Report of the Inter-Ministerial Committee on Policy for Pooling of Natural Gas Prices and Pool Operating Guidelines

August 2011

Planning Commission Government of India New Delhi

TABLE OF CONTENTS
Executive Summary .................................................................................................................. 1 Chapter I: Analysis & Recommendations................................................................................. 6 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Background and Problem......................................................................................... 6 Proposed Scheme of Preferential Allocation ........................................................... 9 Impact of the Future Increase in Domestic Gas Output ......................................... 15 Previous Commitments .......................................................................................... 17 Isolated Gas Fields ................................................................................................. 18 Pipe Line Tariff...................................................................................................... 18 Pooling/Preferential Allotment .............................................................................. 19 Contract and Swap ................................................................................................. 20 Taxes on Natural Gas/LNG.................................................................................... 21 Domestic Natural Gas Prices ................................................................................. 22

Chapter II: Energy Consumption Trends.

12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0 23.0

..27

Primary Energy of which Oil & Gas...................................................................... 27 Growth in Consumption Natural Gas.................................................................. 27 Natural Gas pipelines and LNG ............................................................................. 28 Reserves and Producing Countries......................................................................... 28 Liquefied Natural Gas............................................................................................ 28 Shale and Other Unconventional Gases................................................................. 29 Impact of gas prices ............................................................................................... 29 Likely Trajectory of Global Gas Demand.............................................................. 30 Trans-National Transportation Is Likely to Rise ................................................... 30 Evolution of LNG Markets .................................................................................... 31 Gas Price Setting Mechanism Differ Across Regions ........................................... 31 Some Features of the LNG market......................................................................... 32

Chapter III: Indian Gas Markets Demand & Supply Side.................................................... 33 24.0 25.0 26.0 Introduction............................................................................................................ 33 Domestic Demand for Natural Gas ........................................................................ 34 Future Gas Sourcing............................................................................................... 39

Chapter IV: Non-conventional Natural Gas Sources .............................................................. 43 27.0 28.0 Coal Bed Methane (CBM) ..................................................................................... 43 Shale Gas ............................................................................................................... 44

Chapter V : Liquefied Natural Gas (LNG) .............................................................................. 45 29.0 30.0 31.0 32.0 33.0 34.0 35.0 LNG Terminals in India......................................................................................... 45 Gas Pricing: Status of Price of Gas/LNG from Different Sources......................... 48 Price of Long-term LNG Imports .......................................................................... 50 Gas Pipeline Infrastructure in India ....................................................................... 51 National Gas Grid .................................................................................................. 54 The Rationale for Postal Tariff .............................................................................. 54 Location Economics and Efficiency ...................................................................... 56

Annex-I: Extracts from the Study Conducted by Mercados.................................................. 58 Suggested Mechanism for Gas Price Poling by M/s Mercados .............................................. 58 Recommendations.................................................................................................................... 60 Creation of an Overarching Pool............................................................................................ 63 Concern over Price Discovery ................................................................................................ 63 Appendix 1 Constitution of interministrial Commitee ........................................................ 66

Appendix-2 Letter from JS (TRU), Ministry of Finance.68

LIST OF TABLES
Table 1.1 Natural Gas Production and Imports ...................................................................... 8 Table 1.2 Sectoral Consumption of Natural Gas including R-LNG..................................... 11 Table 1.3 Price Comparison of liquid Automotive Fuels, CNG and Gas from R-LNG....... 11 Table 1.4 Utilization of Domestic Natural Gas .................................................................... 13 Table 1.5 Utilization of Domestic Natural Gas .................................................................... 14 Table 1.6 With Incremental Domestic Natural Gas Going Entirely to Power Sector .......... 16 Table 1.7 Status of Supply and Price.................................................................................... 23 Table 3.1 Consumption of Natural Gas by Sector................................................................ 34 Table 3.2 Optimistic Projections of Output of Natural Gas ................................................. 40 Table 3.3 Projected Availability of Domestic Gas ............................................................... 41 Table 5.1 LNG Terminals..................................................................................................... 46 Table 5.2 Current Gas prices prevailing in select gas importing countries .......................... 48 Table 5.3 - Price & volume of Gas from domestic sources of supplies .................................. 48 Table 5.4 Customer wise and Producer wise Gas Prices as prevailing in India ................... 49 Table 5.5 Natural Gas infrastructure in India ....................................................................... 51 Table 5.6 Regional Imbalance in Natural Gas Infrastructure ............................................... 51 Table 5.7 Pipelines to GAIL about 5,500 kms ..................................................................... 52 Table 5.8 Pipeline to RGTIL around 2800 Kms .................................................................. 52 Table 5.9 Pipeline through bidding process ......................................................................... 53 Table 5.10 Summary of Pipeline Status ............................................................................... 53 Table 5.11 Additional Pipelines ........................................................................................... 53 Table 5.12 Zonal Tariff Order .............................................................................................. 55

LIST OF CHARTS
Chart 1 Pricing Mechanism Worldwide ............................................................................... 32 Chart 2 Composition of Indias Energy Basket.................................................................... 33 Chart 3 Projected net gas production from domestic sources, 2015..................................... 41 Chart 4 Gap between Demand and Supply - Projection for next decade ............................. 47 Chart 5 Affordability of LNG by different sectors............................................................... 50

EXECUTIVE SUMMARY
0.i. Presently domestic gas demand exceeds domestic supply. In future years, the incremental domestic demand will significantly exceed potential incremental domestic supply. This will mean that the import content of total natural gas consumption will have to increase. 0.ii. There is a large price differential today between domestic and imported gas. Domestic gas is priced at $4.2 to $5.5 per mmbtu + pipeline charges + taxes. In contrast R-LNG spot prices are $10 to $14 per mmbtu + pipeline charges + taxes. 0.iii. Higher prices are a burden to everybody. Nobody voluntarily chooses to pay the higher price. However, there are differences in policy priorities, as well as great differences in the paying capacity of different users, specifically in light of regulatory restrictions on certain classes of users to freely set their selling prices. 0.iv. The priorities and regulatory burden are concentrated in the fertilizer and power sectors. 0.v. The recommendations of this report assign priority, following the existing policy of Government. 0.vi. The Committee does not recommend pooling mechanism for natural gas at the overall level, nor does it recommend a price pooling on sectoral basis, except where that may be found to be the best workable option. 0.vii. The Committee has opted for preferential allotment on a scheme of priority as a basis for allocating the scarce resource namely, domestically produced natural gas in this case across users.

0.viii.

The Committee visualizes the internal consumption in oil/gas fields (injection, turbines, flaring), pipeline internal consumption and LPG/C2 C3 extraction as a clear necessity.

0.ix. 0.x.

The balance that is left after this is what is available for allocation. Fertilizer and power sectors have been given first priority for domestic gas. But it is recognized that even they will have to consume some amount of R-LNG. The priority on domestic gas being given to the power sector flows from the policy of the Ministry of Power to require gas based power plants to have a PPA for 85 per cent of their generation.

0.xi.

The projections in this report visualize that of the fertilizer sectors total consumption, RLNG will amount for 2122 percent, while that for the power sector the share of R-LNG will be around 2527 per cent based on the existing capacity and new plants already under construction. The latter projections may change depending on the level of domestic gas production.

0.xii.

For CGD/CNG and other Court mandated customers, the Committee recommends that a certain amount of domestic gas be set aside for their usage. These quantities are 6 mmscmd for CGD/CNG and 1 mmscmd for other Court mandated customers. Presently the former is drawing 5.3 mmscmd and the latter 0.9 mmscmd. Thus the allocation procedure of the Committee does not reduce their current access to domestic gas, but requires that their additional needs will have to be met from imports.

0.xiii.

Non-priority sectors presently consume about 18.4 mmscmd of domestic gas and an amount of 5 mmscmd is being set aside for these users. Their balance needs at both current levels and their incremental needs have to be met from imported R-LNG.

0.xiv.

These (non-priority) users operate in a market environment where their output prices are market driven with no regulatory burden and hence they should be able to pass on the higher costs of gas feedstock.

0.xv.

In regard of the RLNG needs, the users should have a choice of either sourcing their own supply of LNG or depending on their present suppliers to give them gas at blended domestic and RLNG price.

0.xvi.

Large users may opt to choose to source their own RLNG and this will help develop a competitive market for RLNG.

0.xvii.

By making such a large segment of users opt for RLNG, a competitive market will be created to serve the interests of this sector. This will ensure that inefficient LNG pricing cannot prevail. It is also believed that by exposing this class of users to RLNG and giving them the option of sourcing their own RLNG, the scope for use of RLNG will be greatly enhanced.

0.xviii.

Smaller users (and some larger users also) who may not be in a position to source their own R-LNG will have to obtain a blended price from their suppliers. The suppliers can arrive at a blended price depending on their own costs of supply and should do so in a fair and equitable fashion.

0.xix.

In future years, there will be an increase in domestic gas production but there is no certainty as to what extent this increase will be. The Committee has looked at four different scenarios and feels that the most likely one from a fairly conservative point of view is Scenario# 2 which envisages that total (gross) domestic gas output will increase from the present level of 132.5 mmscmd to around 199 mmscmd by 2016/17 that is, a compounded annual rate of output growth of about 8.5 per cent..

0.xx.

At the level of production of 199 mmscmd in 2016/17, the fertilizer sector would need to source 22 per cent of their requirement from RLNG while the power sector, on the basis of existing schedule of gas based power

plants coming up, will need to source 27 per cent of their requirement from RLNG by 2016/17. 0.xxi. All other users, including CGD/CNG and non-priority industries, would have to source the bulk of their requirement from RLNG. In 2011/12, about 73 per cent of their total requirement would have to come from R LNG and this proportion is likely to rise to little over 80 per cent by 2016/17 depending on the growth of demand from the sectors. 0.xxii. Total RLNG imports are likely to rise from about 46 mmscmd presently to about 103 mmscmd by 2016/17. 0.xxiii. The Ministry of Power would like to emphasize that taking R-LNG beyond 25 per cent will be difficult keeping in mind the economics of the electricity distribution business. They also would like to get firm commitments on domestic gas supply and a clear idea of future price. The Committee however felt that it is not in a position to take a view on firm domestic gas supply and future prices. 0.xxiv. As stated previously, no explicit pooling for gas price is being prescribed. However, the preferential allocation will have to be done by the concerned administrative ministries. In the Department of Fertilizers, FICC is institutionally capable of discharging the task. In the case of the Ministry of Power, the requirements will have to be overseen by the Ministry of Petroleum & Natural Gas. It is understood that in the allocation of domestic natural gas, cost and other efficiency criteria will inform the administrative decision. 0.xxv. The other preferential allocations of 6 mmscmd to CGD/CNG, of 1 mmscmd to other Court mandated customers and of 5 mmscmd to nonpriority users will have to be distributed in a reasonable and fair fashion by the Ministry of Petroleum & Natural Gas.

0.xxvi.

It is recommended that the pipeline tariff which is presently being set on a cost/bid-based Zonal tariff basis should be modified to the extent that the outlier tariffs (for small off-takes) should not be more than 50 per cent of the average tariffs. This is a hybrid between a pure cost-based Zonal tariff and Postal Tariff. It serves the objectives of respecting location economics and ensuring efficiency, while at the same time ensuring that small offtakes at underserved locations are not charged excessively high tariffs. The regulator is the appropriate agency to take a call on this based on actual data on both costs and the geographical distribution of demand loads.

0.xxvii.

For Price Discovery, the Committee felt that the process should reflect opportunity costs, adequacy of incentives for exploration and production (E&P) and fairness to the consumer. It has recommended a procedure for arriving at an inferred price by taking the average of the 12-month trailing Henry Hub price on the one hand and the 12-month trailing producer net back price (excluding shipping & liquefaction computed on a normative basis that is discussed in the body of the report) derived from the Japan Korea Marker (JKM) price or equivalent Asian LNG price for Persian/Arab Gulf sources of supply. On the basis of this inferred price, the Government should then set a premium or a discount, depending on extant conditions on what the perception is with regard to it being: (a) adequate for attracting investment in the E&P and (b) not excessive for the consumer.

0.xxviii.

There is a recommendation by this Committee to align the import duty on LNG with that of crude petroleum and to work towards declared good status for natural gas/LNG. The Department of Revenue is not agreed to the proposal for aligning import duty on LNG with that of crude petroleum. On the issue of declared good status in regard of VAT, the Department of Revenue did not wish to record a view.

CHAPTER I ANALYSIS & RECOMMENDATIONS

This chapter deals with the approach and the framework of analysis adopted as well as the recommendations being made in this report. In subsequent chapters, some of the more in-depth background and context has been placed. In an annex to the report highlights from the report of the consultant M/s Mercados appointed by GAIL on the subject has been appended at Annex-1 for information.

1.0
1.1

Background and Problem

The demand for natural gas in India is far exceeding the domestic output. It is most likely that the incremental requirements of natural gas in India for the next 510 years (i.e. 2016/17 which is the terminal year of the Twelfth Plan and up to 2021/22 that is, the terminal year of the Thirteenth Plan) are going to be significantly greater than the increments to domestic output which may be reasonably expected. Therefore, the import component of total domestic consumption will have to rise.

