

Less than 1.5 10% 1.5 - 2.0 16% 2.0 - 2.5 28% 2.5 - 3.0 85% 3.0 - 3.5 85% More than 3.5 85% Annual Cost Recovery Limit: 90%

Contractor’s share of profit petroleum 90% 84% 72% 15% 15% 15%

Table.8

6.7. IM Comparison of Gujarat NIKO fields Invest Multiple(IM) tranche Less than 1 1.0 - 1.5 1.5 - 2.0 2.0 - 2.5 2.5 - 3.0 3.0 and above

Government share of profit petroleum Hazira Surat 0% 0% 10% 20% 20% 30% 25% 40% 35% 50% 40% 60% Table.9

6.8. RIL – RNRL gas mega spat Before 2006 demerger of the Ambani family assets in 2006 it was adjudicated that RIL will supply KG gas to RNRL at the price converged for NTPC and at the same condition.Which was $2.34/Mcf (subjected to EGoM approval) which is nearly half of the EGoM approved unit sale price of $4.2/Mcf plus taxes and transportation for calculating its share of profit and royalty. The recent settlement at Bombay High court approves the RNRL claims for the same and allocated 28 mmscmd RIL’s KG gas to RNRL at $2.34/Mcf for 17 years. But this was the result of the family dispute. RIL has requested the Government that to continue as per the PSC, as the nations interest is ahead of family’s interest.The question now arises whether this decision would impact government revenue of rent being received. If RIL loses, would mean two things. One, since RIL-NTPC settle is still under pipeline and seeking approval from EGoM, there is an unclear benchmark for the RIL-RNRL pact. Two, if the Gas is sold at a lower price , the royalty etc will still be calculated at government’s price. RNRL would supply natural gas to the Gas fired mega power projects of Reliance Power at Dadri which would then become the world largest gas fired power plant in the world with the capacity of 7540 MW. 24 | P a g e

6.9. Value addition from Natural Gas Along with fuel and petrochemicals, LPG is also the major product that can be produced from natural gas. The deplorable thing about the RIL’s gas is that inspite of having a low colorific value it is methane rich. So it can be not used in petrochemicals and LPG production. It is to be understood that the network of natural gas has the limitations that it cannot reach the remote area while LPG as a fuel can be major source of fuel to most of the remote areas of this India.

7. Gas Marketing Strategies 7.1. Basis of MGL Pricing: MGL has categorized its customers into the following table: Category

Customers

Major Fuels Replaced

No. of Customers

Consumption (In SCMD)

(Feb 07)

(Feb 07)

Domestic

Households

Domestic LPG

>2.8 Lakh

113711

Com A (<200SCMD)

Small Hotels & Restaurants

Commercial LPG

683

31166

Com A Concessionary (<200SCMD)

Charitable / religious/ Government Institutions etc.

Domestic LPG/ Commercial LPG

Com B (200 - 1000 SCMD)

Small Scale industries, 3 star hotels, small hospitals etc.

Commercial LPG, LDO, LSHS, FO

115

48092

Com C (1000 and above)

5 Star Hotels & Hospitals

Bulk LPG, 15 LDO, LSHS, FO

10

Com AC (> 200 TR) Industrial (1000 and above) 25 | P a g e

35794

Small / medium sized industrial establishments

LSHS, FO

40

156258

Four wheelers, Buses & Autos

CNG

MS, HSD, LPG

Total

1023570

1408591

Table.10

7.2. Domestic segment •

Primarily NG used is used for domestic cooking and partially for water heating also (Non commercial application)

•

Replaces Domestic LPG cylinders (of 14.2 Kgs)

•

PNG prices indexed to alternative fuel replaced i.e. domestic LPG.

•

Domestic PNG Price was initially kept at 10% discount to domestic LPG (delivered price) after Calorific Value (CV) adjustment.

•

Sample calculations: CV of LPG in Kcal / Kg

: 10900

CV of Natural Gas Kcal/SCM

: 8500

14.2 Kgs of LPG equals : 10900*14.2/8500 = 18.21 = Approx 18 SCM of NG (After CV adjustment) Price of LPG cylinder (delivered) as on Sep 1997:Rs 137.87 Delivered Price of PNG as on Sep 1997 = 90% x 137.87/18 = 6.89 Present delivered price of PNG is Rs 11.82 per SCM

•

Price of domestic LPG cylinder has changed over the years, due to reduction in subsidy. As on date the price of 14.2Kgs cylinder stands at approx Rs 297.

