india-gas-price_HP_SN
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The Practical Insight to Gas Pricing in India
LNG is fast gaining prominence within the Asian Oil and Gas Industry. With the exponential growth of the LNG market coinciding with the economic boom in India, the LNG scene has never been as important as it is now in the South Asian country. This article presents some of the issues pertaining to the pricing of gas in India.
U
R E P O R T
LNG India
ntil the last decade, natural gas was viewed as an “unattractive fuel” compared to oil. The cost of producing gas was greater than its intrinsic value; so many oil producers simply treated natural gas as a spin-off and flared it. Today natural gas has emerged as the “Cinderella fuel” of the world fuel basket and is pertinent to India as well. To sustain India’s robust growth, policy makers are considering increasing natural gas contribution from current 9 percent to 20 percent to the energy mix by 2025(“Hydrocarbon Vision 2025” document, India). At present natural gas is preferentially allocated to core sectors under a fixed price regime called Administrated Pricing Mechanism (APM). The Introduction of New Exploration Licensing Policy (NELP) allowed larger private participation in E&P activities with prices as a function of market forces. In effect to this the Government has approved the Reliance Industries’ KrishnaGodavari (KG) basin gas price formula with minor modifications.
Since India is set to add substantial gas supply by mid 2008 and larger portion of this is expected to be consumed by the key sectors, with new gas price the affordability of these sectors has become a contentious issue.
Going Big
The gas consumption in India has come long way from 35 MMSCMD in 1990 to 109 MMSCMD in 2006. In the present scenario India’s domestic gas production of 87 MMSCMD and LNG imports of 22 MMSCMD is not sufficient to meet the demand. As per “Hydrocarbon Vision 2025” natural gas demand is estimated to be around 391 MMSCMD by 2025, rising from 231 MMSCMD in 2007. India had 1075 BCM (billion cubic meters) of recoverable natural gas reserve at the end of year 2006. At present, almost half of the gas is being sold under APM; this share is likely to fall with declining production from existing fields and the addition of new gas supplies. Core sectors such as
power and fertilizer consume around 70 percent of the present gas supply and command preferential allocation of APM gas. Rising demand in these sectors cannot be fulfilled by APM gas alone, thus leaving no option other than to depend on incremental NELP gas supply. APM allows gas fired generation to compete against coal, whereas in the fertilizer sector APM offers opportunities to replace the high cost feedstock. Any upward movement in gas pricing will certainly raise questions over its affordability of these sectors.
Searching the Range
At the moment wellhead prices vary in the range of $1.96/MMbtu for APM to $4.75/MMbtu for nonAPM gas, whereas imported Regasified LNG (R-LNG) is being priced in the range of $5.20/ MMbtu-$12.00/MMbtu. Acceptable gas prices can be derived under different emerging scenarios by anticipating perfect competition in the market and affordability of key sectors.
18
HYDROCARBON ASIA, SEPT/OCT 2007
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Fertilizers
As of 31 st January 2007, the installed capacity of urea production was 21 MMT (Million Metric Tones) (including non functional capacity of 1.052 MMT), as quoted in the ‘Annual Report2006-2007’ by the Ministry of Chemicals and Fertilizers, India. Of the total existing urea capacity, 78 percent uses natural gas, 11 percent naphtha and 11 percent fuel oil as feed stock. The selling price of urea is controlled and highly subsidized by the government. Gas demand in the fertilizer sector accounted for 38 MMSCMD in 2006-07 (Ministry of Chemicals and Fertilizers, India). The regulated market selling price of urea is $115/MT. Since indigenous urea production is not sufficient for domestic demand, imports make up the shortfall. In the period 2003 - 2007, the International market price for urea has been in the range of $156- $325/ MT. India imports fertilizer mostly from Gulf countries. Input gas price in the region is partially exposed to international gas trade, so is urea. Ideally any feed stock price that can produce urea domestically for less than the landed cost of imported urea should be accepted.
imputed gas price considering the landed urea price in the range of $180-$340/MT. Urea production units can be broadly categorized into four types, based on technology and feedstock (gas, naphtha, fuel oil and green field projects). For the purposes of analysis, the operational and capital parameters are assumed as per Ministry of Fertilizer directive and not considered subsidy provided by Government of India (as subsidy is the matter of policy). At a landed urea price of $180/ MT, the analysis (Table1) indicates that the average imputed price of gas is $3.14/MMbtu for existing units. This leaves very limited scope for green field projects. Urea prices in the range of $230-$260/ MT implies that an average imputed gas price of $5.41/
MMbtu to $6.77/MMbtu which is more in line with expected NELP gas prices. Urea price scenario of $340/MT and above,demonstrates very high acceptable gas price.