1.2

Government policy has clearly recognized the problem as being one of allocation of scarce resources. The scarcity is embodied in the widely different prices at which natural gas is available in the country. Domestic gas is priced at $4.20/mmbtu in most cases + pipeline charges + taxes. There are a few sources of domestic gas that is priced at a slightly higher rate, but that too is only about $1.01.3/mmbtu more costly. On the other hand, imported R-LNG, except for contracted supplies from Qatar (which are due for price resetting in the near future) costs $1014/mmbtu + pipeline charges + taxes. Obviously, every rational consumer in this situation would like to have preferential access to domestic natural gas.

1.3

Government has made a clear distinction between what it considers priority or core and the non-priority or non-core sectors. It has clearly enunciated the need to place fertilizer and power sector in the priority segment, while keeping other industrial users such as petrochemicals, refineries, sponge iron etc. in the non-priority sector.

1.4 1.5

There are two underlying logical threads for arriving at this conclusion. First, fertilizer and power are in a sense vital to the national interest, require substantial amounts of gas and involves large capital investments that is, the sunk costs are large.

1.6

Second, both the fertilizer and power sector operate in an environment where the price of their output is subject to government regulation, either directly or indirectly. Thus, the selling price of urea is much below the operating cost, large government subsidies are involved and, there is limitation on the ability of companies to change the selling price. It is unlikely that in the foreseeable future, fertilizer companies will be able to set their selling prices near their operating costs and will therefore continue, to be dependent on the subsidy regime.

1.7

In the case of power, natural gas based producers have to compete with others who are based on domestic coal. Domestic coal prices have been regulated and are much lower than that of imported coal, even after adjusting for relative heat values. Further, on heat value basis, domestic coal is much cheaper than natural gas. The state electricity regulators are obliged to adopt a merit order dispatch. Power producers, who use natural gas, especially R-LNG, are thus at a great disadvantage in being able to sell their power. At the same time, there is a huge power scarcity in the country. Many manufacturing plants, as well as commercial establishments, have been forced because of the power shortage, to use diesel based generating sets that are highly uneconomical and the cost of such captive power is much more than R-LNG based power.

1.8

It is, therefore, in the larger national interest to ensure that power produced from natural gas, including R-LNG, is able to be dispatched and is affordable to the distribution companies who are financially quite constrained. It is an acknowledged fact that revising certain kinds of electricity tariffs, such as that for households and for agriculture has faced and will continue to be a challenge. Thus, there are regulatory and institutional bottlenecks in the path of gas based power producers to be able to realize the full cost of their generation and this difficulty escalates if that cost is higher, as indeed is the case with R-LNG.

1.9

Therefore, in the light of the above discussion, our own extant policy may be seen as one that expressly provides preferential access for power and fertilizer units to domestic natural gas. It is proposed that this should form the cornerstone to the framework of the solution to the allocation problem which sits at the heart of the present Committees terms of reference.

Table 1.1 Natural Gas Production and Imports Unit: mmscmd

2009/10 1 2 3 4 5 6 Domestic Natural Gas Output Less internal consumption, injection, producer pipelines & flaring Net Domestic Natural Gas available Less LPG & C2C3 extraction Distribution pipeline internal consumption Domestic Natural Gas available for general consumption Of which: Isolated customers 7 8 Imported R-LNG Total Natural Gas available (including isolated customers) 6+7 345 12 130.34 14.76 115.58 8.12 2.01 105.45 2.01 32.35 137.80 2010/11 142.55 12.82 129.73 8.20 2.47 119.06 2.01 37.20 156.26 June 2011/12 132.50 9.07 123.43 10.78 2.06 110.59 2.01 46.33 156.92

2.0
2.1

Proposed Scheme of Preferential Allocation

It is proposed that in the first instance, domestic gas be preferentially provided to the priority sector, as defined to include the fertilizer and power industries. It may be noted that, as on date, both the fertilizer and power sector do source a part of their requirements from imports. The proportion of R-LNG to total consumption was 19 and 12 per cent respectively in 2009/10 and 17 and 9 per cent respectively in 2010/11 for the fertilizer and power sectors respectively (see Table 1.2). The substitution of existing R-LNG supplies with domestic supplies for power and fertilizer is not being considered in this report, given the order of the present shortage and even more that of the prospective shortage.

2.2

In the first instance, as an approximation to start with the total availability of domestic natural gas is fixed at the present level. Subsequently, we will examine what the situation will look like as we incorporate different levels of incremental domestic natural gas output. The scheme then is visualized to operate as below:

i.

The total amount of domestic natural gas that is estimated to be available in 2011/12 is 123.43 mmscmd. This excludes gas that is required in the gas field itself for internal consumption, injection & flaring, but not that required for LPG and C2-C3 extraction and pipeline engines (see Table 1.1). This is on the basis of the situation obtaining in June 2011. Conditions may change somewhat during the course of the year, but the argument that follows will be unaffected.

ii.

After LPG and C2C3 extraction (9.07 mmscmd) and internal consumption in distribution pipelines (2.06 mmscmd) a balance of 110.59 mmscmd will be available for general consumption (see Table 1.1)

iii.

This estimated domestic gas availability in 2011/12 of 110.59 mmscmd is to be then allocated to the power and fertilizer industries at the present rates of domestic off-take. The domestic gas output in June 2011 has been slightly

adjusted for the fertilizer sector to bring it in line with its allocations and closer to the level that obtained in 2010/11. The total adjusted domestic gas drawal by the fertilizer and power sector is then 88.37 mmscmd. The net position between the availability of 110.59 mmscmd and 88.37 mmscmd leaves a balance of 22.20 mmscmd (see Table 1.4). iv. Thus far, the city gas and CNG (CGD & CNG) and Court mandated customers have been treated as part of the core sector, as has LPG/C2C3 extraction. It may be noted that LPG/C2C3 extraction is in any case essential. The Court mandate has been to make the gas available, but not at any particular price. At the moment these customers at the aggregate level receive a mix of domestic natural gas and R-LNG. It is believed that these Court mandated consumers (which include some of the CGD/CNG operations) work in a market environment and should be able to absorb an increase in supply prices of gas. However, it may be appropriate to cap their access to domestic gas at about the present levels. v. In regard of CGD and CNG, the economics appear to suggest that even with R-LNG the business should be competitive (see Table 1.3). The cost of RLNG based CNG in heat value terms is only 20 per cent higher than the present sale price in Delhi and actually less than that it is in Ahmedabad. Since, there will continue to be allocation at the rate of 6.0 mmscmd of domestic gas, the impact of picking up incremental needs from R-LNG should be eminently manageable and the necessary adjustments in selling price will not be large and should be acceptable. This is especially considering the enormous cost differential that is there even with respect to HS Diesel which is being subsidized today. The actual consumption of CGD/CNG in 2010/11 was 5.34 mmscmd from domestic gas and 2.56 mmscmd from R-LNG. It is proposed to cap the off-take of this sector from domestic gas to 6.0 mmscmd.

10

Table 1.2 Sectoral Consumption of Natural Gas including R-LNG Unit: mmscmd Adjusted 2009/10 2010/11 June 2011
Qty Power Sector Domestic R-LNG Sub Total Fertilizer Sector Domestic R-LNG Sub Total CGD/CNG Domestic R-LNG Sub Total Power and Fertilizer sectors Domestic R-LNG Sub Total
80.00 13.78 93.78 (85%) (15%) 89.32 12.14 101.46 (88%) (12%) 85.93 13.23 99.16 (87%) (13%) 88.37 13.05 101.42 (87%) (13%) 6.40 0.14 6.54 (93%) (7%) 7.05 4.32 11.37 (62%) (38%) 5.34 2.56 7.90 (68%) (32%) 6.00 1.90 7.90 (76%) (24%) 30.33 7.04 37.37 (81%) (19%) 33.10 6.76 39.86 (83%) (17%) 29.56 8.18 37.74 (78%) (22%) 32.00 8.00 40.00 (80%) (20%) 49.67 6.74 56.42 (88%) (12%) 56.22 5.38 61.60 (91%) (9%) 56.37 5.05 61.41 (92%) (8%) 56.37 5.05 61.41 (92%) (8%)

Ratio

Qty

Ratio

Qty

Ratio

Qty.

Ratio

Table 1.3 Comparison between Price of liquid Automotive Fuels, CNG and Gas from R-LNG
Unit Retail Selling Price (RSP) 63.38 41.12 29.80 31.47 40.25 12.00 42.07 12,870 0.3269 Calorific value in Kcal per unit 8,798 7,700 10,956 10,956 10,956 RSP converted to heat value in paise per K Cal 0.7204 0.5340 0.2720 0.2872 0.3674

1 2. 3

Motor Spirit HS Diesel CNG CNG CNG

Delhi Delhi Delhi Mumbai Ahmedabad CIF Ex-Delhi

Rs / Litre Rs / Litre Rs / Kg Rs / Kg Rs / Kg $ / mmbtu Rs / kg

4.

R-LNG

11

vi.

In regard of the court mandated customers other than CNG, the present offtake is 0.89 mmscmd from domestic gas and 0.20 mmscmd from R-LNG. Though they may have some paying capacity, in the interest of ease of transition (since their needs may increase in the future) allocation towards these customers may be capped at 1.0 mmscmd. The rest of their needs may be met by blending with R-LNG.

vii.

That would leave 22.206.001.00 = 10.22, say 10.0 mmscmd for purposes of either a substitution of R-LNG requirements by power and fertilizers or for other users. Since it is being proposed that the present R-LNG used by power and fertilizer should not be substituted, this 10.0 mmscmd is available for either incremental use by the fertilizer and power sector or for non-priority use or a combination of the two,

viii.

Presently as is evident from Table 1.4, non-priority users, as in June 2011, are using domestic natural gas to the extent of about 18.43 mmscmd. The suppliers, mostly GAIL and also others, have contracts with these customers. Though there are saving clauses which can permit the supplier to meet their quantitative obligations from R-LNG, there may be disputes and litigation. Further, the magnitude of the shock if all of this 18.43 mmscmd is substituted wholly by R-LNG may be excessive. It is accordingly being recommended that an amount of 5.0 mmscmd1 be set aside for meeting the needs of the nonpriority sectors, the balance requirement to be substituted by R-LNG.

ix.

That will leave a balance of 10.22 mmscmd say 10.0 mmscmd, for additional preferential allocation to the fertilizer and power sectors. Till additional requirement from new power or fertilizer capacity is forthcoming, this quantum of 10.0 mmscmd may be made available to other users.

This quantum of 5.0 mmscmd must include the non-power, non-fertilizer use in isolated gas fields, such as tea factories and similar users. The total gas coming from isolated gas fields is 2.01 mmscmd presently. Most of this is being used in the power and fertilizer sector and some in the CGD/CNG sector (which would be anyway covered under the 6.0 mmscmd set aside for this use). A small amount is being used by other category of users which would be grouped under this head of 5.0 mmscmd.

12

Table 1.4 Utilization of Domestic Natural Gas On Unchanged Domestic Gas Output Basis Unit: mmscmd
2010/11 Base line for 2011/12 & future years 110.59 88.37 22.22 6.00 1.00 10.22, say 10.00

1. 2. 3. 4a 4b 5

Net domestic gas available Less: Fertiliser & power at present off-take level Net gas available (12)

119.06 89.32 29.74 7.05 0.89 21.80

Less: For CGD/CNG Less: For other Court mandated customers Net available for additional needs of fertiliser & power sectors (34a4b)

x.

During the course of 2011/12 an additional quantum of about 16 mmscmd (or more) is going to be needed by the power sector. If all of this is met from domestic natural gas, the balance that will be left for other users will be () 6 mmscmd, that is the entirety of the 16 mmscmd requirement cannot be met from domestic gas and a part of it will have to come from imported R-LNG.

xi.

The point has been raised that merchant power plants which do not have any obligations to sell under a Power Purchase Agreement to Dist Coms./ SEBs, but are free to sell to the highest bidder, ought not to avail of preferential gas allotment. The present policy of Power Ministry requires all power plants who apply for linkage to have a PPA for at least 85 per cent of their generation.