•

Over the years MGL has increased PNG prices, however increase is not inline with increase of LPG prices due to:

26 | P a g e

•

Price sensitive market

•

Large customer base

•

Encourage potential customers to convert to PNG


Considering the present prices of LPG and PNG the discount stands at 29% (approx)

7.3. Commercial A segment •

Commercial A segment: Predominantly in this sector PNG is used for commercial cooking, as in case of small restaurants and hotels.

•

Replaces Commercial LPG cylinders (of 19 Kgs)

•

PNG prices indexed to alternative fuel replaced i.e. commercial LPG.

•

Commercial A PNG price was initially kept at 10% discount to commercial LPG (delivered price) after Calorific Value (CV) adjustment.

•

Commercial A concessionary: Predominantly in this sector PNG is used for non commercial cooking mainly as in case of charitable, religious, government hospitals etc.

However presently, they are not offering this price benefit to any new customers as Govt. has withdrawn this benefit from above establishments. •

Replaces domestic LPG cylinders (of 14.2 Kgs)

•

PNG prices indexed to alternative fuel replaced i.e. domestic LPG.

•

Prices in this segments is same domestic PNG.

•

Price of commercial LPG cylinder has increased over the years. As on date the price of 19 Kgs cylinder stands at approx Rs 752 i.e. approx Rs 40 per Kg.

•

Over the years MGL has increased Comm A prices, however increase is not inline with increase of LPG prices reasons being: •

Encourage more customers to convert.

•

Large section were illegally using the domestic LPG cylinder of 14.2 Kgs, hence for them price benefit was not attractive.


Considering the present prices of LPG and PNG the discount stands at 46% (approx)

7.4. Commercial B segment •

Commercial B segment: Predominantly in this sector PNG is used for various industrial applications such as industrial heating, stream generation, drying, tin printing, commercial cooking, etc.

27 | P a g e

•

Replaces Furnace Oil (FO) / Low Sulphur High Stock (LSHS), Light Diesel Oil (LDO), High Speed Diesel (HSD), commercial LPG cylinders (of 19 Kgs).

•

PNG prices indexed to LSHS.

•

Commercial B PNG price are kept at 10% discount to LSHS (delivered price) after Calorific Value (CV) adjustment.

•

Commercial B prices are revised every month in line with variations in the LSHS prices.

7.5. Commercial C segment •

Commercial C segment: PNG is used for commercial cooking, stream generation, water heating, dryers, ovens etc.

•

Replaces Furnace Oil (FO) / Low Sulphur Heavy Stock (LSHS), Light Diesel Oil (LDO), High Speed Diesel (HSD), bulk LPG.

•

PNG prices indexed to Fuel basked comprising of LSHS, LDO and LPG.

•

Commercial C PNG price are calculated in the following manner: •

70% weightage given to LSHS price (after CV adjustment and 10% discount)

•

27% weightage given to LDO (after CV adjustment)

•

3% weightage given to LPG (after CV adjustment)

This % mix was arrived based on fuel usage pattern of this consumer category.

7.5.1. Working formula: Basic price (BP) of NG for Comm C = BP ((70% of LSHS *0.9)+ 27% of LDO + 3% of Bulk LPG) •

Commercial C prices are revised every month in line with variations in the above fuel prices.

7.6. Commercial AC segment •

Commercial AC segment: PNG is used for direct fired air conditioning machines (VAM). This category was introduced in June 2000.

28 | P a g e

•

Replaces electricity as fuel.

•

Prices of NG was indexed to electricity initially with 10% discount. Discounted price was offered to customers so that they can recover additional capital cost in 2 to 3 years period.

•

3% price escalation was envisaged for a period of first 3 years.

•

Present delivered price of NG for this sector is Rs 8.784 per SCM.

•

In view of price revision of non APM gas, NG price for this segment is in the process of revision. The proposed price (delivered) is Rs 13.877 per SCM

7.7. Industrial segment • Industrial segment: PNG is used for industrial use or application such as heating, steam generation, powder coating, furnaces etc. • Replaces Furnace Oil (FO) / Low Sulphur High Stock (LSHS), Light Diesel Oil (LDO), High Speed Diesel (HSD), bulk LPG. • Prices are indexed to LSHS price after CV adjustment and 10% discount. • For the period effective from April 1, 2003 to December 31, 2004 CAP and FLOOR for selling prices were fixed: CAP

- Rs.7.50 per SCM

FLOOR

- Rs.5.66 per SCM

•

Subsequently the above CAP and FLOOR prices were extended till June 05. After GAIL price hike of Rs. 0.5 per SCM towards transportation charges, the cap price was raised to Rs 8.00 per SCM.

