A note on pooled price for natural gas

At the instance of Union Petroleum Ministry the Gas Authority of India

Limited (GAIL) had appointed Mercados Energy Market Private Limited, a
Spanish consultant firm, to submit a feasibility report on single reference price or
pooled price for natural gas that comes with varying price tags from various
sources in the country. The report, which has already been submitted by the
consultancy firm, is being currently debated among the stake holders, including
industry players and the government. One of the options under consideration, as
reported in the media in the third week of March, 2010, is to introduce sector
specific uniform pricing for natural gas across the country.

There are six prices that have been considered for pooling. They are: Long-
term LNG(liquefied natural gas), spot LNG, gas sold under administered price
mechanim (APM) to the North East, APM gas sold to other regions, Panna Mukta
Tapti gas and D6(Reliance Industries Ltd) gas from KG Basin. While maintaining
that a final view is yet to be taken on the issue, the officials of the Petroleum,
Power and Fertiliser Ministries, including the Union Petroleum Minister Murali
Deora, Minister of state for Oil and Naural Gas Mr Jitin Prasada and GAIL
chairman & managing director B C Tripathi, openly advocated for a pooled price
for natural gas while participating in the recent 6th Asia Gas Partnership Summit in
New Delhi.

“This would pave way for not only availability of gas to hitherto uncovered
parts of the country but also lead to one reference price throughout the country, just
like the Henry Hub price in the US,” ---Minister Jitin Prasada

“Over the next few months we will explore further how to make all parts of
the country get gas at almost the same price,'' ----Union Petroleum Secretary Mr. S
Sundareshan

The complete unanimity on the issue of single reference price for gas across
the country is quite evident among various ministries in the Central Government
even before the final report was due to be submitted some time in the near future,
even as the arguments in favour of a pooled gas pricing not only defies the
economic logic but also denies the advantage of the state of Andhra Pradesh of
having huge natural gas resources at its doorsteps in KG Basin besides taxing it for
the same.
 Before discussing the implications of pooling of all the prices let us just
apply the single reference price formula to Reliance Industries’ D6 gas from KG
Basin alone. The market discovered price of KG D6 gas is at $ 4.2 per
MMBTU(million metric British thermal units). The delivered price, including
taxes and transportation charges, of RIL gas in Andhra Pradesh is about USD 5.34
per MMBTU while in Maharashtra it would cost USD 5.87. In Gujarat it would
cost USD 5.87 and along the Hazira-Vijaipur-Jagdishpur (HVJ) pipeline it is USD
6.21. The delivered price of RIL gas in Delhi will be $6.7-6.8 per MMBTU. A gas
consumer in Andhra Pradesh, who currently pays $5.34 per MMBTU for natural
gas, will have to pay about $6.00 per MMBTU from day one if all the above prices
are averaged out as advocated by the Petroleum Ministry. This means the gas
consumers in Andhra Pradesh have to shell out extra money for the sake of the gas
consumers in Gujarat and Delhi. Even the price of $6.00 per MMBTU for Andhra
consumers will only be notional and will move further up considering the fact that
the amount of D6 gas that goes to Maharashtra, Gujarat, Delhi and other far away
places from KG Basin would be much larger compared to the portion of gas
consumed in Andhra Pradesh. Consider the scenario after other companies such as
GSPC starts producing and exporting natural gas from KGBasin to other parts of
the country. India’s gas output rose 57 per cent in last December to 4.4 billion
cubic meters as RIL alone continued to raise its output I D6 block. Therefore the
more the gas is exported from KG Basin to other parts of the country the higher the
price of natural gas to be paid by the consumers in Andhra Pradesh state as the
transportation costs are merged with gas prices to offer uniform rate across the
country.