2.3

In working out what the allocation procedure will result in (Table 1.5), we first try and meet the incremental needs of the fertilizer sector arising on account of switching from LSHS/FO and naphtha to natural gas and that on account of de-bottlenecking and new plants. We have maintained the composition of incremental demand from the fertilizer sector at 75 per cent domestic gas and 25 per cent imported R-LNG. That results in an average position of around

13

2122 per cent of R-LNG use in the consumption basket for the fertilizer industry in the future years up to the end of the Twelfth Plan period. Table 1.5 Utilization of Domestic Natural Gas On Unchanged Domestic Gas Output Basis Unit: mmscmd
2010/ 11 1 2. Net available natural gas for 21.8 additional needs of fertiliser & power sectors Additional Requirement of Fertiliser Sector (a) Switching LSHS/FO & Naphtha (b) Debottlenecking (c) New plants 4.8 3. Consumption of Fertiliser Sector Domestic Gas Imported R-LNG Total Proportion of R-LNG 4. Net gas available after Fertiliser for New Needs of Power Sector Consumption of Power Sector a) Additional Needs b) Total Consumption Domestic Gas Imported R-LNG Total Proportion of R-LNG 56.2 5.4 61.6 9% 16.0 63.9 13.5 77.4 17% 26.0 70.3 33.1 103.4 32% 16.0 72.3 47.2 119.4 40% 3.0 68.7 53.7 122.4 44% 60.0 62.4 122.4 51% 49.0 73.4 122.4 60% 33.1 6.8 39.9 17% 32.0 8.0 40.0 20% 7.6 35.6 9.2 44.8 21% 6.4 40.1 12.7 50.8 21% 1.9 45.5 14.5 58.0 22% 3.5 50.8 16.3 65.0 22% 8.8 53.0 17.0 68.0 22% 11.0 6.0 3.8 1.0 2011/ 12 2012/ 13 2013/ 14 2014/ 15 2015/ 16 2016/ 17

10.22, say 10.0

4.0 2.0

2.2 1.0 4.0 7.2 7.0 7.0 3.0 3.0

5.

2.4

It should be made clear that the 2122 per cent R-LNG results out of the way the incremental requirements are being satisfied through allocation. It does not have implications for existing supplies.

2.5

Then we look to the additional needs of the power sector. A phasing has been done, keeping in mind the completion of about 12,200 MW through 2011/12, 2012/13 and 2013/14. What then results is a sharp increase in the R-LNG

14

component of the power sectors consumption to 40 per cent in 2013/14 and 60 per cent by 2016/17 (Table 1.5).

3.0
3.1

Impact of the Future Increase in Domestic Gas Output

Next we relax the constraint on domestic gas output, which so far has been kept fixed at the base level corresponding to the position in June 2011. Four scenarios have been examined. These increase the level of net domestic gas availability after oil/gas-field internal consumption, LPG/C2C3 extraction and pipeline internal consumption.2 In the first scenario, it is assumed that there will be an increase of 6.0 mmscmd in each year at the level of net domestic gas availability after internal consumption in oil/gas fields, LPG/C2 C3 extraction and pipeline internal consumption. The second scenario takes an 8.0 mmscmd increase in each year. The third with 12.0 mmscmd increase in each year. The fourth scenario envisages an addition of 16.0 mmscmd in each year.

3.2

To put it alternatively, the first scenario envisages gross domestic gas output to rise from 132.5 mmscmd in June 2011 to about 189 mmscmd by 2016/17, which is a very modest expectation. The second scenario envisages a larger increase by 2016/17 to about 199 mmscmd which is also reasonably in the feasible range. The third and fourth scenarios envisage a much larger increase of 12.0 and 16.0 mmscmd in each year and a gross output level in 2016/17 of 219 mmscmd and 239 mmscmd which are on the optimistic side.

3.3

As may be seen from Table 1.6, that only in the most optimistic scenario (namely, Scenario #4) will there be adequate domestic gas to meet the entirety

As on June 2011, the proportion of domestic gas available after oil/gas field internal consumption, injection & flaring, LPG/C2C3 extraction and pipeline internal consumption is 83.5 per cent. This proportion has been used to arrive at the corresponding gross natural gas output level. Thus an additional 6 mmscmd net gas available at this level would translate to 6.0 0.853 = 7.04 mmscmd of additional gross gas output.

15

of the needs of the power sector, which does not include the requirements of new gas based power plants, beyond the 12,200 MW that is due for completion in 2011/12 to 2013/14. Table 1.6 With Incremental Domestic Natural Gas Going Entirely to Power Sector
2013/14 I. 2014/15 2015/16 2016/17

Composition of Power Sector Consumption with unchanged domestic gas output Proportion of imported R-LNG 40% 44% 51% 60%

II.

With projected increase in domestic gas output the proportion of imported R-LNG now comes to Scenario #1 [@ additional 6 mmscmd each year]* Scenario #2 [@ additional 8 mmscmd each year]* Scenario #3 [@ additional 12 mmscmd each year]* Scenario #4 [@ additional 16 mmscmd each year]* 26% 26% 19% 13% 29% 24% 14% 5% 31% 25% 12% 1% 35% 27% 11% 5%

Note: * Each year there is an increment in net domestic availability of stated amount. That is, in Scenario #1, by 2016/17, the total incremental output would be 30 mmscmd and in Scenario #4, it would be 80 mmscmd. Negative proportions under Scenario#4 means that the complete needs of the power sector are met from domestic gas and there is a surplus over and beyond that for use by other sectors. That is, on the assumption that there are no new gas based plants that would come up in the closing years of the Twelfth Plan.

3.4

Thus, even with domestic gas output potential greatly relaxed, the prioritization of fertilizer and power sector is clearly unavoidable.

3.5

If, however, domestic gas turns out to be along the lines envisaged in Scenario#4 or even better and as a result there is a surplus of domestic gas after meeting the needs of the fertilizer and the power sector to the extent of 75 per cent, then the excess should be allocated to the non-priority users.

16

3.6

In the light of the shortage of domestic gas, it is clear that users other than power and fertilizer will have to meet the large part of their needs from RLNG. It is further obvious that even the power and the fertilizer sector will have to meet a part of the incremental needs from imported R-LNG. This is especially true for the power sector whose incremental requirements in their coming years are going to be quite large.

3.7

Thus, the basic arithmetic even as it preferentially allocates domestic natural gas to the power and fertilizer sector, only succeeds in mitigating, not eliminating, the extent to which the import dependence of the fertilizer and power sectors would rise, given their increasing requirements.

4.0
4.1

Previous Commitments
There is an extant CCEA decision in regard to the gas requirement for units that are switching from LSHS/FO and naphtha that it may be ensured that full allotment of future gas should be made to the requirement as projected for fertilizer industry on priority. One option would be to place these needs (3.80 mmscmd for LSHS/FO and 8.45 mmscmd for naphtha) to the extent of 100 per cent on domestic gas.

4.2

However, as has been seen, even at the moment imports account for about 19 22 per cent of the gas that is being consumed by fertilizer units. Further, there will be a subsidy regime in place for such units and if the incremental allocation is made on the basis of 75 per cent domestic and 25 per cent R-LNG that subsidy regime will recognize it. Further, if for other existing and new units the R-LNG proportion is also placed at 25 per cent it is a more symmetric treatment if the eight units that are switching from liquid fuels to gas feedstock are treated in a uniform fashion that is identical to the rest of the industry. As may be seen from Table 1.5, the overall R-LNG component of the consumption basket for the fertilizer industry is maintained at around 2122

17

per cent. In any case, the subsidy regime will have to take into account the allocation and its implications.

5.0
5.1

Isolated Gas Fields

As may be seen from the previous tables there is a production of about 2.1 mmscmd of natural gas from gas fields that are not connected to the gird. This gas is being utilized locally and cannot be allocated to customers who are not in that geographical location. A large part of this gas is being used for power plants and the balance is being used for a variety of applications that includes industry for example, tea factories in Assam. The recommendations made here do not envisage any change in the pattern of consumption for these isolated fields. This fact does not substantially change the nature of the recommendations, given that the bulk of this isolated gas fields output is being used for power generation, the broad tenor of the recommendations will be implicitly adopted in the case of these isolated gas fields. The adjustment that is implicit here has been spelt out previously.3

6.0
6.1

Pipe Line Tariff

In the latter section of this report, the issue of pipeline tariff and postal tariff has been discussed at some length. The latter (postal tariff) is a means of equalizing the freight cost at different destinations. In the view of the Committee, complete freight equalization may not be desirable from the consideration of locational efficiency. At the same time, very widely varying tariff cost on account of a lack of economies of scale may also not be in the larger public interest.

6.2

It is possible to conceive of a situation where we adopt a hybrid position, where by and large the pipeline tariff reflects the actual transportation cost, but the outlier pipeline tariff is mandated not to exceed a certain proportion of the

See footnote 1

18

average tariff, say by 50 per cent. This is on the assumption that the bulk of the off-take will take place at locations that are near the average or below the average pipeline tariff and the more distant locations will account for a relatively smaller part of consumption If this is taken as a policy advice, the pipeline regulator may be allowed to work out the details within this framework. The regulator is the appropriate agency to take a call on this based on actual data on both costs and the geographical distribution of demand loads.

7.0
7.1

Pooling/Preferential Allotment
The recommendations put forth here do not envisage any form of pooling at the all-India level cutting across industries. What it does is to preferentially allot available domestic natural gas to fertilizer and power sectors with a certain reserved allotment for the CGD/CNG sector. Further this preferential allotment is with respect to the incremental needs of the preferred industry, rather than to their existing usage.

7.2

Following from this, the concerned administrative ministries dealing with fertilizer and power will have to ensure that the incremental requirement is fulfilled in the fashion that has been described in this report.

7.3

In the case of the fertilizer industry, the recommendations that is currently before the CCEA is that up to the cut-off point, the department through FICC, will operate a notional gas pooling so that different plants participating in the pool will be able to get gas at a common price.

7.4

In addition, the Department of Fertilizers will have to ensure that in the incremental requirements of the industry, the allocation procedure suggested here is implemented by using the 75 (domestic): 25 (imported) formula.

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7.5

In the case of the power sector, the Ministry of Power in conjunction with MoPNG will have to ensure that the incremental requirements of the sector are met in the preferential manner delineated here. They should seek to try and ensure a fair allocation, whereby individual power units for the incremental requirements are allocated the domestic gas in such a way that broadly the overall resultant ratio applies at least within a power company if not specifically across every single utility. It however would be preferable to do this with respect to individual utilities, since it is conceivable that ownership of a specific utility could change over time.

7.6

The Ministry of Petroleum & Natural Gas will have to coordinate the overall procedure.

7.7

It may be noted that the scheme being proposed here is somewhat similar to Option B as proposed by the Mercados report extracts of which are placed as an Annex-1 to this report.

8.0
8.1

Contract and Swap

It is proposed that the allocation of gas does not involve physical pooling. Indeed it is best that it operate as a simple allocation procedure. That is, each user will lift X units of domestic gas, in the understanding that he will lift a pre-specified Y unit of R-LNG. This the element of proportionate pricing charged by the provider of gas, irrespective of the physical origin of the gas can reflect this ratio of X:Y. The customer should of course have a choice of sourcing the Y units of R-LNG on his own which will serve the ends of competitive sourcing and price efficiency. However, if in certain cases, it is felt necessary that a notional pooling of existing contracts is the only way to serve the objectives of an efficient and simple settlement this can be worked out through the use of swaps.

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8.2

Thus once the allocation formula is used and a said party A is to be provided domestic gas to the extent of 75 per cent and imported R-LNG of 25 per cent, then two eventualities can arise. The customer may choose to search out his own supply of R-LNG. Alternatively, if its supply contracts is such that domestic is 60 per cent or for that matter 80 per cent, then the difference will have to be swapped with someone else. Likewise, for a unit in the non-priority sector having contract for supply of domestic gas in excess of the amount that is available under the caps spelt out previously, that unit will have to be swap with a priority user who is permitted incremental supplies of domestic gas in keeping this need with the preferential allotment principle. Government of India must ensure that these swaps do not attract taxes of any kind if the swaps are made through the MoPNG as a part of the policy measure. In the case of incremental domestic gas output the preferential allotment should directly result in a contract and there may not be a need for a swap.

9.0
9.1

Taxes on Natural Gas/LNG

Presently there is varying VAT on natural gas, including LNG, across the country. It may be advisable for the Government to treat LNG/Natural Gas as a declared good so that they have a common concessional rate of VAT.

9.2

Import of LNG presently attracts Basic Customs Duty of 5 per cent ad valorem. Till 25 June 2011, this was the same rate that the import of crude petroleum attracted. There is no justification to have differential tax treatments for LNG and crude petroleum. The Committee recommends that the import duty of LNG may be made identical to that of the import duty of crude petroleum, which presently is zero. If in future a non-zero import duty is levied on crude petroleum, the same rate may be made applicable to LNG.

9.3

It may be noted that though there is a 2.5 per cent import duty on several refined petroleum products, this is largely notional since the actual imports of liquid hydrocarbons is overwhelmingly in the form of crude petroleum. If a

21

uniform tax treatment is not extended on import duty as between crude petroleum and LNG, there will be needless discrimination against the latter, given that the cost per calorific unit to the user is less in the case of LNG than in the case of crude petroleum. It may be pointed out that unlike crude petroleum, where it is the light and middle distillates that perform a valuable energy function, the entirety of LNG is directly usable in a highly efficient fashion. Further, the use of LNG is environmentally friendlier than is the case with crude petroleum or rather refined petroleum products.

10.0 Domestic Natural Gas Prices

10.1 Traditionally, crude oil markets have been deep and active. As a result, natural gas/LNG began to be priced in relation to widely traded crude oil marker prices. Our contracts from Qatar were based on such a formula. These formulae have in the past provided for a floor and cap to the price of crude oil and the indexation process resulted in a certain discount in terms of calorific value from the marker crude price.

