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Focused Energy Report –
Volume XXXXX
Monthly Report – December 2016
Energy Desk
GAIL (India) Ltd.
1
Table of Contents
I. Energy Prices 3
II. Under-Recoveries on Petroleum Products 3
III. Country Analysis – HongKong 4
A. Energy Mix ...................................................................................................................................................... 4
B. Regulatory Structure ................................................................................................................................... 4
C. SWOT Analysis ............................................................................................................................................... 5
D. Oil and Gas Infrastructure ......................................................................................................................... 5
E. Gas Pipelines .................................................................................................................................................. 5
IV. Comparative Analysis of Q3 Results of Global Oil and Gas Corporates 6
A. BP Overall ........................................................................................................................................................ 6
B. Shell Overall .................................................................................................................................................... 7
C. Comparison of BP and Shell ..................................................................................................................... 8
V. Pooling of Gas – Fertilizer Sector 9
A. Fertiliser Pooling ........................................................................................................................................... 9
B. Phase of Pooling ........................................................................................................................................... 9
C. Functions of Pool Operator .................................................................................................................... 10
D. Pool Operation Mechanism .................................................................................................................... 10
E. Uniform Delivered Pool Price ................................................................................................................. 10
F. Weighted Average Price Mechanism .................................................................................................. 11
G. Downward trend in pooled gas prices to benefit the industry .................................................. 11
VI. Carbon Pricing And India 12
A. Why Price Carbon? ..................................................................................................................................... 12
B. Carbon Tax Vs. Carbon Market ............................................................................................................ 12
C. History Of Flexible Global Carbon Pricing ......................................................................................... 12
D. COP 21 & Carbon Pricing ........................................................................................................................ 13
E. Carbon Pricing And India......................................................................................................................... 14
F. What is the carbon pricing opportunity for Indian business? .................................................... 14
G. Conclusions and key messages ............................................................................................................. 16
2
Executive Summary
The Focused Energy Report for the month of November 2016 reviews the Energy Prices taking in
consideration the comparison with last month. There’s increase of around 5.5 % in the WTI oil prices, the
prices of natural gas Henry Hub have increased by 10.6 % and crude oil prices of Brent increased by
around 4.5%. Some market analysts cited forecasts of colder weather and predictions of a larger-than-
average storage draw as reasons for the price increase of HH in US. Brent and WTI also gained after OPEC
hashes out a deal to cut production.
The next discussion in the report is about “HongKong”. It is energy deficient and primarily depends on
imports for its energy usage. Oil and Coal form basic form of energy sources. Hong Kong has one of the best
business environments in Asia. This is reflected by its high position in the Index of Economic Freedom league
table, compiled by the Heritage Foundation and the Wall Street Journal. Gas consumption will increase as
new gas-fired units replace older coal powered ones.
An analysis of its Energy Mix, SWOT Analysis, Regulatory Structure, Oil and Gas Infrastructure and Gas
Pipelines is covered.
In the next section company “Comparative Analysis of Q3 Results of Global Oil and Gas Corporates” is
analysed. The environment remained volatile over the quarter and continued to impact quarterly earnings
across the sector. BP’s third-quarter underlying replacement cost profit was $930 million, down 49% on
the same period a year ago, and 30% higher than the second quarter of 2016. Royal Dutch Shell’s third
quarter 2016 Current cost of supplies (CCS) earnings attributable to shareholders were $1.4 billion
compared with a loss of $6.1 billion for the same quarter a year ago. Shell and BP's results were important
landmarks for both companies after a tumultuous few years.
The analysis covers its Q3 results of BP Overall, Shell Overall and Comparison of BP and Shell.
In this section there is a discussion about “Pooling of Gas Fertiliser Sector”. Prior to July 2015, the price of
gas supplied to fertilizer units varies from plant to plant depending upon the combination of domestic gas
and RLNG. CCEA approved pooling of gas for Fertilizer (Urea) sector which came into effect from 1st July,
2015. The price of pooled gas for urea units have fallen to about US$6.5-6.6/MMBTU during April-May 2016
from ~ US$7.2-7.3/MMBTU during Feb-Mar 2016 due to a further 20% reduction in the domestic gas prices.
As per ICRA research estimates, for a fall of every US$ 1/mmbtu in gas price, the retention price of urea
would reduce by Rs. 1800-2000/tonne. Hence, reduction in the pooled prices to US$6.5-6.6/ mmbtu
should lead to subsidy savings of ~Rs.15-16 billion for the Government for H1 FY2017 (assuming the
currency to remain stable).