•

In June 2006, gas price was increased by Rs.4.50 per SCM for Non APM sector (I&C). Subsequently, MGL had decided to pass-on only Rs. 2.50 per SCM to the industrial customers and absorb balance Rs. 2.00 per SCM. Hence, industrial basic gas price was revised from Rs.8.00 per SCM to Rs.10.50 per SCM w.e.f Dec 2006.

7.8. CNG segment •

CNG segment: CNG is used as fuel for Natural Gas Vehicles (NGVs)

•

Replaces Petrol, Diesel, LPG.

29 | P a g e

•

•

Initially CNG price was decided based on following parameters: •

Converted vehicle owners to recover the additional cost towards CNG kit within a period of 1 year and

•

Operating cost (towards fuel) of CNG vehicle is atleast 50% cheaper than that of petrol vehicle.

As on date the CNG is almost

•

•

70 to 72% cheaper than Petrol

•

40 to 45% cheaper than Diesel

•

50 to 55% cheaper than LPG

Increase in CNG prices over the last few years were solely due to increase in either gas purchase price or statutory taxes / duties.

8. LNG 8.1. Import of LNG: Government initiative to satisfy the energy needs extended to import LNG. Petronet LNG ( Promoter being GAIL,ONGC,IOCL and BPCL) was the first venture initiated under GOI. Petronet LNG further proposed projects in various areas but so far only one of its terminal is operating at Dahej, Gujarat with a capacity of 5 MMTPA with long term contract with RasGas, Qatar. Shell Hazira regasification terminal was the 2nd venture with Total Elf Fina as 26% partner. Presently its main purchaser is GGCL and rest being put into HBJ pipeline on the RLNG price. The other proposed projects are as follows: Port Location

State

Pipavav

Gujarat

Maroli Dahej Kakinada

Gujarat Gujarat Andra Pradesh

30 | P a g e

Company/Consortium Capacity(mmtpa) Expected commissioning date British Gas, 2.5 NTPC,Sea King Infrastructure UNACOL 2.5 Petronet LNG 5.0 Indian Oil, 2.5 Petronas,BP Amoco,Kakinada Port Co.

Ennor Kochi Tuticorin Vizag Manglore Hazira Trombay Dabhol

Tamil Nadu Kerala Tamil Nadu Andra Pradesh Karnataka Gujarat Maharashtra Maharashtra

TIDCO + Partner Petronet LNG Indian Gas Total/HPCL Finolex Shell Tata Power,TOTAL Dabhol Power

5.0 2.5 2.5 2.5 2.5 2.5 3.0/6.0 5.0

Table.11

8.2. Pricing of R-LNG •

Contract signed with Rasgas, Qatar for supply of 5 MMTPA LNG (equivalent to about 18 MMSCMD] by Petronet LNG Limited and supplies were commenced from April 2004.

•

The price for LNG has been linked to JCC crude oil under an agreed formula.

•

However, the FOB price for the period up to December 2008 has been agreed at a constant price of $2.53/MMBTU. This translates to RLNG price of $3.86/MMBTU ex-Dahej terminal.

•

To make the price of RLNG affordable, EGoM has decided for pooling of prices of 5 MMTPA RLNG presently being imported from Qatar with the price of new RLNG being imported on term contract basis.

•

Ministry issued orders on 6.3.07. The pool price ex-Dahej of RLNG for various consumers would be about US$ 4.92/MMBTU.

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9. Potential other sources of natural gas: CBM Coal bed methane as a source of clean natural gas has immense potential for India, especially since there are rich sources in the Jharkhand and West Bengal regions. Methane gas is found trapped in fissures in coal and extraction reduces explosion hazards in mines, thereby reducing safety risks for miners. When burnt as fuel, methane has zero emission, whereas when released into the atmosphere its global warming potential is 21 times that of carbon dioxide over a span of 100 years. There are, however, several factors that have hampered the realisation of this clean fuel potential in India. Though the country is rich in reserves of bituminous coal containing methane, the reserves are at depths of up to 1,200 metres and need appropriate drilling equipment apart from know-how for extraction. This, and the fact that converters to extract methane from coal beds are not available locally, makes it imperative for India to have ties with other countries for technology and know-how transfer. China is on the job, showering tax breaks and subsidies on coal bed methane extraction companies and having an agreement with the US for technology inputs. India should speed up its coal bed methane projects in order to generate clean fuel in areas easily accessible from coal-bearing zones. Methane capture and its utilization from coal mines is not being undertaken in India due to: •

Lack of latest technology

•

Lack of expertise and experience

•

Vague perception that commercial viability of exploitation and utilization of Methane is doubtful.