10.2

On the discovery of the KG Basin, a similar formula was developed. The Empowered Group of Ministers (EGOM) decided the following price indexation formula for natural gas to be sold from KG basin:

Gas Price ($/mmbtu) = 2.5 + (CP25) ^ 0.15

Where, CP is annual average Brent crude price for the previous FY with a cap of $60/bbl & floor of $25/bbl. The price comes to US$ 4.20 per mmbtu for crude at a cap of $60/bbl

Existing Gas Price contracts in the Country 10.3 Currently, in India there are multiple prices for gas sold by different producers. The status of volume and price is given below in the Table 1.7:

22

Table 1.7 Status of Supply and Price

S.No. 1. 2. 3. 4. 5. 6. 7. 8. Producer ONGC (APM) ONGC (Non APM) ONGC (North East) OIL PMT / Ravva / Lakhmi RIL-KG-D6 R-LNG (Long-Term) LNG (Spot) Total Gas Note: Sales (mmscmd) 49 1.46 2.19 5.2 17 48 28 8 10 159 161 Price ($/MMBTU) 4.20 4.75 2.54 2.54* 5.28 4.20 6.50 12 14

LPG/C2-C3 extractable & internal Consumption includes 10 12 MMSCMD of gas *40 per cent price compensated from the budget

Source: GAIL

11.0 Price Discovery

11.1 The Committee has been asked to examine what should be the procedure for discovery of gas price. It is fairly obvious that India will be a substantial importer of natural gas/LNG and also of crude oil. It is also self-evident that the world price of crude oil will remain elevated.

11.2

There is today a great disparity between the prevalent prices in the North American market (which is the largest gas market in the world) and the Asia Pacific market. The discovery of shale gas and other non-conventional gas has led to the North American prices settling at quite low levels of around $ 4.0 4.5 per mmbtu. This is in sharp contrast to the Asia Pacific prices where LNG (the tradable form of natural gas in such markets) has gone to as high as $14 per mmbtu following on the March 2011 Tsunami in Japan and dislocation of its nuclear power facilities.

23

11.3

It is in our national interest that exploration and production (E&P) activities for natural gas and non-conventional gases proceed rapidly. For that to happen, the indicative pricing of future domestic natural gas production should realistically reflective the opportunity cost of such investment.

11.4

One view that may be taken is that as we live in the Asia Pacific market, hence it is that price which should be relevant.

11.5

However, it is impossible to conceive of a situation where the Asia Pacific market prices will continue to be so completely at odds with prices prevailing in the North American market. The huge difference in price is an arbitrage opportunity. Normal market dynamics will always consume such arbitrage opportunities and result in the equalization of prices. There is a cost to make the arbitrage work, which is the cost of liquefaction and transportation. By no stretch of imagination is this cost equal to the present difference between the North American markets and the peak Asia Pacific LNG spot prices.

11.6

The simplest approach to evolve a reference price for future price discovery is to take a simple average between the Henry Hub (US) prices and that of the Asia Pacific LNG (JKM or Japan Korea Marker), the latter being reduced to the extent of shipping, liquefaction and associated charges or as has been described by some as the netback value or the producer netback. It should be noted that there is a concept of net back price in the LNG trade which is a bit of a notional calculation.

11.7

The Energy Intelligence Agency (EIA) of the Department of Energy of the US federal government reports that: Netbacks are calculated using a long-term charter rate of $65,000 per day for 138,000 cubic meter tankers. Re-gasification fees in the United States and the United Kingdom are taken as 10 percent of the base price. U.S. netbacks are calculated using the first and second month out closing price taken from the New York Mercantile Exchange (NYMEX) on the 3

24

trading days before and including the date reported. A local adjustment for delivery to the Lake Charles terminal is made using prior month spot prices reported by Natural Gas Week. The calculation of United Kingdom netbacks comes from an average of the closing price on the Intercontinental Exchange (ICE) futures contract for delivery at National Balancing Point (NBP) on the first and second months out. Japanese netbacks are derived from the official average ex-ship prices for the most recent month. A World Gas Intelligence European Border Price table is used to estimate the most recent ex-ship prices for Spanish netbacks.4

11.8

Trade journals such as the New York based World Gas Intelligence (weekly) regularly reports volumes and prices for Asian LNG markets and Spot LNG Exporter netbacks at key worldwide markets. These reported netbacks are appears to be the CIF prices reduced by normative shipping costs perhaps as described in the previous paragraph,

11.9

In so far as the JKM marker LNG price is concerned, for our purposes, we should compute the producer netback starting from the reported Asian LNG price, less the normative shipping cost to Qatar, which is regularly reported in the trade literature. From this, we need to subtract the liquefaction cost again on a normative basis, by say $2.50 per mmbtu. This will give us the gas producers net back value.

11.10 To illustrate at the present time, the Henry Hub spot price is $3.94 per mmbtu. The reported LNG netback at Qatar from North East Asian markets (JKM marker) was $12.64 per mmbtu. Reduced by the normative $2.50 towards liquefaction this comes to $12.642.50 = $10.14 per mmbtu. The simple average of Henry Hub sport and this computed producer netback price is $7.04 per mmbtu.

Short-term Energy Outlook Supplement, US LNG Imports the Next Wave, Damien Gaul and Kobi Platt, EIA, January 2007, p.7

25

11.11 These calculations are based on spot prices. It is obviously better to eliminate momentary price spikes by adopting a 12-month trailing average.

11.12 The calculation based on 12-month trailing average should be treated as a reference price which has indeed been discovered from the market. However, it need not necessarily be the operational price but an inferred price. This latter price can then be the basis for being combined with either a discount or a premium which may be applied, given the view taken by the policy establishment in light of the combined criteria of fairness to the consumer and adequacy of incentive to the E&P enterprise.

26

CHAPTER II Energy Consumption Trends

12.0 Primary Energy of which Oil & Gas

12.1 Energy is a key component of a modern society and a vital ingredient for economic growth. The world consumed over 12,000 million tonnes oil equivalent (mtoe) of primary energy in 2010, while the Asia Pacific region consumed over 4,500 mtoe and India 477 mtoe in 2010/11. India is the fifth largest energy consumer in the world with oil and gas constituting about 45 per cent of (gross) primary energy consumption, of which 35 percentage points is from crude oil and 10 percentage points from natural gas. The size of the oil and gas industry in India in terms of turnover is around $160 billion. The value of crude oil and LNG imports into India in 2010/11 was around US$98 billion. About 78 per cent of Indias petroleum consumption is met from imports (mostly of crude oil), while about 25 per cent of natural gas (including LNG) consumption comes from imports.

13.0 Growth in Consumption Natural Gas

13.1 Global consumption of primary commercial energy (coal, oil & natural gas, nuclear and major hydro) has grown at the rate of 2.6 per cent over the last decade. In the Asia Pacific region, the growth rate is close to 6 per cent while that for India is around 6.8 per cent. Globally, natural gas consumption has grown by 2.7 per cent over the past decade while that in the Asia Pacific region growth has been 6.8 per cent. India with a low base of natural gas consumption has seen very rapid growth trending 8.7 per cent (including LNG) over the past 11 years. Total natural gas consumption world wide in 2010 was 3,169 billion cubic meters (BCM). The International Energy Agency has projected that natural gas consumption worldwide will increase by 1.4 per

27

cent per annum in its base case between 2008 and 2035. That would take total natural gas demand to over 4,300 BCM by 2035.

14.0 Natural Gas pipelines and LNG

14.1 Of global natural gas consumption of over 3,000 BCM, about 20 per cent involves cross-border movement, either through transnational pipelines or in the form of LNG. The LNG trade constitutes 7.5 per cent of global natural gas consumption.

15.0 Reserves and Producing Countries

15.1 The major conventional natural gas reserves in the world are in Russia, Iran, Qatar, Turkmenistan and the USA. 40 per cent of global assessed conventional natural gas reserve is in Russia and in Iran. The important fact to note is that the major gas reserves with the exception of the US are away from mature markets. The USA is the worlds largest gas producing country and also the largest gas consuming country, with output of around 600 BCM and consumption of around 647 BCM. Russia is the second largest gas producing country with output of 520 BCM and consumption of around 400 BCM, with the balance being exported to European countries through transnational pipelines. Recently, with the commissioning of the Sakhalin liquefaction terminal, Russia has also entered into the LNG exporting business.

16.0 Liquefied Natural Gas

16.1 Around 200 million tonnes per annum (mtpa) of LNG is produced and exported globally by some 17 countries. Qatar is the largest LNG exporter in the world with an installed capacity of 77 mtpa. The other major LNG producers/exporters are Malaysia, Indonesia and Australia. Australia is in the process of adding large LNG capacities and is expected by 2015 to rival Qatar as the pre-eminent LNG exporter. Of the total LNG produced globally, around 7075 per cent is consumed in the Asia-Pacific region. The five major

28

importing countries in the Asia Pacific are Japan, South Korea, Taiwan, China and India. The balance 25 per cent volume of LNG is consumed in 22 other countries, mostly in Western Europe, including Spain, France, UK and Belgium. Re-gasification capacity in the world is around 560 mtpa with the US alone having re-gasification infrastructure of about 140 mtpa.

17.0 Shale and Other Unconventional Gases

17.1 The last decades high gas prices have seen the emergence as major sources of unconventional gases such as shale gas. In the US today, nearly 4050 per cent of total gas consumption is reported to be coming from these unconventional sources. The US is estimated to have vast reserves of shale gas. In the American continent assessed Canadian shale gas deposits rival that of the US and Argentina has been recently assessed to have deposits of a similar magnitude.

18.0 Impact of gas prices

18.1 The emergence of shale gas as a major source of additional supply has altered the character of the North American gas market. The Henry Hub gas price in the US has been hovering around $4 per million BTU (mmbtu) ever since the global economic crisis which saw a sharp decline in gas prices worldwide. However, unlike Henry Hub, the other benchmark prices for natural gas have picked up sharply over the past two years with UK benchmark (New Balancing Point or NBP) at around $911 per mmbtu and the Pacific Mark benchmark price (Japan/Korea Marker or JKM) at around $1014 per mmbtu. In other words, a huge spread has developed in the two years since the Crisis between North American natural gas prices and that in the Asia-Pacific. Given the large potential for incremental supplies of shale gas there is also the strong potential of being able to equalize market prices between the North American and Asia-Pacific regions through the physical movement of LNG.

29

19.0 Likely Trajectory of Global Gas Demand

19.1 Global gas demand is expected to continue to show robust growth, although the pace of the growth beyond 2020 may slow due to both economic and environmental factors.

19.2

Phase 1 2011 to 2020 - Factors underlying strong growth in consumption:

o

Growth is likely to be driven by a combination of preference for natural gas in the fossil fuel portfolio of developed countries and the economic recovery and attendant demand growth especially in Asia and other nonOECD markets.

The potential impact of rising energy efficiency, renewable and new technologies in the erosion of demand for natural gas may be limited.

CO2 and other emission regulation/legislation is likely to continue to push coal to gas substitution.

19.3

Phase II 2020 to 2030 - Continued growth but with greater uncertainty:

o

Growth will continue to be driven by Asian markets while the consumption in the US and Europe is likely to plateau. Renewable and nuclear sources of energy will begin to replace natural gas in power generation.

CO2/emissions legislations may begin to reduce the use of fossil fuel in general, including natural gas.

20.0 Trans-National Transportation Is Likely to Rise

20.1 With the geographical distribution of natural gas being quite different from that of the geographical spread of consuming centres, an increasing proportion of natural gas will come to be traded across national boundaries. This transportation will cover both pipelines as well as LNG. Pipelines are not always feasible and are vulnerable from the security point of view. In many areas, that could form the transit points for natural gas pipelines, the security concerns are especially marked. It is therefore quite likely that the increase in

30

the LNG trade will more than hold its ground, not only on account of basic economics but also from security considerations. As a consequence, it is expected that the share of LNG in global natural gas (conventional, shale, CBM etc) will continue to show a significant rise in the coming years.

20.2

Emerging markets in South and South East Asia, Central and Latin America are expected to experience rapid growth in gas consumption of up to 10 per cent per annum over the next couple of decades. It is possible that both India and China will experience a similar pace of growth in domestic demand.

21.0 Evolution of LNG Markets

21.1 Conservative estimates of project completion suggest that global LNG capacity will grow by 30 per cent between 2010 and 2015. LNG markets may retighten by 2015 depending on spread of new liquefaction capacity being put in place. On the natural gas supply side, in the next 20 years unconventional gas output is expected to grow manifold and form an important component in the total output of natural gas.

22.0 Gas Price Setting Mechanism Differ Across Regions

22.1 The different pricing mechanisms in the world are as follows:
o

North America Coal floor/residential ceiling based on power dispatch economics- Fuel switching in power and industrial applications sets marginal demand

OECD Europe Residential linked long-term supply contracts - Incentives for residence-linked pricing aligned across stakeholders

Asia Pacific Crude-linked long-term contracts- Security of supply is critical

22.2

A summary of the current situation, the likely future situation and the associated risk factors are presented in Chart-1.

