Indexation Of Natural Gas Pricing

Akhil Saraswat (2015001)Dhaivat Acharya (2015012

Raj Vadukul (2015034)Ronak Sani (2015039)

MENTORED BY:PROF.PRAMOD PALIWAL

Topics covered in the Proposal

1) Defining Oil indexed pricing and Gas-on-gas pricing

2) A brief introduction to Cost-Plus and Netback Pricing

3) Natural Gas trading Hubs: NBP, Henry Hub, Futures Market and Physical Markets

4) Ways through which Natural Gas pricing is determined

Price interaction with other Gas markets-As a gas market moves from being non-competitive to competitive, alternative sources of natural gas will be offered to consumers.

Europe:It is expected that various hubs developing in Europe today will converge to one price level.

-Relative Law of One Price (LOP) holds in Northwest European gas market- prices at various gas hubs moves in harmony.

-Several factors account for this co-integration:1) Ease with which natural gas is traded2) Increasing volumes traded on one single hub and better functionality

Towards an Interconnected market….?

-The overall volume of imported natural gas in the region will continue to increase to around 200 bcm in 2017 (International Energy Agency, 2015)

-A considerable expansion of intra-regional PNG trade of natural gas remains unlikely for the time being.

-No effective regional cooperation between large natural gas markets that would support a more interconnected gas market in the Asia-Pacific region.

Market Maturity: When will the Liquid Gas Market be Truly Liquid Increasing competition is the key to establishing a functioning in

the Gas Market. Effective functioning will increase the confidence among market

participants Two factors to be meticulously considered for gas market reforms

Confidence Timing

Governments Role

A government is likely to inspire confidence if it met the Institutional Requirements Structural Requirements

Different Indicators to indicate a Market’s ability to function and set a Reliable Price Nominated volumes to a hub Volumes traded on exchange (supplemented with OTC) Churn rate Trade horizon Bid Ͳask spreads

The Role Of Regulator Regulators role is closely linked to the pace of the reform Regulators might be persuaded to Reregulate Reregulation happens incase when the Market outcome is not

what is desired This increases the risk market participants Frequent changes might deter further participation

Indian gas sector is broadly characterized by two moving parts

1. which has prices and quantities set by the Indian government.

2. Utilizes gas at market (LNG import) prices.

Indian Supply-Demand scenario

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The Structure of Gas Prices in India• The Nomination regime (also known as the Administered Pricing Mechanism or

‘APM’), existed prior to the liberalisation of the upstream sector in the 1990s, covering most of the ‘legacy’ fields of the two largest NOCs – ONGC and OIL.

• The Discovered Fields regime (also known as the Pre-New Exploration Licensing Policy regime or ‘Pre-NELP’) was a semi-liberalised system brought in during the early 1990s to replace the Nomination regime, enabling joint ventures between private companies and the NOCs – which typically had a 30% carried interest

• The New Exploration Licensing Policy (NELP) replaced the Pre-NELP regime in 1999, and was the main fiscal regime for upstream exploration and production as of March 2015, based on Production Sharing Contracts.

• Pricing under the NELP Regime– Example :- KG-D6 – operated by Reliance Industries Limited (Reliance). The formula

for this was proposed by Reliance, the producer, and was approved by the Government with some revisions: SP = $2.5 + (CP – 25) 0.15+ C.

– SP represented the selling price (in $/MMBtu), $2.5 was a constant representing the base price of gas, and CP was the lagged price of Brent Crude, subject to a floor and a ceiling. C was a constant representing the outcome of bids (presumably as a proxy for demand) invited from consuming sectors in the original discovery exercise, which was later set to zero by the Government.

• Pricing of LNG Imports– Example :RasGas of Qatar agreed to supply 5 mtpa of LNG from 2004, at a

contracted price of $2.53/MMBtu for 5 years, with a further 2.5 mtpa from January 2010. The period of fixed prices ended in 2009, and a 5 year transition then began to a 100 % linkage with crude oil.The formula agreed between Petronet LNG Limited and RasGas was: Po*JCCt/$15

– Po was $1.90/MMBtu, JCCt was the 12 month average of the JCC price and t referred to the month in which the price calculation was carried out. The term JCCt in the formula was subject to a ceiling and a floor, which were:• Ceiling: [(60-N) * 20+ (N*A60)]/60+4• Floor: [(60-N)*20 + (N*A60)]/60-4

– Where, N =1 for January 2009, and increased by 1 every month thereafter until December 2013, after which it remained 60, and A60 = 60 months’ average of the JCC price.

Domestic Gas supplied under Different Fiscal & Pricing Regimes (%)

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