Back to Home
Domestically, the present average urea production cost is $226/MT for existing gas units, $538/MT for naphtha units and $358/MT for Fuel Oil/LSHS units(Ministry of Chemicals and Fertilizers, India). Significant opportunity lies in switching the costlier liquid feedstock to gas; since feed stock makes up sixty five percent of urea prices. Assuming that gas supply will be available to replace liquid feedstock, the implied gas price could be as high as $20/MMbtu. In a different development, considering Reliance’s recently announced Kakinada green field project to be a perfect competitor against existing fertilizer units, imputed gas price is derived. Taking Reliance imputed gas price $4.58/MMbtu as a benchmark; the realized production cost of urea varies in the range of $188/MT to $194/MT for existing units.
First Cut
The analysis displays the
HYDROCARBON ASIA, SEPT/OCT 2007
19
The landed cost of imported urea and domestic production determines the affordability of gas price for the sector. Internationally urea prices are expected to stay in the range of $260/MT to $340/ MT, thus average imputed gas price range $6.77/MMbtu -$9.04 / MMbtu can be easily acceptable in the sector.
Power Sector
India’s existing installed generation capacity stands at 134 GW as of June 30, 2007. At this level, India still has a deficit of generating capability that is estimated to be about 13.5 percent below peak demand and 8.7 percent below energy demand (Ministry of Power, India; Central Electrical Authority). Under the “Power for All” initiative, the projected installed generation capacity should be at least 200 GW to meet power demand in 2012. As per “Hydrocarbon Vision 2025” gas fired generation is projected to double from the current 10 percent level of 13.4 GW to about 26.8 GW by 2012. This growth in gas fired generation suggests an increase in gas demand of 153-208 MMSCMD from the current consumption of 38 MMSCMD. Coal is the mainstay fuel and contributes almost 53 percent of the total installed capacity. Power prices across the country are regulated. Coal price is regulated whereas gas is on verge of deregulation. New gas-fired plants must compete with regulated coal and APM gas - fired generation. Hence any substantial upward
movements in gas prices will certainly raise questions of gas affordability to the power sector. But, it cannot be judged only by comparing against the coal fired generation. It is also crucial to consider the future revenue options available in the emerging competitive market.
Testing the Water
The majority of the generation tariffs across the country are in the range of Rs. 1.5/KWh to Rs. 2.5/ KWh. Taking this as a benchmark for power generation, the implied gas price of gas varies is between $ 2.67/MMbtu - $5.49/MMbtu. India is in the process of establishing a power exchange
under which all utilities will have to compete in an open market for economic dispatch. Under merit order dispatch, new gas plants will compete against existing coal and APM gas-fired units. The average acceptable delivered gas price based on comparison to existing generation mix is around $3.00/ MMbtu. (Table 2). In the wholesale power market recently announced /commenced coal fired projects including Ultra Mega Power Plant (UMPP) are setting new bench mark tariffs and could be potential competitors to gas based generation. The lowest imputed gas price $1.64/MMbtu is realized from bidders of UMPP Sasan and highest $5.39/MMbtu
LNG India
20
HYDROCARBON ASIA, SEPT/OCT 2007
Visit our website at: http://www.safan.com
is from Rosa power plant. The average imputed gas price is around $3.81/MMbtu (Fig. 2) It is evident from the imputed gas price curve that pithead coal plants are tough to compete, whereas imported coal and non pithead plants moderately support higher gas prices.