31

Chart 1 Pricing Mechanism Worldwide

Source: GAIL

23.0 Some Features of the LNG market

23.1 The LNG industry has the potential to self-balance. The current supply capacity overhang is finite (existing capacity will be absorbed by 2015-2018). Despite new players entering the market, sellers act as a club with the largest 10 players expected to account for more than 60 per cent of capacity by 2020. Buyers have limited incentive to drive prices down, due to downstream market structure and upstream equity participations. Sellers have a strong disincentive to alter the price structure and kill the goose that lays the golden egg (Asian market). Industry has a consistent history of project delays and budget overruns. Buyers and sellers paid a heavy price for overestimating the impact of past imbalances (e.g. 2003/04).

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CHAPTER III Indian Gas Markets Demand & Supply Side

24.0 Introduction
24.1 In the last decade, the Indian economy has shown strong growth. Slowly, India is gaining strategic importance globally owing to its economic growth pattern and attractive market. After coming out successfully from the financial crisis, the Indian economy is back on a robust growth track. 24.2 With economic growth, there will be more energy demand. This will result in an increase share of natural gas in Indias energy basket. With a targeted GDP growth rate of 9 per cent, Indias energy demand is expected to grow by 6.5 7.0 per cent. 24.3 The last decade also showed strong growth in the Indian gas sector. Gas is slowly emerging as a primary source of energy for India, along with coal and oil. The British Petroleum Statistical Review 2010, places natural gas as accounting for about 10 per cent of Indias energy basket and this figure is forecast to reach 20 per cent by 2025. It is also expected that by 2015, the Indian gas market may be likely to be as large as that of Japan. Chart 2 Composition of Indias Energy Basket

Source: BP Statistical Review 2010

33

24.4

Current consumption of gas in India is around 170 mmscmd. The power sector is the anchor customer for the gas sector, consuming 38 per cent of the total supply while the fertilizer sector consumes around 25 per cent. The sector wise consumption of gas in India is given in Table 3.1. Table 3.1 Consumption of Natural Gas by Sector Unit: mmscmd
2009/10 Power Fertilizers CGD/CNG Refineries Sponge Iron/Steel Petrochemicals Other uses LPG and C2-C3 extraction Internal Consumption in Pipelines Total 56.42 37.37 6.54 12.29 6.49 6.79 11.72 6.52 2.01 146.15 June 2011 61.41 37.74 7.90 19.77 7.01 5.67 17.01 9.18 2.47 168.16

24.5

Although gas price have changed a lot in last two decades and are slowly moving towards market driven price, the Indian gas market is sensitive to price. In the last 20 years, the growth of the gas market was steady and with improved infrastructure, local discoveries and low price level, the usage has begun to rise rapidly. Currently, India has a substantial demand for gas that has been estimated to rise, with estimates in excess of 370 mmscmd by 2016/17. As domestic gas discoveries are expected to be limited, the demand supply gap is expected to continue due to non-availability of domestic gas.

25.0 Domestic Demand for Natural Gas

25.1 The consumption of natural gas and R-LNG in India has expanded rapidly. At the margin it was, and will continue to be, a replacement for other fossil fuels and petroleum based chemical feedstock. Historically, natural gas was significantly cheaper than comparator petroleum fuels like motor spirit,

34

naphtha, diesel and LSHS/FO. This was the case too in India and it assisted in covering the capital cost for the older liquid fuel based plants to natural gas use. The advent of new technology and larger plants, ensured that gas based use came to enjoy very large efficiency and scale economies. In consequence, it has become the preferred route for fertilizers, petrochemicals and has made large inroads into power generation.

25.2

However, as the natural gas market has matured, the spread between the price of natural gas and that of liquid fuels has reduced. Further, the price of liquid fuels itself has shot up. Thus, the price of Brent crude has risen from $25/bbl in 2002 to $50/bbl in 2005, to $117/bbl in recent months. This is an increase of 368 per cent over the nine-year period. In the same period LNG prices in the Asia Pacific market has gone up from $2.50 to $14.00 per mmbtu or by 460 per cent.

25.3

In the face of such sharp and steep price increase, adjustment on the user side is not easy. This is especially so since natural gas is an intermediate good and the decision to use it involves a commitment of large investments in the form of fixed capital. The user is constantly facing the risk of not being fully able to pass-on the escalating cost of the input material to the final customer. This causes friction in decision taking and in the finalization of supply contracts.

25.4

Significant investment have already been made in the power, fertilizer, petrochemical and other areas such that it is most likely that there will be a sustained increase in the level of natural gas consumption in the country.

25.5

As noted previously, starting from the existing consumption level (net of I/C, flaring etc) of about 170 mmscmd, there are additional requirements from the power and fertilizer sectors.

35

25.6

Between 2011/12 and 2012/13 an additional 12,200 MW of gas based power capacity is expected to be commissioned which will require commensurate additional supply of natural gas.

25.7

In the fertilizer sector 3.8 mmscmd of natural gas would be needed for the conversion of LSHS/FO based fertilizer plants to gas based. In the next year, or shortly thereafter, another 8.45 mmscmd of natural gas will be needed for the change over of naphtha based fertilizer plants to gas based. Further, debottlenecking and unmet demands of 4.10 mmscmd exist. In addition, there is further possible demand from new urea projects.

25.8

Even if we were not to consider additional gas based power plants and new gas based fertilizer plants, the total gas consumption level would approach 235 mmscmd by 2014/15. Further, sectors other than power and fertilizer would also see growth. If we are to ascribe a modest growth of 67 per cent in these areas of use (which may be quite conservative), the total demand for natural gas is likely to exceed 300 mmscmd by 2014/15 and more than 370 mmscmd by 2016/17.

25.9

It is estimated by the Department of Fertilizers that further capacity of 8 million tonnes of urea involving six projects is in the pipeline which would require additional 14.4 mmscmd. In the power sector, further gas based capacity of 20,000-25,000 MW is being considered which would involve an additional gas requirement of 80100 mmscmd.

25.10 There is enormous scope for further use of natural gas in automotive vehicles and as cooking fuel. Conversion of vehicles, especially that in the public transport system, from diesel to natural gas not only involves direct economic savings to the user (even at R-LNG prices), but also creates beneficial externalities in the form of lower pollution levels. The replacement of LPG use in the larger urban areas with piped gas is also desirable, both in terms of comparative economics and also keeping in view the large subsidy outgo that

36

LPG use presently entails. There are many other innovative uses of natural gas such as that in combined power generation and cooling in large office complexes, as also as fuel in factories. Bearing all this in mind, the inevitable conclusion is that there is a large potential increase in the consumption level of natural gas that is possible in this country, beyond even 370 mmscmd by 2016/17.

25.11 The domestic production of natural gas is significantly less than that of consumption, being about 75 per cent of domestic consumption needs. Imports in the form of LNG account for the balance. It is certain that over the next several years, exploration and production efforts will result in an increase in the availability of natural gas. However, even in the most optimistic circumstances it is not possible to visualize a situation where increase in domestic gas production will be able to meet incremental domestic consumption. In fact, incremental domestic output is more likely that not to fall considerably short of incremental domestic consumption.

25.12 The proportion of imported natural gas to total consumption is thus quite likely to increase from the present level of 25 per cent to around 40 per cent if not higher. Natural gas can be imported either through pipelines from producing countries in the neighbourhood or in the form of LNG. The difficult conditions that are prevalent in all the access points in the North West to gas fields in Central Asia or West Asia place any immediate start up of pipeline construction in some doubt. Likewise, the pipeline with natural gas fields in Myanmar is also futuristic. In any case, pipeline construction takes time and for the foreseeable 58 years (i.e. up to the end of XIIth Plan and up to 2020), it is necessary to plan on the basis of the entirety of the incremental imports as coming from LNG.

25.13 This would have consequences in terms of adequate handling capacity being set up in the country as well as appropriate sourcing to be done from overseas.

37

25.14 The critical issue may seem to be the price of natural gas/LNG. The fact, however, is that energy prices are going to rise relative to other goods and services. This is particularly true for petroleum. As things exist today, LNG prices are linked to crude petroleum prices with a discount. This discount has been rapidly falling over the past few years and present LNG prices in the Asia Pacific region imply a discount of only 34 percentage points. Even assuming no further reduction in the discount but given the fact that crude oil prices will continue to escalate, it is hard to conceive of a situation that LNG prices will not.

25.15 It is, of course, true that the discovery and development of non-conventional natural gas sources shale gas, tight gas and Coal Bed Methane may work to the advantage of the natural gas user by exercising a moderating influence on the price. However, even in the most benign situation that can be envisaged, at best, the implicit discount from crude may reduce somewhat from the elevated levels presently embodied in Asia Pacific LNG prices of $14 per mmbtu. But a return to prices of $56 mmbtu for LNG should not be envisaged. It is, therefore, imperative that any operational plan to bear in mind that the best possible prices in the future are going to be higher than that in the past and we should be prepared for the adverse situation when prices are even higher.

25.16 In India, there is a particular situation where domestic coal prices have lagged the general world wide increase in price of fossil fuels. In consequence, there is a very large spread between the price of domestic coal and that of imported coal and also between domestic coal and world gas prices. However, this situation will also slowly correct. Rapid correction is not possible because of the public policy need to moderate the consequent price in electricity tariffs. This is the same reason why domestic natural gas prices are also lower than Asia Pacific LNG prices, though it is at about the same level as natural gas prices in the US and Canada.

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26.0 Future Gas Sourcing

26.1 India is pushing hard to increase its domestic gas production to cater to the large demand. Since the creation of NELP, eight rounds of bidding have taken place. The ninth round of bidding is currently in progress. There is consensus that a large portion of the possible sedimentary basin has been explored. Currently, there is prevailing uncertainty over potential from the new NELP and CBM blocks. In addition, the government is bringing out the new Open Acreage Licensing policy towards the end of 2011 or early 2012 which could prove to be a discontinuity against the earlier regime. The open acreage licensing policy will have several new features as opposed to the earlier NELP: Flexibility of bidding throughout the year for upstream oil companies Shifts bidding of blocks from government to investors Helps manage risks better and E&P companies can evaluate the data in a meaningful manner

26.2

This will result in building the National Data Repository (NDR) to archive all E&P data. In addition, it will help E&P companies reduce their risk exposure and attract international companies, that is, Shell, Exxon Mobil, and BP to the Indian E&P space.

26.3

Domestic supply of gas will be limited and the primary producer of gas will be Reliance and ONGC. Optimistic supply projection of domestic gas (Producer wise) is given in the following Table 3.2 which is based on DGH data.

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Table 3.2 Optimistic Projections of Output of Natural Gas Unit: mmscmd Year 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 ONGC 58.86 68.74 73.10 75.10 75.00 102.00 99.80 OIL 9.0 10.4 10.8 11.0 11.3 11.6 11.7 PSC 78.0 75.5 104.3 106.5 109.2 116.3 126.5 CBM 0.1 0.4 3.4 5.8 7.4 8.6 9.3 Total 146.0 155.0 191.6 198.4 202.9 238.5 247.3

Source: GAIL, DGH

26.4

Indigenous gas production in India can be classified on regulatory & contractual basis as follows: nominated fields awarded to National Oil Companies, Small size & Medium size fields awarded to private parties, preNELP discovered fields, NELP fields and CBM blocks5. As regards NELP blocks, production has commenced from KG D6 (D1, D3 & MA). Field Development Plan (FDP) is under implementation in GSPCs Deendayal West block and gas production is expected from mid 2012. Further, Declaration of Commerciality (DoC) has been approved for KG D6 satellite discoveries & NEC 25 of RIL and of ONGCs blocks in KG & Mahanadi Basin. As regards Coal Bed Methane (CBM) blocks, only Raniganj (South) of GEECL is currently under production. FDP is under implementation in RILs Sohagpur (E) & (W). Further, FDP is under review for ESSARs Raniganj (E) block Future availability of indigenous gas (Projected) as per EGoM on 28th July, 2010 is given in the Table 3.3.

26.5

As regards nominated blocks given to National Oil Companies (NOCs), viz., ONGC and OIL, information regarding expected gas availability has been obtained from the NOCs themselves. Information regarding expected future production from Small size & Medium size fields, pre-NELP discovered fields, NELP fields and CBM blocks has been obtained from Directorate General of Hydrocarbons (DGH)

40

Table 3.3 Projected Availability of Domestic Gas

20102011 20112012 20122013 20132014 20142015 20152016 Small Size (A) Medium Size (B) Pre-NELP (C ) NELP (D) CBM (E) ONGC Nominated Firm (F) ONGC (Nominated) Additional Indicated (G) OIL (Nominated) (H) Total (Firm) (A+B+C+D+E+F+H) Total (Optimistic) (A+B+C+D+E+F+G+H) 5.8 142.81 142.81 5.8 150.47 150.47 5.8 186.6 186.6 2.03 14.31 2.11 59.6 0.1 58.86 1.78 11.62 1.83 60.29 0.41 68.74 2.44 9.55 1.39 90.95 3.37 73.1 2.05 8.21 1.19 95.02 5.8 67.57 7.53 5.8 185.64 193.17 2.03 7.29 1.15 98.7 7.36 61.34 13.21 5.8 183.67 196.88 1.65 6.85 1.15 106.68 8.59 55.77 15.23 5.8 186.49 201.72

26.6

As per GAILs internal analysis, additional domestic gas sourcing can be in the range of 215 mmscmd to 240 mmscmd by 2015.