The analysis covers Fertiliser Pooling, Phase of Pooling, Functions of Pool Operator, Pool Operation
Mechanism, Uniform Delivered Pool Price, Weighted Average Price Mechanism and Downward trend in pooled
gas prices to benefit the industry.
In the last section an analysis on “Carbon Pricing and India “is covered. Climate change is a negative
externality and can be a cause of market failure. Raising the market price of carbon provides strong
incentives to reduce carbon emissions through four mechanisms. A carbon tax fixes the price of carbon
emissions and lets the quantity fluctuate. While a carbon market fixes the quantity of carbon
emissions and lets the price fluctuate. India is currently the third largest polluting country in the world,
emitting 2407 million tCO2 as of 2015. India has not yet established a carbon market or carbon pricing
policy.
The analysis covers Why Price Carbon?, Carbon Tax Vs. Carbon Market, History Of Flexible Global Carbon
Pricing, COP 21 & Carbon Pricing, Carbon Pricing And India, What is the carbon pricing opportunity for Indian
business? and conclusions and key messages.
3
ENERGY PRICES I.
Price on 1st Nov. 2016 Price on 1st Dec. 2016 Change % Change
Brent crude oil 48.3 50.47 2.17 4.5%
WTI crude oil 46.86 49.44 2.58 5.5%
Henry Hub Natural Gas 3.03 3.35 0.32 10.6%
WTI Crude Oil ($/barrel) BRENT Crude Oil ($/barrel) Natural Gas ($/mmbtu)
Particulars Sep. 2016 (Final) Oct. 2016 (Estimated)
JCC Crude Oil ($/b) 45.52 45.17
Average International FOB Price & Exchange rate:
UNDER-RECOVERIES ON PETROLEUM PRODUCTS II.
(A) Product-wise Under-recovery of Public Sector Oil Marketing Companies(OMCs):
* Under (Over) Recovery is for Mumbai market, ** Cash Subsidy is for Delhi market
(B) The details of the under recovery/DBTL Subsidy during 2014-15 & 2015-16:
Particulars Unit 30-Nov.-16
Next Pricing Fortnight
for
16th
Dec. 2016
Crude Oil(Indian Basket)
- In US Dollar
- In Indian Rupees
($/bbl)
(Rs/bbl)
45.83
3140.33
49.53
3122.90
Exchange Rate (Rs/$) 68.53 68.59
Product Unit Under/Over-recovery
(eff. 1st Dec. 16)
Cash Transfer under
DBTL (eff. 1st Dec. 16)
PDS Kerosene* (Rs/litre) 10.51
Cash Compensation on Domestic LPG by
Govt. to consumers** (Rs./Cylinder)
123.17
Cash Compensation on Domestic LPG by
OMCs towards
'Uncompensated Costs' to consumers**
(Rs/Cylinder) 28.12
Product 2015-16
(Rs./Crore)
2014-15
(Rs./Crore)
Diesel 0 10,935
PDS Kerosene 11,496 24,799
Domestic LPG 18 36,580
DBTL Subsidy (Direct Benefit transfer for LPG) 16,056 3,971
4
Oil 66%
Natural Gas 10%
Coal 24%
Energy Mix 2015: Hong Kong
COUNTRY ANALYSIS – HONGKONG III.
Hong Kong officially the Hong Kong Special Administrative
Region of the People's Republic of China, is an autonomous
territory on the Pearl River Delta of East Asia. Hong Kong does
not have legislation specific for the oil and gas industry. The laws
generally promote competition and the functioning of a free
market economy. Hong Kong has one of the lowest tax rates in
the region.
A. Energy Mix
There are no indigenous energy resources in Hong Kong, they
derive energy supplies almost entirely from external sources.
Energy is either imported directly (as in the case of oil products
and coal products), or produced through some intermediate
transformation processes using imported fuel inputs (as
in the case of electricity and towngas). Small amount of
energy are produced by renewable energy sources such
as solar and wind energy. Coal dominates the fuel mix for
power generation in Hong Kong, followed by natural gas
and nuclear power imported from the Mainland.
B. Regulatory Structure
Key Legislation
The main laws apply to competition and stockpiling of oil products:
In the government's May 1998 'Statement on Competition Policy' it was noted that the government would
promote economic efficiency and free trade through competition.
The government requires all the oil companies to maintain a minimum stock in Hong Kong sufficient for 30
days supply.