Trading most of the electricity during peak and intermittent load requirements results into high implied price of gas. At 85 percent plant load factor (PLF) the implied gas price varies in the range of $9.56/MMbtu to $13.75/MMbtu, whereas at 40 percent PLF this is $7.26/MMbtu to $11.45/MMbtu. It is evident from the analysis that under the existing tariff regime it is difficult to absorb high gas prices, but, the flexibility to offload capacity as merchant certainly enhances the price competitiveness of the sector.
Looking Beyond the Red Tape
Emerging strategies of power plants are focused on operating partially or fully as merchant enterprises and marketing their available capacity to intrastate or interstate traders. This allows them to offload the available capacity at desired price. At present, more than 14 traders are operational and trading around 2.5 percent of generated electricity. This share is growing continuously; thus the average price of traded electricity is a good measure to realize the imputed gas price for merchant capacity (Fig. 3).
Taking India to the World
Generally, deregulation of the gas market broadly follows three stages of development as shown in fig. 4. It starts with decontrolling of well-head gas prices, followed by unbundling of the supply value chain, giving impetus to infrastructure expansion. At this stage of development, gas trades under mix of long and short term contracts and priced at netback
HA
HYDROCARBON ASIA, SEPT/OCT 2007
21
market value compared to substitute fuels. Subsequently discovery of single market clearing price is achieved via a hub (physical or hypothetical) like structure, where bidders quote their requirements. Such a structure allows creation and trading of physical and financial risk hedging instruments like spot, forwards, futures and options for the underlying gas commodity.
this will discard incentive to produce more. Any move to bypass this will set wrong example to private players and will hamper future investments. India has around 7000 km of gas pipeline with capacity to transport 160 MMSCMD of natural gas. Government policy of open access and private participation to ensure enough pipeline capacity to evacuate gas is getting realized. Major players are building pipelines that will connect supply centers to demand regions. Although India’s gas market is evolving rapidly; at present there is no competitive gas market in the country; where multi sourcing and multi buying options are available. Any constraint in gas handling infrastructure will lead to higher gas prices. Pricing should encourage both
production and consumption; offer incentives to existing players switch to clean gas and allow fair and reasonable return on investment across the value chain of the business. The key off-takers (Power and Fertilizer) approach gas pricing differently. In the fertilizer sector the use of gas will help to reduce the current high production cost whereas for power sector the converse is true. The fertilizer sector’s aim to produce cheaper urea can be achieved by switching to gas feedstock whereas the power sector’s affordability for higher gas price cannot be realized without reducing T&D losses substantially and providing other revenue options such as operating fractional plant capacity comparable to merchants. HA
Countdown Started
The time has come to ensure availability of adequate gas to meet growing energy demand and sustain high economic growth. In practical terms, the size and shape of the country’s gas industry is decided by its pricing regime. Introduction of the right pricing mechanism is vital as India’s thirst for gas is high. Price can not be set in isolation to the alternative fuels and supply demand imbalance, as
This publication thanks Mr. Sachin Nagdive and Mr. Hitendra Patel, of ICF International, India, for providing this article. Mr. Sachin Nagdive, is an Analyst, Gas Markets, with ICF International (India). He carries rich exposures in analysis of gas demand/supply, LNG contracts, LNG pricing and risk analysis of global natural gas/LNG trade. Mr. Nagdive has been involved in various projects related to the Indian energy sector such as analysing gas demand in power sector, feasibility studies of setting up merchant gas based power plant and gas monetization options in the eastern part of the country. He has also worked on various international assignments supporting a US statutory organization for building an International Gas Model (INGM) and an analysis of the economic comparison of gas based power plant in Oman. Mr. Hitendra Patel is a Power Market Analyst with ICF International. His areas of expertise include various aspects of Asset Valuation of power plants and legal proceeding with respect to bankruptcy filing. He is currently working with a USA power major to carry out strategies to come out of bankruptcy. He has developed a gas major evolve a right pricing strategy for the Indian markets. He has also handled a number of projects related to feasibility study and valuation of power plants in different US power markets. He is also instrumental in economic modeling of the Indian and USA power markets.