Chart 3 Projected net gas production from domestic sources, 2015

Source: GAIL

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26.7

As the demand is far exceeding supply in India and there are very few new domestic sources available, in future, additional demand can be catered to only through LNG (unless any large domestic discovery is made) or through transnational pipelines if and when they get constructed.

26.8

But currently, structural features existing in the closely held LNG market is driving crude linked LNG price in an upward direction. Some of the issues pertaining to this are: In a commodity market where supply exceeds demand, there should be consistent downward pressure on the market price. However, certain structural features of the LNG market tend to protect the status quo on pricing: The current supply capacity overhang is finite, and is expected to be overtaken by demand by 201516. Despite new players entering the market, seller industry concentration remains high. The 10 largest players are expected to account for more than 60 per cent of LNG capacity by 2020 Buyers have limited incentive to drive prices down, due to downstream tariffs and upstream equity participations Sellers have a strong disincentive to alter the price contracts and jeopardize the pricing in the Asian market Industry has a consistent history of project delays and budget overruns.

26.9

Buyers and sellers paid a heavy price for overestimating the impact of past supply demand mismatches.

26.10 However, some downward pressure is expected on LNG prices on account of factors such as unconventional gas development (Europe and Asia) and energy efficiency measures. Other sources of gas include unconventional gas sources like shale gas and Coal Bed Methane (CBM). In the long term shale gas is a good prospect for domestic gas.

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CHAPTER IV Non-conventional Natural Gas Sources

27.0 Coal Bed Methane (CBM)
27.1 Coal Bed Methane (CBM) in India offers good potential due to our high coal reserves. Worldwide CBM production has been slow to pick up, with current production of about 15 mmscmd coming primarily from the US. Global production is expected to grow to around 65 mmscmd by 2015 with technical challenges being gradually resolved. India has the sixth largest coal reserves in the world with projected CBM reserves of about 92 trillion cubic feet (TCF). Government has developed a policy to encourage CBM production and 33 blocks have already been offered in four bidding rounds. Five of these have established reserves of about 8.9 TCF. However, after several years of existence and promise, CBM production in India is still 0.1 mmscmd from 1 block. DGH expects production to grow up to 7.4 mmscmd by 2015 (RIL: 5.0 mmscmd, GEECL: 1.5 mmscmd, ONGC/ Essar: 0.9 mmscmd).

27.2

Several challenges still exist in meeting CBM production targets and increasing production beyond 2015 which includes technical challenges related to assessment of potential, utilization of produced methane, inferior grade of coal in India and low production from wells on account of low porosity and permeability, regulatory challenges related to use delineation of blocks for mining and CBM exploitation, environmental challenges on account of higher requirement of land and disposal of water, logistical challenges on account of requirement to drill large number of wells at low cost, big requirement of fracking and off-take of gas and political challenges as most prospective coal mines lie in insurgency affected areas and pose a threat to safe operations.

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28.0 Shale Gas

28.1 The share of production of unconventional gas is expected to increase twofold globally. Unconventional gas has grown in a big way in the US and currently accounts for 50 per cent of total gas production. Shale gas production is the most rapidly growing segment and currently accounts for around 15 per cent of the US gas production. Shale gas developed in the US as a result of several tax incentives for unconventional gas production, favourable geological features, and development of game-changing

technology. Major shale gas basins outside USA exist in Canada, Argentina, Eastern Europe, China, India, Australia, etc. However, most of the basins are not yet in production. Unconventional gas, particularly shale gas, can be a big game-changer in India going forward.

28.2

Based on unconventional resource base in USA, estimates of recoverable unconventional gas (excluding offshore) could range between 55 and 110 TCF in India. The Indian government is looking to monetize the shale gas resources. A MoU has been signed with the US government to bringing shale technology to India. Further, ONGC is drilling exploratory wells in the Damodar Valley. A policy framework is expected to be in place by 2012.

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CHAPTER V Liquefied Natural Gas (LNG)

29.0 LNG Terminals in India

29.1 Liquefied Natural Gas (LNG) trade has picked up significantly in recent years owing to increasing demand, declining domestic natural gas resources in gasconsuming countries and efforts of gas-producing countries to commercialize their resources. The LNG market has also seen key developments in the past few years including declining capital costs of LNG liquefaction plants and more flexibility in tenure and pricing of LNG Contracts. 29.2 Current LNG re-gasification capacity in the country is 15 mtpa (12.5 mtpa at PLLs terminal at Dahej, and 2.5 mtpa at Shells terminal at Hazira). While current capacity at the Dahej terminal is deployed for importing LNG from Qatar and short term supplies from other sources, the Hazira terminal sources spot cargoes. Out of current total LNG imports, 63 per cent is imported on firm contract basis while 37 per cent is imported on spot basis. Beyond this 15 mtpa capacity, PLL is adding another 5 mtpa terminal at Kochi, RGPPL plans to add a 5 mtpa terminal at Dabhol, GSPC-Adani plans to add a 5 mtpa terminal at Mundra, and IOCL plans to add a 5 mtpa terminal at Ennore. According to GAIL this will take the total re-gasification capacity in the country to 37.5 mtpa (around 135 mmscmd). There are also possibilities of a terminal in Mangalore and another in the East Coast.

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Table 5.1 LNG Terminals

Upcoming Terminal Dabhol Kochi Mundra Ennore Mangalore Promoter Ratnagiri Gas and Power Projects Ltd (RGPPL) PLL Adani Group and GSPC IOCL ONGC Capacity (MTPA) 5.0 2.5 in Phase I, To be increased to 5.0 5.0 2.5 in Phase I, To be increased to 5.0 2.5 Expected timelines 2011-12 2012-13 2014-15 2014-15 2014-15

29.3

One of the key drivers to expand LNG demand in domestic market will be India's ability to source long term LNG at competitive prices. At current prices, LNG may be cost efficient to few consumer segments like industrial consumers, petrochemical plants and CGD.

29.4

India has huge potential but the market naturally is sensitive to price. Demand varies with the different price point as the price affordability of the consumers is different. In Chart4 three scenarios have been presented by GAIL to assess the gas demand of India low, medium and high.

29.5

If the demand is constrained, then there will be demand of around 230 mmscmd in 2015 at a rate growth of 6 per cent pa. In this scenario, the Indian market will consume all of its domestic production, the current contracted LNG (around 30 mmscmd) and a further 20 mmscmd of incremental LNG.

29.6

In the medium case, if gas sales can be made at over $10 per mmbtu, then additional demand of 45-50 mmscmd may be generated and total demand will reach to around 276 mmscmd. At this price range, demand from additional sectors will be unlocked as the use of natural gas will be economical, despite of switching cost and required additional investment. This demand will be driven primarily by refining and petrochemical industry. Gas price of $10-11

46

will increase the demand to 311 mmscmd by 2015 as there will be demand from gas based peaking power generation. There is further potential to increase the demand to 387 mmscmd if we can provide gas at a price point of $67 per mmbtu. List of industries which can afford the various price points are also mentioned considering their switching cost and price of crude oil at $70 per barrel

Chart 4 Gap between Demand and Supply - Projection for next decade

1
(USD 13-15) Industries CNG transport

2
(USD 10 -13 ) Refineries Industries Power (CCGTs)

3
(USD 09-11) Peaking Power Plants

4
USD 06-07 Power New Fertilizer Plants

Source: GAIL

29.7

As on date the Priorities of allocation for core and non core sectors for APM/ Private Sector/ Joint Venture gas in terms of supply: APM: Priority 1: CGD and Agra-Firozabad consumers Priority 2: Power, Fertilizers Priority 3: Other industries PMT: 5 mmscmd Power, Fertilizers Remaining qty: Other industries RIL KG D6: As per designated consumer list with priority to power, fertilizers

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30.0 Gas Pricing: Status of Price of Gas/LNG from Different Sources

Table 5.2 Current Gas prices prevailing in select gas importing countries
Country Consumption in 2009 (BCM) 19.7 88.7 39.2 37.9 39.2 86.5 69.6 646.6 Proportion of domestic supply in 2009 100% 96% 76% 100% 79% 69% 84% 92% Price of gas in July 2011 (approximate average) in $ per MMBTU 3.2 4.4 4.2 4.05.0 7.010.0 8.3 (NBP) 4.0 (Referenced to US markets) 4.1 (Henry Hub)

Bangladesh China India Pakistan Thailand United Kingdom Mexico United States

Source: GAIL

Table 5.3 - Price & volume of Gas from domestic sources of supplies, i.e. APM gas, Private & JV sector gas. Price indexations and review clause, if any.
Rs / MSCM $/mmbtu Price Revision

APM PMT RAVVA RAVVA Satellite Pooled RLNG price RIL (ex Kakinada) Spot Min-Max Source: GAIL

6,986/7,917 9,194 5,695 7,167 9,000 6,986 17,85625,000

4.20/4.75 5.65 3.50 4.30 6.30 4.20 10.014.0

Till further MOP&NG orders 2017 2010 2010 Contract up to 2025 Price fixed by EGOM until 2013

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Table 5.4 Customer wise and Producer wise Gas Prices as prevailing in India
Source Customers Gas Price Gas Price (US S/mmbtu) 4.2 2.52 5.65 4.6 4.75 3.5 4.3 4.75 5.5 6.22 4.61 5.5 1.77 2.71 3.5 4.2 2.15 1.29 6.75 6.75-11.7

NOCs (APM) NOCs (APM) PMT PMT PMT Ravva Ravva Satellite CB/OS-2 (Cairns)

Customer outside North East Customer in North East Weighted average price of PMT except RRVUNL & Torrent RRVUNL Torrent GAIL GAIL GPEC GSPC GTCL

$4.2/mmbtu $ 2.52/mmbtu $5.65/mmbtu $4.6/mmbtu $4.75/mmbtu $3.5/mmbtu $4.3/mmbtu $4.75/mmbtu $5.5/mmbtu $6.22/mmbtu $4.612/mmbtu $5.5/mmbtu Rs. 79.43/ mmbtu $2.71/mmbtu $3.5/mmbtu $4.2/mmbtu Rs.3840/ mscm Rs.2304/ mscm $6.75/mmbtu $ 6.75- 11.7/ mmbtu

Hazira (Niko)* Olpad (NSA) (Niko)* Dholka North Balol (HOEC) Palej (HOEC) KG-D6 Amguri Fields (Canero) Amguri Fields (Canero) Term R-LNG Spot-R-LNG Note:

GACL/GSEG/GSPC Gas* GGCL* Small Consumer GSPC Small Consumer All Consumers AGCL GAIL For all For all

* These prices exclude royalty 1 mscm=39.682 mmbtu Term RLNG price is excluding of re-gasification charges &Marketing margin. The price changes every month on the basis of a formula agreed between seller & buyer. Spot RLNG prices vary from cargo to cargo. Panna Mukta gas price is $ 5.73/mmbtu & Mid Tapti gas price is $ 5.57/ mmbtu All the prices are excluding marketing margin. Source: GAIL

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31.0 Price of Long-term LNG Imports

31.1 The prices of long term LNG are based on the following:

o For Asian market, the FOB price is presently 14-15 per cent of Japanese Crude Cocktail (JCC) for long term supplies from projects like Australia, Qatar etc. which works out to $15.4/mmbtu on CIF basis. o For supplies from countries like US, Canada etc, the supplies are expected to be indexed to 115-120 per cent of Henry Hub prices or about $4.9 per mmbtu plus capacity charges & liquefaction costs, plus cost of liquefaction, transportation (including boil-off) and other charges. This may give a final CIF price of about $910/mmbtu on CIF basis.

31.2

Price of LNG purchased on spot, short term contract basis: For Asian market,

the FOB price is expected to be 11-12 per cent Brent for medium term supplies from projects or current spot prices that works out to be $1214 per mmbtu.