Hong Kong does not have a national oil company. It does not have a separate fiscal regime for the Oil & Gas
sector.
2014 2015e 2016f 2017f 2018f 2019f 2020f
Crude, NGPL & other liquids prod, 000b/d 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Refined products production, 000b/d 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Refined products consumption & ethanol, 000b/d 379.2 395.1 408.6 423.5 437.9 452.8 467.7
Dry natural gas production, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dry natural gas consumption, bcm 2.6 2.7 2.8 2.9 3.0 3.1 3.1
Brent, USD/bbl 99.50 53.60 40.00 53.00 62.00 65.00 71.00
e/f = BMI estimate/forecast. Source: National Sources, BMI
5
C. SWOT Analysis
Strengths
Hong Kong has one of the best business
environments in Asia. This is reflected by its high
position in the Index of Economic Freedom
league table, compiled by the Heritage
Foundation and the Wall Street Journal.
Hong Kong's legal system is regarded as both fair
and transparent. The level of corruption, which is
a problem in most of Asia, is also very low in
Hong Kong.
Opportunities
Increases in vehicle population and air traffic will
sustain the upward trend in refined products
demand and imports.
Gas consumption will increase as new gas-fired
units replace older coal powered ones.
Plans for the city's first LNG import terminal will
increase Hong Kong's gas import capacity and
pose upside to gas consumption.
Weaknesses
Hong Kong has neither indigenous energy
resources nor refineries, rendering it wholly
dependent on imports to meet domestic energy
requirements.
Threats
Currently, Hong Kong is entirely reliant on
mainland China for natural gas imports, making it
vulnerable to supply shocks.
A slowdown in the Chinese economy can drag the
Hong Kong economy down, given that both
economies are intertwined. This poses downside
risk to refined fuel consumption growth.
Source: BMI
D. Oil and Gas Infrastructure
Hong Kong has established oil and gas infrastructure - consisting of natural gas pipelines, petroleum product
terminals and storage facilities - to transport refined products and natural gas to intermediate and end-users.
1. Service Stations
ExxonMobil leads the fuels retail market with 52 service stations, followed by Shell, Chevron (Caltex) and
Sinopec, each with around 45 stations.
2. Oil Storage and Terminals
As a major entrepôt and transport hub, Hong Kong has several petroleum product terminals and storage
facilities. The three major international oil company (IOC) players in Hong Kong - ExxonMobil, Shell and Chevron
- all operate oil import and storage facilities. Chevron's facility has a handling capacity of 1.4mn barrels (bbl) of
petroleum products. Sinopec has taken over the operation of China Resources (CRC)'s terminal. Local players,
such as the Hong Kong Petrochemical Company and Towngas (Hong Kong and China Gas Company), operate
import and storage facilities, as does the AFSC consortium, which supplies aviation fuel to Hong Kong
International Airport at Chek Lap Kok. AFSC's tank farm is one of the world's largest aviation fuel storage depots,
with a capacity of 220,000 cubic metres.
E. Gas Pipelines
Towngas operates a 3,500km gas pipeline network across Hong Kong, supplying town gas (a blend of naphtha
and natural gas) to 1.8mn consumers. It is manufactured at the plants in Tai Po and Ma Tau Kok, which have daily
throughput capacities of 9.6mn cubic metres (mcm) and 2.4mcm respectively. With regard to electricity
generation, Hong Kong has been receiving gas from offshore fields in the South China Sea through the 780km
Yacheng pipeline since 1996, which connects to CLP Power's Black Point Power Station. Since early H213, the
power station also receives gas from the new extension of the Second West-East Gas Pipeline, which has a
proposed maximum capacity of 6.0bn cubic metres (bcm) per annum. Another 92km pipeline connecting HK
Electric's Lamma Power Station and the Guangdong Dapeng LNG terminal supplies the power plant with
regasified Australian LNG.
6
COMPARATIVE ANALYSIS OF Q3 RESULTS OF GLOBAL OIL AND IV.GAS CORPORATES
A. BP Overall
The environment remained volatile over the quarter and continued to impact quarterly earnings across the
sector. Outside of the environment BP had some mainly one-off and non-cash items impacting our Upstream
result for the period, while their Downstream delivered strong underlying earnings. Most notably, it has been
another quarter of robust underlying operating cash delivery for the Group.
BP’s third-quarter underlying replacement cost profit was $930 million, down 49% on the same period a year
ago, and 30% higher than the second quarter of 2016.