LNG India
22
HYDROCARBON ASIA, SEPT/OCT 2007
Visit our website at: http://www.safan.com
LNG is fast gaining prominence within the Asian Oil and Gas Industry. With the exponential growth of the LNG market coinciding with the economic boom in India, the LNG scene has never been as important as it is now in the South Asian country. This article presents some of the issues pertaining to the pricing of gas in India.
U
R E P O R T
LNG India
ntil the last decade, natural gas was viewed as an “unattractive fuel” compared to oil. The cost of producing gas was greater than its intrinsic value; so many oil producers simply treated natural gas as a spin-off and flared it. Today natural gas has emerged as the “Cinderella fuel” of the world fuel basket and is pertinent to India as well. To sustain India’s robust growth, policy makers are considering increasing natural gas contribution from current 9 percent to 20 percent to the energy mix by 2025(“Hydrocarbon Vision 2025” document, India). At present natural gas is preferentially allocated to core sectors under a fixed price regime called Administrated Pricing Mechanism (APM). The Introduction of New Exploration Licensing Policy (NELP) allowed larger private participation in E&P activities with prices as a function of market forces. In effect to this the Government has approved the Reliance Industries’ KrishnaGodavari (KG) basin gas price formula with minor modifications.
Since India is set to add substantial gas supply by mid 2008 and larger portion of this is expected to be consumed by the key sectors, with new gas price the affordability of these sectors has become a contentious issue.
Going Big
The gas consumption in India has come long way from 35 MMSCMD in 1990 to 109 MMSCMD in 2006. In the present scenario India’s domestic gas production of 87 MMSCMD and LNG imports of 22 MMSCMD is not sufficient to meet the demand. As per “Hydrocarbon Vision 2025” natural gas demand is estimated to be around 391 MMSCMD by 2025, rising from 231 MMSCMD in 2007. India had 1075 BCM (billion cubic meters) of recoverable natural gas reserve at the end of year 2006. At present, almost half of the gas is being sold under APM; this share is likely to fall with declining production from existing fields and the addition of new gas supplies. Core sectors such as
power and fertilizer consume around 70 percent of the present gas supply and command preferential allocation of APM gas. Rising demand in these sectors cannot be fulfilled by APM gas alone, thus leaving no option other than to depend on incremental NELP gas supply. APM allows gas fired generation to compete against coal, whereas in the fertilizer sector APM offers opportunities to replace the high cost feedstock. Any upward movement in gas pricing will certainly raise questions over its affordability of these sectors.
Searching the Range
At the moment wellhead prices vary in the range of $1.96/MMbtu for APM to $4.75/MMbtu for nonAPM gas, whereas imported Regasified LNG (R-LNG) is being priced in the range of $5.20/ MMbtu-$12.00/MMbtu. Acceptable gas prices can be derived under different emerging scenarios by anticipating perfect competition in the market and affordability of key sectors.
18
HYDROCARBON ASIA, SEPT/OCT 2007
Visit our website at: http://www.safan.com
Fertilizers
As of 31 st January 2007, the installed capacity of urea production was 21 MMT (Million Metric Tones) (including non functional capacity of 1.052 MMT), as quoted in the ‘Annual Report2006-2007’ by the Ministry of Chemicals and Fertilizers, India. Of the total existing urea capacity, 78 percent uses natural gas, 11 percent naphtha and 11 percent fuel oil as feed stock. The selling price of urea is controlled and highly subsidized by the government. Gas demand in the fertilizer sector accounted for 38 MMSCMD in 2006-07 (Ministry of Chemicals and Fertilizers, India). The regulated market selling price of urea is $115/MT. Since indigenous urea production is not sufficient for domestic demand, imports make up the shortfall. In the period 2003 - 2007, the International market price for urea has been in the range of $156- $325/ MT. India imports fertilizer mostly from Gulf countries. Input gas price in the region is partially exposed to international gas trade, so is urea. Ideally any feed stock price that can produce urea domestically for less than the landed cost of imported urea should be accepted.
imputed gas price considering the landed urea price in the range of $180-$340/MT. Urea production units can be broadly categorized into four types, based on technology and feedstock (gas, naphtha, fuel oil and green field projects). For the purposes of analysis, the operational and capital parameters are assumed as per Ministry of Fertilizer directive and not considered subsidy provided by Government of India (as subsidy is the matter of policy). At a landed urea price of $180/ MT, the analysis (Table1) indicates that the average imputed price of gas is $3.14/MMbtu for existing units. This leaves very limited scope for green field projects. Urea prices in the range of $230-$260/ MT implies that an average imputed gas price of $5.41/
MMbtu to $6.77/MMbtu which is more in line with expected NELP gas prices. Urea price scenario of $340/MT and above,demonstrates very high acceptable gas price.