Chart 5 Affordability of LNG by different sectors

Source: GAIL

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32.0 Gas Pipeline Infrastructure in India

32.1 Gas market has remained mostly limited to the states where gas sources were found. This explains higher consumption of gas in the western region. Pipelines have also been laid from source to developed markets and major consumers like Fertilizer & Power Plants. States closer to the gas source have had benefits of higher utilization of gas and local development of gas market e.g. Gujarat, Maharashtra, Andhra Pradesh, etc. Other states/under developed have not been able to utilize benefits of gas due to less gas availability and lack of infrastructure e.g. Punjab, Haryana, Jharkhand, Uttrakhand, Karnataka, Kerala, Bihar, Chattishgarh, etc. The present natural gas infrastructure in the country is at Table 5.5 and the regional imbalance is at Table 5.6: (A) Existing Table 5.5 Natural Gas infrastructure in India
Player GAIL GSPL Gujarat AGCL/OIL RGTIL EWPL TOTAL Design capacity (mmscmd) 155 40 8 80 283 Length (Kms) including spur-line 8,000 2,000 500 1,400 11,900 AVG Present flow mmscmd 120 40 6 50 166

Table 5.6 Regional Imbalance in Natural Gas Infrastructure

REGION Approx. % of Total gas P/L network 40 20 13 16 0.0 10 % of consum ption 53 26 3 14 NIL 4 States having infrastructure & consuming gas Gujarat, Maharashtra Delhi, UP, Haryana, Rajasthan MP TN, AP Assam, Tripura States in the region lacking gas pipeline infrastructure

Western Northern Central Southern Eastern North Eastern

Goa Punjab, J&K, HP, Uttrakhand Chhattisgarh Kerala, Karnataka Bihar, W.B, Jharkhand, Orissa Meghalaya, Sikkim, Arunachal, Manipur. Nagaland, Mizoram

(28 States and 7 UT including Delhi)

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(B) Under Execution To remove the regional imbalances to a large extent, in 2007, MoPNG authorized for construction around 5,500 Kms of pipelines to GAIL and 2,800 Kms of pipeline to RGTIL. These pipelines are under various stages of implementation. Table 5.7 Pipelines to GAIL about 5,500 kms
Sr 1 2 3 4 5 Pipeline Dadri Bawana Nangal Chainsa Jhajjar Hissar Jagdishpur Haldia Dabhol Bangalore Kochi Kanjirikkod/Bangalore Total Length Kms/ Capacity mmscmd 646 Kms/31 mmscmd 350 Kms/35 mmscmd 2000 Kms / 32 mmscmd 1400 Kms/ 16 mmscmd 1100 Kms / 16 mmscmd 5,496 Kms /130 mmscmd Capex Approx Rs Cr 646 1,259 7,569 5,014 3,263 17,000-20,000 Commissioning year 2011-12 2011-12 2013-14 2011-12 2012-13

Table 5.8 Pipeline to RGTIL around 2800 Kms

Sr RGTIL Pipeline 1 2 3 4 Kakinada Haldia Kakinada Chennai Chennai Bangalore Mangalore Chennai Tuticorin Total Length Kms/ Capacity mmsmcd 1100 kms / 25 mmscmd 445 kms/8 mmscmd 600 kms/5mmscmd 670 kms/8 mmscmd 2820 kms/46 mmscmd Estimated to be 2014-15 but progress slow as on date Commissioning year

(C) Pipelines through bidding process Further with the PNGRB in place, Expression of Interest for 6000 Kms of pipeline has been invited. However, the grant of authorization is under process and is getting delayed due to ongoing litigation process. Also, Bids had been/are being invited by PNGRB for the following pipelines as mentioned below:

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Table 5.9 Pipeline through bidding process

Sr 1 2 3 4 5 6 Pipeline Mallavaram-Vijaipur-Bhilwara Mehsena-Bhatinda Bhatinda-Srinagar Surat-Paradeep Durgapur Kolkata Kakinada-Srikakulam Total Length Kms / Capacity mmsmcd 1584 kms / 30 mmscmd 1670 kms/30 mmscmd 740 kms/15 mmscmd 1724 kms/30 mmscmd 160 kms/4 mmscmd 350 kms/15 mmscmd 6228 kms/124.5 mmscmd Estimated to be 2014-15 ie 3 years from the grant of authorization by PNGRB Commissioning date

The above can be summarized as below: Table 5.10 Summary of Pipeline Status
Pipeline Type (A)-Existing (B)-Under Execution by GAIL/RGTIL (C)-PNGRB Bidding Rounds Grand Total Lengths (Kms) 11,900 8,300 6,000 26,200 Capacity(mmscmd) 283 180 124 587

32.2

After completion of all the above mentioned pipelines, nearly 80 per cent of the gas pipeline infrastructure will be in place in India in next 5 years. Further with laying of another 4,0005,000 kms of pipelines the entire country can be connected with gas grid for making gas available from any source to supply to major markets. The additional pipelines can be conceptualized as below so as to complete the National Gas Grid: Table 5.11 Additional Pipelines
Pipeline Name Barauni Guwahati Nagpur Hyd Bangalore Trivandrum Kota Jaisalmer Chandigarh Parwanoo Hissar Ganganangar Bhatinda Allahabad Shadol Raipur Vijaipur Grand Total Length Kms 760 2,000 600 75 250 750 4,435

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33.0 National Gas Grid

33.1 Therefore around 30,000 Kms of pipelines with capacity of around 700 mmscmd is expected to be completed in next 5-6 years. It is felt that after completion of all the above mentioned pipelines, a National Gas Grid would be formed in India which would connect the demand and supply centres located in India. The benefits of formation of National Gas Grid/Additional Missing pipeline links are as follows: This will ensure wider availability across all regions uniformly for social and economic progress. PNGRB has formulated guidelines for laying of pipelines on competitive bid basis across the country. This should be viewed in light of the comments in the summary.

34.0 The Rationale for Postal Tariff

34.1 Balancing regional economic considerations: At present, in India, sources of natural gas are broadly limited to two areas offshore of Western and SouthEastern States of India. A cross-country pipeline starts at the source of gas and provides connectivity to various demand centres. Postal Tariff provides for equal tariff to all the consumers. Zonal Tariff on the other hand can make the delivered price of the gas increase for consumers with increasing distance from source of the natural gas. Therefore it may be argued that to negate the potential economic imbalance Postal Tariff is desirable.

34.2

City Gas Consumers: PNGRB has a vision to implement CGD in around 250 cities within a span of few years in order to have a deeper penetration of use of environmentally natural gas. City gas consumers in many cities do not have access to cheap source of natural gas and Postal Tariff can help mitigate transport costs. Domestic & automobile consumers have access to LPG and Diesel at prices that are controlled by Government, which include controls on allocated inland transport costs. Postal tariff on gas can bring parity with these controlled inland freight allocations procedure in liquid fuels and LPG.

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34.3

Development of Gas Grid: In recent round of bidding for 3 Trunk Pipelines out of which the winning bid of 2 cross country pipelines MallavaramBhilwara and Mehsana-Bhatinda Pipeline has a near Postal Tariff (negligible tariff in Zone 1 and almost equal tariff in all subsequent zones) and winning bid for Bhatinda-Jammu-Srinagar pipeline is effectively Postal Tariff only.

34.4

An example: In June 2010, PNGRB had issued Zonal Tariff Order for the HVJ, HVJ-up-gradation and the EWPL natural gas pipelines. As per this order, the Zonal tariffs (Z-1, Z-2 etc) are as Table 5.12. As per the

aforementioned Tariff Order, the applicable pipeline tariffs, for different set of consumers in different locations, would be at Table 5.12: Table 5.12 Zonal Tariff Order
Zones Z-1 Z-2 Z-3 Z-4 Z-5 Levelised Region
Gas Source Pipeline Tariff EWPL DUPL HVJ HVJ U/G Total Total in Rs/1000 SCM Total in $/mmbtu

EWPL Rs/mmbtu 15.00 42.00 53.69 58.75 60.94 52.23 Rs/000 scm 530 1,485 1,898 2,077 2,155 1,847 Maharashtra
KG D-6 Rs/ mmbtu 58.75 26.14* 84.89 3,142 1.83

HVJ-GREP-DVPL Rs/mmbtu 19.83 22.48 25.10 27.70 25.46 Gujarat

KG D-6 Rs/ mmbtu 60.94 19.83 80.77 2,990 1.74

HVJ Upgradation Rs/mmbtu 42.46 48.14 53.76 59.32 53.65 Delhi (Existing)
KG D-6 Rs/ mmbtu 60.94 27.70 88.64 3,281 1.91

Rs/000 scm 734 832 929 1,025 942 Gujarat

ONGC, PMT, PLL Rs/ mmbtu 19.83 19.83 734 0.43

Rs/000 scm 1,572 1,782 1,990 2,196 1,986 Delhi (New Supply)
KG D-6 Rs/mmbtu 60.94 59.32 120.26 4,452 2.60

34.5

Zonal Tariffs are substantial part of the end-user gas price: The Government approved price of the KG D-6 gas is US $ 4.2/ mmbtu on NCV basis, which would work out to about $3.80 / mmbtu on GCV basis. As per the PNGRBs zonal tariff order, in Delhi, the transportation charges for receiving the KG D-

55

6 gas ($2.60/mmbtu) is almost 70 per cent of the commodity (gas) price itself. If, the KG D-6 gas is to be further transported up to Haryana, Punjab etc, the transportation tariff would then be almost equal to the gas price itself.

34.6

In case of CGDs, a CNG station or a PNG user would be required to pay additional CGD network tariff also, over and above the trunk pipeline tariff, thereby making the gas prohibitively expensive for retail users in these states.

34.7

Status on Zonal tariff declared by PNGRB: The tariffs for HVJ/DVPL and DUPL have been notified but the remaining tariffs have been filed by GAIL but pending for approval.

35.0 Location Economics and Efficiency

35.1 On the other hand, there is a strong and persuasive case that location and scale economics must not be excessively distorted through a scheme for across-theboard freight equalization. The danger is that the cross-subsidies then get embedded in otherwise irrational and inefficient location choices for largescale users. And that the cost of these otherwise irrational location choices has then to be borne by the system at large to its perpetual detriment.

35.2

It surely is not anybodys case that every urban centre must have a world class airport and metro-rail transport system. Likewise the argument for equal treatment can only be taken up to a point and cannot become an over-riding consideration.

35.3

Therefore, the Committee is of the view that while regional demand patterns and actual costs of pipeline construction and transportation should adequately enter into the framework of determination of pipeline tariffs, so should an effort be made to ensure that small users in outlying locations are not subject to prohibitive tariffs. The regulator is the appropriate agency to take a call on

56

this based on actual data on both costs and the geographical distribution of demand loads.

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ANNEX-I Extracts from the Study Conducted by Mercados

A study was conducted on behalf of GAIL by M/s Mercados EMI Pvt Ltd on how a common pooled price of natural gas could be worked in India. This study was completed in January 2010. Some excerpts from the study that has relevance to the task of the present Committee is presented below.

Suggested Mechanism for Gas Price Poling by M/s Mercados As of today, different prices of natural gas prevailing in the country can be put broadly under three categories. Till the KG D-6 gas production commenced, out of the total gas being supplied, almost 40 per cent was based on Administered Pricing Mechanism (APM). Even in case of APM gas, there are different prices prevailing for priority sector (power & fertiliser), North Eastern region (North Eastern power & fertiliser) and non priority sectors. To add to complexity, seven more types of prices are prevalent for gas coming out of production sharing contractsbe it from PMT, RAVVA, KG basin or other fields. The third category is LNG, which is broadly available at prices based on buyer-seller contracts.

Under the circumstances, a single benchmarked price of natural gas in India would be in the larger interest of the consumers, and also benefit the market development of natural gas in this country.

Objectives of pooling for the Indian gas markets: 1. Introducing new gas sources in the market; 2. Ensuring stable price signals for long gestation investments based on gas; 3. Deepening the pipeline network to expand the gas markets geographically; 4. Sending appropriate price signals for efficient use of gas;

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Various Pooling options: Option A: A general cost based pool covering all consuming sectors and all suppliers, excluding those of spot LNG. The option would become operational only through a legislative mandate since the provisions of existing PSCs relating to price discovery would be affected; Option B: A more limited sectoral pool arrangement covering the price sensitive power and fertilizer sectors, which are heavily subsidised as well as subjected to heavy regulations. Even as the pools would be smaller than a comprehensive pool, it would still be large enough to contain volatility to a certain measure and also introduce new supplies within the limits established by the pool governance rules. Power and fertiliser due to their reasonably large unit gas demand are also good anchor customers for new locations around which to grow the pipeline network. A growing grid supports smaller consumers who are less price sensitive and can support out-of-pool import contracts, smaller domestic gas sources and spot LNG. Option C: Competitive markets based on auction pools (bid based pools) on the lines already established for the power sector in the country. Even as this would be superior in many respects, we believe that the network infrastructure would need to be in place on a much larger scale than at present to ensure that the market can function. We believe that over the next 3-4 years this should be possible, and should be considered for introduction at that stage.

All aspects considered, we believe that the sectoral pool option B above would be most suited at this stage. It would serve the basic objectives without being heavy on administrative arrangements and costs. It would also be facilitative of an eventual migration to competitive markets. It needs to be noted that a cost based pool or long term contracts could co-exist with competitive gas markets. We also believe that the sectoral pool option would leave sufficient room for price discovery for new gas supplies.