Sl. No

State

1

West Bengal

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Coalfield/Block

a. North Raniganj b. Eastern Raniganj c. Birbhum

Area of delineate d block (Sq. KM)

232

500

Prognosticated Remarks CBM Resource as per DGH In In trillion billion cubic cubic feet meter 1.030 29.17 Marginal resource may be in Jharkhand 1.850 52.38

Sub Total 2 Jharkhand

Sub Total 3 Madhy a Pradesh

4

250 982 69.20

1.000 3.88 2.407

28.32 109.87 68.16

1.590

45.02

340.54

2.181

61.75

503.11 495

6.178 3.030

174.93 85.79

500 1495 24003218

1.000 4.030 11 to 19.4

28.32 114.11 311549.39

2980.113798.11

25.088– 710.3933.488 948.73

a. Jharia b. East & West Bokaro 93.37 c. North Karanpura

a. Sohagpur b. Sohagpur c. Satpura

Sub Total Gujarat a. Cambay Basin

Grand Total

500

May not be immediately available because ONGC has active conventiona l Oil & Gas operations. *As per Advanced Resources Inc.

Table.12 : Prognosticated Resource of CBM

9.1. Contractual & Fiscal Terms The CBM policy provides an attractive fiscal & contractual terms, which are considered to be one of the best in the world, with freedom to work in a

33 | P a g e

free and flexible working environment. Some of the attractive terms offered by the Government are: • • • • • • • •

No participating interest of the Government. No upfront payment. No signature bonus. Exemption from payment of customs duty on imports required for CBM operation. Walkout option at the end of Phase-I & II. Freedom to sell gas in the domestic market. Provision of fiscal stability. Seven years tax holiday.

9.2. CBM Rounds

9.2.1. CBM I DGH in close interaction with Ministry of Coal (MOC), carved out several prospective CBM blocks in different coalfields of the country, generated CBM related data and prepared Information Dockets & Data Packages. In May 2001, for the first time in the country, Government offered 7 blocks under 1st round of CBM bidding, out of which 5 blocks were awarded and contracts signed. Contracts for another 3 blocks awarded on nomination basis were also executed. 9.2.2. CBM-II: Under 2nd round of CBM bidding 9 blocks were offered through international competitive bidding in May 2003 with bid closing date of 15th October 2003. A total of 14 bids were received for 8 out of 9 blocks offered. Contracts for these 8 awarded blocks were signed in June 2004. 9.2.3. CBM-III: International competitive bids have been invited by Government of India for 10 CBM blocks under 3rd round of CBM bidding with bid closing date of 30th June 2006. There was an overwhelming response to the CBM-III round of bidding. For the first time major foreign E&P companies participated in the CBM-III bidding round. 70 nos. of data packages valued Rs. 10 crores (approx.) were sold and a total of 54 bids were received for all the 10 blocks, from 26 companies including 8 foreign and 18 Indian companies. All the 10 blocks received multiple bids. The blocks were allotted amongst 4 companies /consortium. Contracts for these 10 awarded blocks were signed in November, 2006. 34 | P a g e

9.3. Current CBM E&P Activities • • • • •

• • • •

Area Opened Up for CBM Exploration Blocks Awarded CBM Resources in Awarded Blocks Production Potential in Awarded Blocks Exploration activities completed

13600 Sq Km 26 Nos. 1374 BCM 38 MMSCMD

Phase I

10 Blocks

Phase II

4 Blocks

Commercial assessment is completed: Development Plan approved Commercial Production commenced Present Gas production Activity Core Holes Test/Pilot Wells Investment (Rs. In Crores)

4 Blocks 3 Blocks 1 Blocks 1 lakh SCMD Commitment 201 344 1350

Achievement 140 77 400

Table.13

The chart shows the comparison of the Indian Natural Gas production and consumption in the coming future. Supply

PAST 31 bcm

PRESENT 50 bcm

FUTURE(2017) 65 bcm

company ONGC is major producer ONGC is major producer ONGC,RIL Basins Bombay Bombay KG high,Ravva,PMT,Cambay high,Ravva,PMT,Cambay Basin,Cauvery,Rajastan,Gujarat

Table.14

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10. Gas Hydrates Gas hydrates are the chemical formation in which methane is trapped in a cage like structure of water molecule. These ice structure are found deep in the ocean at very low temperature and high pressure. 1 volume of methane hydrates would contain 168 volumes of methane at STP.