Back to Home
Domestically, the present average urea production cost is $226/MT for existing gas units, $538/MT for naphtha units and $358/MT for Fuel Oil/LSHS units(Ministry of Chemicals and Fertilizers, India). Significant opportunity lies in switching the costlier liquid feedstock to gas; since feed stock makes up sixty five percent of urea prices. Assuming that gas supply will be available to replace liquid feedstock, the implied gas price could be as high as $20/MMbtu. In a different development, considering Reliance’s recently announced Kakinada green field project to be a perfect competitor against existing fertilizer units, imputed gas price is derived. Taking Reliance imputed gas price $4.58/MMbtu as a benchmark; the realized production cost of urea varies in the range of $188/MT to $194/MT for existing units.
First Cut
The analysis displays the
HYDROCARBON ASIA, SEPT/OCT 2007
19
The landed cost of imported urea and domestic production determines the affordability of gas price for the sector. Internationally urea prices are expected to stay in the range of $260/MT to $340/ MT, thus average imputed gas price range $6.77/MMbtu -$9.04 / MMbtu can be easily acceptable in the sector.
Power Sector
India’s existing installed generation capacity stands at 134 GW as of June 30, 2007. At this level, India still has a deficit of generating capability that is estimated to be about 13.5 percent below peak demand and 8.7 percent below energy demand (Ministry of Power, India; Central Electrical Authority). Under the “Power for All” initiative, the projected installed generation capacity should be at least 200 GW to meet power demand in 2012. As per “Hydrocarbon Vision 2025” gas fired generation is projected to double from the current 10 percent level of 13.4 GW to about 26.8 GW by 2012. This growth in gas fired generation suggests an increase in gas demand of 153-208 MMSCMD from the current consumption of 38 MMSCMD. Coal is the mainstay fuel and contributes almost 53 percent of the total installed capacity. Power prices across the country are regulated. Coal price is regulated whereas gas is on verge of deregulation. New gas-fired plants must compete with regulated coal and APM gas - fired generation. Hence any substantial upward
movements in gas prices will certainly raise questions of gas affordability to the power sector. But, it cannot be judged only by comparing against the coal fired generation. It is also crucial to consider the future revenue options available in the emerging competitive market.
Testing the Water
The majority of the generation tariffs across the country are in the range of Rs. 1.5/KWh to Rs. 2.5/ KWh. Taking this as a benchmark for power generation, the implied gas price of gas varies is between $ 2.67/MMbtu - $5.49/MMbtu. India is in the process of establishing a power exchange
under which all utilities will have to compete in an open market for economic dispatch. Under merit order dispatch, new gas plants will compete against existing coal and APM gas-fired units. The average acceptable delivered gas price based on comparison to existing generation mix is around $3.00/ MMbtu. (Table 2). In the wholesale power market recently announced /commenced coal fired projects including Ultra Mega Power Plant (UMPP) are setting new bench mark tariffs and could be potential competitors to gas based generation. The lowest imputed gas price $1.64/MMbtu is realized from bidders of UMPP Sasan and highest $5.39/MMbtu
LNG India
20
HYDROCARBON ASIA, SEPT/OCT 2007
Visit our website at: http://www.safan.com
is from Rosa power plant. The average imputed gas price is around $3.81/MMbtu (Fig. 2) It is evident from the imputed gas price curve that pithead coal plants are tough to compete, whereas imported coal and non pithead plants moderately support higher gas prices.