Even as the sectoral pool would be relatively simple in terms of administration, it would still require substantial preparatory work for its introduction. Our review

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suggests that legislative changes would not be required to modify PSC terms. Instead a sectoral pool could work through a simpler policy directive. The policy would need to set out the detailed guidelines for constitution and operations of the pool, notify a pool operator, set out the institutional mechanisms, and also the transition processes. This report outlines certain key measures in this regard.

Recommendations It is important to note Indian gas market needs a rational gas pricing mechanism to encourage efficient consumption and development of natural gas infrastructure, while preserving the incentives to gas suppliers. Gas price pooling (either based on cost pooling or bid based pooling) is desirable for all the sectors consuming gas in order to bring in price stability at the individual consumer level. However, based on the analysis conducted by the consultant that Power and Fertilizer being the most vulnerable sectors, it is imperative for the Power and Fertilizer sectors to have a stable (within a range) gas price.

Accordingly the following are recommended: 1. Price pools should be formed for power and fertilizer customers. We recommend separate pools for the two sectors to avoid cross subsidies between the customer groups and administration issues that a combined pool would present; The pools should be notified consequent to a policy issued by the GoI. The notification should spell out the guidelines for pool operation in sufficient detail, and should also provide for tenure for the pool. The pool can be disbanded or extended upon a specific review on completion of the term. Considering the market realities the consultant recommended a 4-5 year term for the pool; The policy should notify a pool operator. We believe that GAIL as an existing operator of the pipeline system (and also with prior experience of pooling of RLNG) would be well placed to operate the pool. However the pool operation would have to be done on an arms length basis with suitable functional separation within the organization. The design of the pool should be undertaken on the basis of minimisation of structures, costs and complexities; A detailed set of pool rules should be drawn up and such rules should be notified by the GoI after due consultation. The limits of operations of the pool should be clearly set out, including the range of acceptable pool prices and corresponding quantities to be introduced. Detailed operating codes would also need to be drawn up;

2.

3.

4.

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5.

6.

All existing contracts for the sectors identified for pooling should be modified or novated to the pool as per the pool rules. This would require the pool operator to develop standard contracts; The pool should feature the necessary institutional structures and governance arrangements discussed earlier in this report. A separate analysis of these arrangements is suggested consequent to acceptance of the recommendations of this report;

As mentioned, the pools are recommended for the power and fertilizer industries only. This leaves adequate room for an alternate market to develop for other industries and even for customers of the power and fertilizer sector (particularly the former), who may not wish to be a part of the pool. This would facilitate price discovery for new gas supplies, and the pooling arrangements would not be a limiting factor for development of the industry beyond the limits that the pool can serve within its rules. This would also provide comfort to new gas suppliers who wish to supply to such industries.

It is important to note that the benefits of cost pooling are not necessarily restricted to the power and fertilizer sectors only. However the benefits of central pooling in the other sectors on the lines proposed is more complex on account of the large number of consumers with small volumes, since this would militate against the objective of keeping the pool administration set up and costs to a minimum. For the other sectors such as sponge iron, petrochemicals, CGD and other small customers pooling can be done at the gas suppliers level. In the present scenario the gas consumers source gas from various sources and pool it at the individual company level. Our analysis shows that in the international markets such as Italy and France where mostly the supply is based on contracts the gas supply company pools the gas from various sources and supplies it to the customers at a common price to all the end consumers. As we have mentioned in the report, we do not recommend pooling of transportation costs since this distorts the basic economic price signals derived from the location of the customer vis--vis the resource. However we do recommend the development of a robust gas transportation system across the country based on a policy or legislative mandate. In the initial years when the utilization is low on such pipelines, the policy

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framework should place limits on the pipeline charges. Deficits if any can be made good through mechanisms like Access Deficit Charges (ADC) as prevalent in the telecommunications sector.

Finally we recommend the creation of a roadmap for migration to competitive wholesale markets for gas, which would typically be through bid based pools, and feature a large number of independent shippers. It is important to note that such mechanisms could coexist with cost based pools and also long term contracts for gas supply. This would result in the emergence of a vibrant gas market that could attract new gas suppliers willing to supply for various contract tenures, and would provide a strong signal for emergence of gas trading hubs at key dispatch/aggregation points in the country.

An important aspect to consider is the taxation regime for gas. At present there are a wide range of taxation regimes that apply to gas from various sources, both at origin and at point of sale. Pooling of prices would result in the costs of feed gas varying from the sale price under the supply contract. While in case of PMT gas supplied under the APM mechanism a similar situation has been addressed (through the Gas Pool Account), and the same can be done for the sectoral pool, we would recommend a relook at the taxation regime and suggest simplification of the same. In particular since it is the stated objective of Government of India to reach gas out as a clean source of energy across the country, according gas the status of Declared Goods would merit consideration.

Critical Issues in Implementation of Gas Pooling: The following critical issues have emerged which would require resolutions before moving ahead with the idea of gas pooling.

Variations in taxation among the states The rates of VAT vary among the states from 12% to 26%. Some of the states have also allowed VAT credit against the final product while some do not. An inherent feature of the pooling would be that all the customers would be supplied gas through a

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pooling mechanism at a common price irrespective of the rate at which gas is contracted. This would lead to the issues of taxation as the common pooled price may be higher than the contracted price for some and lower for others. The states are not bound to levy VAT on common pooled price. It might be difficult to account for the variations in taxes through the pooling mechanism. In case an effort is made to pool the taxes, then some states may increase the VAT rates and this may lead to export of state taxes and may lead to legal complications.

Since, there is no physical pooling of gas and the actual delivery of gas may be different than pooled gas. Also, transportation charges would follow the contractual path, while the physical path may be different. Swapping of gas, which is inherent in gas pooling, would also require a clear taxation regime. To remove these anomalies natural gas may be included in GST regime or be conferred Declared Good status.

Creation of an Overarching Pool In the present system, the producer gives the gas to a marketer or enters into a GSPA directly. With the pooling mechanism, there may be no direct relationship between the producer/marketer and the customer regarding the quantity of gas supplied as well as the price. The pool will have to decide whether to make any gas a part of pooled price or not. It will need to be worked out how GSPA/GTAs between the producer/marketer/transporter and the consumer will be operated. Future

GSPA/GTAs may have to be modified to accommodate the pooling concept.

Concern over Price Discovery In their comments on the report of the consultant, most of the upstream companies have expressed reservations on the price discovery mechanism as it would operate in the pooling scenario. The pools do not have any control over the international LNG price and to get the benefit would like to keep the domestic prices at much lower levels than the LNG. This would be detrimental to the interest of upstream producers and indigenous development. Since, the customers will not be getting the gas at the contracted price with the producer, producer will not be able to discover the price of

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gas supplied to fertilizer and power sectors through bidding and it would be only the pool which will be able to discover the price.

Pooling of Transportation Tariff The transportation tariff cumulates as gas moves from one trunk pipeline to the next. The transportation tariff for a customer in a state like Punjab for the KG Basin gas could be more than 70% of the producer price of the gas. It has been suggested by some consumers especially fertilizer sector that transportation tariff should also be pooled. Pooling transportation tariff would have to involve transporters also in the pooling mechanism, making it further complicated.

Legal Challenge The directive for pooling of LNG prices by Petronet LNG in 2007 was challenged by several Gujarat customers. Though Gujarat high court decided in favor of pooling 2:1, the appeal is pending in Supreme Court. In view of the complex issues involved in pooling of all existing gases as well as future domestic gas and LNG for creation of two sectoral pools, it is for consideration whether an Inter-Ministerial group involving Ministry of Finance, Planning Commission, Ministry of Power and Deptt. Of Fertilizers may be formed and chaired by Addl. Secretary, MoPNG to resolve the inter-ministerial issues and also devise pool operating guidelines.

Other Issues o Imports of LNG only at reasonable price: The same would be facilitated if LNG imports are made for upcoming power/fertilizer plants. In order to maintain that the prices are at a reasonable level, a high empowered committee can be formed comprising of high level officials from GAIL, MOP&NG and other administrative Ministries. o How convergence of price pooling and NELP could be achieved: Under the present contract, flexibility is given for discovery of prices through market route which would be approved by GOI. Since the pooling proposed is at consumer level, the prices payable to producers would remain unaffected and would be governed by provisions of PSC/NELP contracts. The prices of consumers for core sectors would only be dictated by the pooling mechanism. o Examine the conflict between pooled price and existing contracts with the customers

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The existing formulation wherein different types of gases are supplied to individual plants seems to factor in only the existing power/fertilizer plants wherein pooling can be operating at unit level. However, for new power/fertilizer plants, there is no access to cheaper sources of domestic gas and hence have to rely heavily on new sources of domestic gas at higher prices or LNG at present high price levels. Therefore, until and unless enabling mechanism like sectoral gas pooling takes place, price moderation would not happen and it would be difficult for these Greenfield projects to come on stream. Therefore, in order to ensure that these projects materialize in the foreseeable future, sectoral pooling mechanism would be needed rather than leaving it at the plant level. It has been seen that certain states like Gujarat had derived considerable benefits on account of higher gas usage primarily aided by factors like proximity of gas sources as also extensive pipeline infrastructure. In order that other states in India are also able to consume substantial quantities of gas in their energy usage basket, pooling mechanism at sectoral level is required to be enabled so that Greenfield projects in core sectors like power, fertilizers etc can materialize. However, this would mean that the existing prices in individual contracts would be superseded with sectoral pooled prices under GOI Pricing orders as was done in the past for RLNG contracts. o Whether pooled price should be implemented as a policy directive or through an act: In our view the same has to be implemented through a policy directive by MOP&NG as was done in the past for Gas Pooling Order. In case of enforcement through Act, the process would be time consuming and may be a lengthy affair. o Examine the option for allocations of APM/Private/JV gas to the core sectors and non core sectors to use market price gas: The same can also be explored by MOP&NG and is independent of the sectoral pooling option. However, GOI may chose to take out APM gas supplies from the supply basket to non-core sectors and supply it to core industries.

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APPENDIX - 1
N-14026/2/2010-PET (P&E) PLANNING COMMISSION Government of India (Energy Division) Yojana Bhavan, New Delhi Date 9thth March.2011 Subject: Constitution of Inter-ministerial committee to formulate a policy for pooling of natural gas prices & devise pool operating guidelines to make the policy operational Ministry of Petroleum & Natural Gas has requested Planning Commission to constitute an interministerial committee to formulate a policy for pooling of natural gas prices and devise pool operating guidelines to make the policy operational. Accordingly, Planning Commission has constituted a committee under the chairmanship of Dr. Saumitra Chaudhuri, Member, Planning Commission with the following constitution. Saumitra Chaudhuri, Member, Planning Commission Secretary, PNGRB Additional Secretary, MOP&NG Sr. Adviser (Energy), Planning Commission JS/AS, Ministry of Power JS/AS, Ministry of Fertilizer JS/AS, Ministry of Finance (Deptt.of Revenue) Shri Govind Mohan, JS, Cabinet Secretariat OSD (Petroleum), Planning Commission CMD, Gail (India) Ltd CEO&MD, Petronet LNG Ltd Director (Finance), ONGC JS, MOP&NG Chairman Member Member Member Member Member Member Member Member Member Member Member Member Secretary

1. Following terms of reference are formulated for the committee: i. To examine the need for and to suggest a viable Scheme for a pooled price for Natural Gas delivered to the consumers. ii. To work out a mechanism of pool price of natural gas from different domestic sources of gas supplies & other sources including LNG imports under term/spot contract. iii. To examine the zonal transportation tariff & to suggest how gas pipeline transportation tariff could be rationalized or brought at a uniform level. iv. To examine the impact of taxation on pooling mechanism and to develop strategy for the same v. To suggest whether common pooled pricing of natural gas should be implemented as a policy directive or through an act. vi. To examine conflict, if any, between pooled pricing and existing contracts with customers & to suggest means to resolve the same. vii. To examine the impact of pooling on price discovery under NELP contracts and to suggest how convergence of price pooling and NELP contracts could be achieved.

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viii. ix. x.

To develop mechanism to ensure that only Regasified LNG at reasonable prices is allowed in the pool. To study natural gas/LNG price mechanism existing in Europe, USA & other countries. Any other relevant issue considered appropriate by the committee.

2. The Secretarial & other support would be provided by the MOP&NG/GAIL (India) Ltd. to the Committee. GAIL (India) Ltd/PLL to arrange consultants for carrying out any study required for the report. 3. Committee will submit the report in six months. Sd/(Banarsi Ram) Under Secretary to Government of India Distribution 1. Cabinet Secretary, Cabinet Secretariat, New Delhi-1 2. Secretary (Revenue), North Block, New Delhi-1 3. Secretary (P&NG), Shastri Bhavan, New Delhi-1 4. Secretary, Power, Shram Shakti Bhavan, New Delhi-1 5. Secretary (Fertiliser), Sahstri Bhavan, New Delhi-1 6. Chairman, PNGRB, WTC, 1st Floor, New Delhi-1 7. Chairman & all the members of committee 8. Copy to DCH/Member (Energy)/Member Secretary, Planning Commission for information Sd/(Banarsi Ram) Under Secretary to Government of India

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