Fig.3 Figure showing the probable existence of Gas Hydrates. Presently its not commercially viable. But India has gone into agreement with Russia for the related exploratory work. As per DGH, India has almost 2000 trillion cubic feet of prognostic reserves, mostly along the eastern coast. Extraction of methane from Gas hydrates has some serious implications too. 1. There is about 3000 times more methane present in the hydrates than as in the atmostphere. So any mismanagement of the same would lead to disaster as methane is about 11 times more worse than carbon dioxide as a climate warmer. 2. Most of the Gas Hydrates formation are along the coastline. Mining of them would lead to landslides.

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11. Gas supplies and prices as of Dec 2007 Source

Supply (mmscmd) 42 28

Operators

Rajasthan KG basin Tamil Nadu

0.04 4.5 2.49

ONGC ONGC ONGC

Assam

0.35

ONGC

Uran Cauvery basin North East Total ONGC Oil India Limited Rajastan North-East Total OIL JVs Ravva-I

10.1 1.7

ONGC ONGC

1.81 53.19

ONGC

Ravva Satellite

0.9

PannaMukta

4.8

Gujarat GujaratHazira

37 | P a g e

ONGC ONGC

Price ($/mmbtu)

Price Build up for gas delivered in Gujarat ( for power and fertilizer sector) ONGC producer price Consumer price Uniform transportation charge along HVJ calculated@(1,150x10,000)/8500 Royalty for ONGC@10%producer price Sub total Gujarat sales tax @12% of subtotal Total

0.55 4 4.55

OIL OIL

1

CAIRN Energy India Pvt. Limited CAIRN Energy India Pvt. Limited

Rs/Mscm

3137 3200 1352

314 4866 584

5450

All other consumers to be supplied gas at market related price subject to a ceiling of ONGC and OIL pricing to be referred to Tariff Commission Option of cost plus pricing being considered.

Since July 1st 05’ Gail is paying $3.5/mmbtu.But from Nov 2006 the prices were increased to $3.6/mmbtu(includes royalty) Ceiling price $3.3/mmbtu for GAIL signed at five years starting from Sept $4.3/mmbtu.The end ’01. Revision was made in consumers price would Dec ‘06 be $4.4/mmbtu+applicable taxes+transport charges.The ceiling price was set at $4.75/mmbtu Initially held PMT sells gas themselves at USD 4.08/mmbtu by ONGC.Now (including marketing margin and royalty).Rest is sold operators are to GAIL at $4.75/mmbtu. British Gas 4.46 Exploration and Production India Ltd,RIL,ONGC

Mid&South 6 Tapti

Lakshmi & Gauri

Hazira

Bheema-1 and North Surat

KGD6 PY-1 field R-LNG Dahej R-LNG Hazira

Initially held by ONGC.Now operators are British Gas Exploration and Production India Ltd,RIL,ONGC 1.7 CAIRN Energy Contract I –Floor price: $3.06/mmbtu (2.4 (Lakshmi)& India Pvt. mmscmd).Ceiling Price: $ 4.46/mmbtu Gauri 1.27 Limited Contract II- $3.68/mmbtu (1.27 mmscmd) (Gauri) 3.58 Niko $4.05/ mmbtu till March 2007 $4.5/mmbtu from Resources March 2008 to March 2009.$5/mmbtu from March 2009 0.05 Niko Contract signed for 1 customer is (Bheema)& Resources $3.65/mmbtu and 2 other 0.21 (North customer is $3.75/mmbtu.All its Surat) other prices are between $3.45/mmbtu to $3.65/mmbtu till a new price is negotiated. 40 Reliance $4.20/mmbtu as per the formula approved by EGoM. RNRL and NTPC prices still to be fixed. 0.05 HOEC $3.70/mmbtu to PNN power project ( Prices approved by TNEB) 17.5 Petronet LNG $3.86 ex-terminal price 10.5

Shell India

$16mmbtu to GGCL at spot trading

Table.15

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12. Conclusion We shall discuss some issues in this concluding part: •