Trading most of the electricity during peak and intermittent load requirements results into high implied price of gas. At 85 percent plant load factor (PLF) the implied gas price varies in the range of $9.56/MMbtu to $13.75/MMbtu, whereas at 40 percent PLF this is $7.26/MMbtu to $11.45/MMbtu. It is evident from the analysis that under the existing tariff regime it is difficult to absorb high gas prices, but, the flexibility to offload capacity as merchant certainly enhances the price competitiveness of the sector.
Looking Beyond the Red Tape
Emerging strategies of power plants are focused on operating partially or fully as merchant enterprises and marketing their available capacity to intrastate or interstate traders. This allows them to offload the available capacity at desired price. At present, more than 14 traders are operational and trading around 2.5 percent of generated electricity. This share is growing continuously; thus the average price of traded electricity is a good measure to realize the imputed gas price for merchant capacity (Fig. 3).
Taking India to the World
Generally, deregulation of the gas market broadly follows three stages of development as shown in fig. 4. It starts with decontrolling of well-head gas prices, followed by unbundling of the supply value chain, giving impetus to infrastructure expansion. At this stage of development, gas trades under mix of long and short term contracts and priced at netback
HA
HYDROCARBON ASIA, SEPT/OCT 2007
21
market value compared to substitute fuels. Subsequently discovery of single market clearing price is achieved via a hub (physical or hypothetical) like structure, where bidders quote their requirements. Such a structure allows creation and trading of physical and financial risk hedging instruments like spot, forwards, futures and options for the underlying gas commodity.
this will discard incentive to produce more. Any move to bypass this will set wrong example to private players and will hamper future investments. India has around 7000 km of gas pipeline with capacity to transport 160 MMSCMD of natural gas. Government policy of open access and private participation to ensure enough pipeline capacity to evacuate gas is getting realized. Major players are building pipelines that will connect supply centers to demand regions. Although India’s gas market is evolving rapidly; at present there is no competitive gas market in the country; where multi sourcing and multi buying options are available. Any constraint in gas handling infrastructure will lead to higher gas prices. Pricing should encourage both
production and consumption; offer incentives to existing players switch to clean gas and allow fair and reasonable return on investment across the value chain of the business. The key off-takers (Power and Fertilizer) approach gas pricing differently. In the fertilizer sector the use of gas will help to reduce the current high production cost whereas for power sector the converse is true. The fertilizer sector’s aim to produce cheaper urea can be achieved by switching to gas feedstock whereas the power sector’s affordability for higher gas price cannot be realized without reducing T&D losses substantially and providing other revenue options such as operating fractional plant capacity comparable to merchants. HA
Countdown Started
The time has come to ensure availability of adequate gas to meet growing energy demand and sustain high economic growth. In practical terms, the size and shape of the country’s gas industry is decided by its pricing regime. Introduction of the right pricing mechanism is vital as India’s thirst for gas is high. Price can not be set in isolation to the alternative fuels and supply demand imbalance, as
This publication thanks Mr. Sachin Nagdive and Mr. Hitendra Patel, of ICF International, India, for providing this article. Mr. Sachin Nagdive, is an Analyst, Gas Markets, with ICF International (India). He carries rich exposures in analysis of gas demand/supply, LNG contracts, LNG pricing and risk analysis of global natural gas/LNG trade. Mr. Nagdive has been involved in various projects related to the Indian energy sector such as analysing gas demand in power sector, feasibility studies of setting up merchant gas based power plant and gas monetization options in the eastern part of the country. He has also worked on various international assignments supporting a US statutory organization for building an International Gas Model (INGM) and an analysis of the economic comparison of gas based power plant in Oman. Mr. Hitendra Patel is a Power Market Analyst with ICF International. His areas of expertise include various aspects of Asset Valuation of power plants and legal proceeding with respect to bankruptcy filing. He is currently working with a USA power major to carry out strategies to come out of bankruptcy. He has developed a gas major evolve a right pricing strategy for the Indian markets. He has also handled a number of projects related to feasibility study and valuation of power plants in different US power markets. He is also instrumental in economic modeling of the Indian and USA power markets.
LNG India
22
HYDROCARBON ASIA, SEPT/OCT 2007
Visit our website at: http://www.safan.com
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