Why the government should contemplate introducing a single reference

price for natural gas when there was no such mechanism so far for any other fuel
source being utilised in the country, is an intriguing question. Take for example
coal, which is the predominant fuel source for power generation in the country but
is available at different landed costs for different thermal power projects even
within Andhra Pradesh, let alone the price variations of coal at all India level. Cost
of coal is cheaper when it comes to NTPC’s pit-head station at Ramagundam as
compared to the landed coal price for Vijayawada Thermal Power Station(VTPS),
which gets coal all the way from Mahanadi coal fields in Orissa, and Rayalaseema
Thermal Power Project(RTPP). The landed coal costs for VTPS and RTPP also
vary because of the transportation costs depend on the distance between the source
of coal and the power station.

For the sake of economic viability the power utilities across the country
prefer setting up pit-head stations to eliminate transport costs that some times
double the delivery price of coal when it lands at a certain non-pithead power
project. The same logic is applied to other sectors as well. For example the steel
plants are situated near iron ore mines and cement plants are located near the lime
stone quarry areas.

Even if some one puts up a thermal power project at a location from where
the source of coal is far away like in case of RTPP or the upcoming thermal power
projects at Krishnapatnam, which are expected to import coal from Indonesia, the
government does not subsidise their transportation costs in the name of a single
reference price for power sector.

But the state government, which has to absorb any hike in fuel costs while
making power purchases from private gas power projects in the state, will have to
pay more for natural gas if some one wants to set up a huge power project using
natural gas from KG Basin at Dadri in Uttar Pradesh in the name of a pooled price
for power sector. Likewise private sector players from other sectors in Andhra
Pradesh will also have to cross subsidise the transport costs or the higher import
costs of natural gas for the sake of some one who uses natural gas for his plant
some where in Gujarat or Delhi. It does not make any economic sense to set up a
power plant far away from the source of natural gas in the first place. Over and
above, a private sector gas consumer or a power utility in Andhra will be penalized
for the act that was committed by some one in Gujarat and Delhi.

This way the state would be left with no advantage what so ever if a single
reference price is introduced for natural gas in the country. And it would become
more and more disadvantageous to the state when more and more natural gas is
produced and transported from KG Basin through pipelines to place outside
Andhra. Instead of igniting the prospects of industrialization of the state in
particular and east cost in general, the KG Basin will only serve the interests of the
companies that operate in Northern and Western parts of India besides
economically promoting only those regions which had alone benefited by the
natural gas resources so far.

Among other prices considered for pooling, the APM prices of natural gas
such as in joint venture fields under the new exploration and licensing policy,
ranges from $ 2 per MMBTU to over $7 per MMBTU. While the low APM prices
are set to be increased to the level of D6 gas price of $4.2 per MMBTU by he year
2013 starting this year, the higher APM price of sources like Panna Mukta Tapti
fields will further add to the proposed pooled price of natural gas.
 The other category of natural gas that is proposed to be pooled into single
reference price is the spot and the long term LNG. While 80 per cent of the natural
gas demand in the country is currently being met by domestic sources, the
remaining 20 per cent is coming by way of imported LNG. The impact on pooled
price from LNG imports would be much higher. While the spot LNG prices have
dome down to as low as $ 4 per MMBTU these days from the record high prices of
around $22 per MMBTU in the year 2008 under the impact of global recession, the
long term contract prices are now going to be around $ 10 per MMBTU as the
Qatar, the major global LNG supplier has asked for $ 10 per MMBTU price as a
condition to enter long term supply contract with Government of India recently. So
if the Government of India decides to enter a long term supply contract for LNG
with Qatar then the natural gas consumers in Andhra have to pay for such a
decision as the pooled price will go up to absorb the high cost of LNG imports.
And the imported LNG prices, both spot and long term, will go up as the global
demand for the same starts increasing in future. The pooled price of natural gas
will also increase with the expected increase in India’s LNG once the higher
import costs are distributed among all the natural gas consumers in the country in
the name of sector specific uniform pricing for natural gas.
It may be noted that a recent report by McKinsey, which has projected
India’s natural gas demand to nearly double to 320 MMSCMD from the current
166 MMSCMD by the year 2015, said the inability to absorb high international
costs limiting the import of LNG in the short term.