•

•

•

•

How should Indian government trade off between the business ethics and the national interest? If 28 mmscmd of Natural Gas gets supplied to RNRL at nearly half the price as approved by the EGoM, then there would be huge loss in the estimated provided projected by RIL. Presently only the family conflict has been resolved, but till now the government interest is not been considered. RIL is now seeking help from the government to stick to the PSC contract and follow the interest as per the priority list. But if RIL complies with the High Court decision, would definitely make the Investment multiple tranche quite stagnant even at a quite low scale of somewhat between 1 to 2.5 leading to low government share in the coming future. As per my analysis, price for NTPC should be around $3.5/ mmbtu which will get followed by RNRL as per the contracts. Which would somewhat smoothen the losses covered by RIL and Government. And if necessary, the deficit of NTPC shall be paid by the government as similar as bonds as NTPC is now paying high. Secondly, a part of the consumer allocation and price of the power from Dadri power project should be regulated by the EGoM. That would serve national purpose as well. Another issue is that should India develop its Natural Gas Import infrastructure. Presently the LNG operating terminals are LNG Petronet at Dahej, Gujrat and Shell Hazira,Gujrat. Dabhol Power project is due to start in coming months. The major pipelines projects under talks are the IPI (Iran-Pakistan-India) and the TAPI (Turkmenistan-Afganistan-Pakistan-India) pipelines. But the present situation shows that both these projects for importing natural gas would not be so beneficial .Recently, Government of India has started showing unhealthy attitude towards these tow pipelines as whether there is really a need for such long term import agreements. Looking at the future of the Indian Indigenous gas production, immediate investing in the import/LNG facility would be improper. With RIL started production (the production is expected to reach 80 mmscmd in coming months if everything is as per the schedule) and GSPC claiming a huge gas reserve in the KG basin, almost 20Tcf the highest in India so far, soon the Indian Gas market will get over supplied. Rather investment should be more focussed towards the new pipeline and infrastructure. A way ahead thought will be thinking of liquefaction terminal for LNG export. Fair amount of investment should be directed towards building of the CGD networks all along the small and big cities of India. CBM should get a main focus and investment. CBM can really change the Indian Gas market with more and more of competitive pricing. Indian has huge coal reserves, which, if utilized for the production of the methane gas would only be a bonus. Presently 4th CBM rounds for block allocation is under its way.

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13.References: Cedigaz (2007): BP statistical review Infraline Energy Research (2008): Gas Supply and Prices as of Dec 2007 ERM INDIA (2009):GSPC-NIKO: Executive Summary of Drilling & Development of O&G Wells Hazira Field. Hazira,Surat. Price Waterhouse Coopers (2008): Oil and Gas, India-Fastest growing free market. New Delhi, India CBM India (2008): Analysis and Evaluation of Clean Development Mechanism (CDM) Prospects for Coal Bed Methane. Gauri Athanikar(2008):Crisil report on Natural Gas.New delhi,India http://www.dghindia.org/site/dgh_forthcoming_nelp_round.aspx http://www.dghindia.org/site/dgh_oil_gas_legislation_rules.aspx www.petroleum.nic.in www.thetimesofindia.com www.indianexpress.com www.infraline.com www.bloomberg.com/markets/commodities/energyprices.htm www.eia.doe.gov/ https://www.vedamsbooks.com/no40225.htm http://www.dghindia.org/ http://en.wikipedia.org/wiki/Iran%E2%80%93Pakistan%E2%80%93India_gas_pipeline http://pesd.stanford.edu/publications/india_gas_synth/ http://www.tradeindia.com/exporters-suppliers/c368/natural-gas.html www.allacademic.com/meta/p252133_index.html www.methanetomarkets.org/events/2006/oil-gas/.../india_profile.pdf www.wartsila.com/Wartsila/global/docs/en/.../bright_future.pdf

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Annexure Indian Gas Demand:

In mmscmd

Power Fertilizer City gas Industrial Petrochemicals/Refineries/ Internal uses Sponge iron/steel Total

2007-08

2008-09

2009-10

2010-11

2011-12

79.70

91.20

102.70

114.20

126.57

41.02

42.89

55.90

76.26

76.26

12.02

12.93

13.83

14.80

15.83

15.00

16.05

17.17

18.38

19.66

25.37

27.17

29.05

31.08

33.25

6.00

6.42

6.87

7.35

7.86

179.17

196.64

225.52

262.07

279.43

Gas Supply as per table 15. is 146 mmscmd. In short future this will increase by 40 mmscmd with RIL increasing production. So we can consider 186 mmscmd as the present supply.

Supply Demand Gap: 2009-10 2010-11 2011-12 2013-14 2014-15

In mmscmd

demand 225.52 262.07 279.43

supply 186 186 219.2

gap 39.27 76.07 60.23