* Replacement cost (RC) profit or loss reflects the replacement cost of inventories sold in the period and is arrived at
by excluding inventory holding gains and losses from profit or loss. RC profit or loss is the measure of profit or loss
that is required to be disclosed for each operating segment under IFRS. RC profit or loss for the group is not a
recognized GAAP measure. The nearest equivalent measure on an IFRS basis is profit or loss attributable to BP
shareholders.
BP’s third-quarter replacement cost (RC) profit was $1,661 million, compared with $1,234 million a year ago. For
the first nine months of 2016 the RC loss was $1,071 million, compared with a loss of $2,929 million for the first
nine months of 2015. Both periods were impacted by charges associated with the Deepwater Horizon accident
and oil spill following the settlement of federal, state and local government claims in 2015 and additional
provisions this year, when a reliable estimate for all the remaining material liabilities was determined.
Compared to a year ago, the result reflects: Significantly weaker refining margins; and Lower liquids and gas
realisations. Partly offset by: Continued lower cash costs across the Group and A one-off tax benefit arising from
changes to UK supplementary taxation.
Compared to the previous quarter, the result reflects: The one-off UK tax benefit; and stronger underlying
performance in our Downstream. Partly offset by: Lower refining margins and Higher Upstream rig cancellation
charges, exploration write-offs and various one-off items.
1. BP Segment wise
In Upstream, the third-quarter underlying replacement cost loss before interest and tax of $220 million
compares with a profit of $820 million a year ago and a profit of $30 million in the second quarter of 2016.
Production: Excluding Russia, third-quarter reported production versus a year ago was 5.9% lower. After
adjusting for entitlement and portfolio impacts, underlying production decreased by 2% mainly due to seasonal
Nine months Nine months Third quarter Second quarter Third quarter
2016 2015 2015 2016 2016
Profit (loss) for the period -382 -3,175 46 -1,419 1,620
Inventory holding (gains) losses, net of
tax -689 246 1,188 -828 41
Replacement cost profit (loss)* -1,071 -2,929 1,234 -2,247 1,661
Net (favourable) unfavourable impact of
non-operating items and fair value
accounting effects, net of tax
3,256 8,638 585 2,967 -728
Underlying replacement cost profit* 2,185 5,709 1,819 720 933
per ordinary share (cents) -5.74 -16.01 6.73 -12.03 8.82
per ADS (dollars) -0.34 -0.96 0.4 -0.72 0.53
per ordinary share (cents) 11.7 31.18 9.92 3.85 4.96
per ADS (dollars) 0.7 1.87 0.6 0.23 0.3
Replacement cost profit (loss)*
Underlying replacement cost profit*
$ million
7
turnaround and maintenance activities, and the impact of weather and the Pascagoula plant outage in the Gulf of
Mexico.
Downstream: The third-quarter underlying replacement cost profit before interest and tax was $1.4 billion
compared with $2.3 billion a year ago and $1.5 billion in the second quarter.
The Lubricants business reported an underlying replacement cost profit of $370 million in the third quarter,
compared with $410 million in the second quarter and $350 million a year ago. The Petrochemicals business
reported an underlying replacement cost profit of $80 million, compared with $90 million in the second quarter
and $40 million a year ago.
$ million
Nine
months
Nine
months
Third
quarter
Second
quarter
Third
quarter
2016 2015 2015 2016 2016
Underlying RC profit before interest and
tax
Upstream -942 1,921 823 29 -224
Downstream 4,757 6,327 2,302 1,513 1,431
Rosneft 432 1,075 382 246 120
Other businesses and corporate -814 -922 -231 -376 -260
Consolidation adjustment – UPII -64 -101 67 -121 17
Underlying RC profit before interest and
tax 3,369 8,300 3,343 1,291 1,084
Finance costs and net finance expense
relating to pensions and other post-
retirement benefits
-1,012 -1,064 -359 -337 -358
Taxation on an underlying RC basis -161 -1,428 -1,155 -205 164
Non-controlling interests -11 -99 -10 -29 43
Underlying RC profit attributable to BP
shareholders 2,185 5,709 1,819 720 933
B. Shell Overall
Royal Dutch Shell’s third quarter 2016 Current cost of supplies (CCS) earnings attributable to shareholders were
$1.4 billion compared with a loss of $6.1 billion for the same quarter a year ago. Third quarter 2016 CCS
earnings attributable to shareholders excluding identified items were $2.8 billion compared with $2.4 billion for
the third quarter 2015, an increase of 18%.
Earnings attributable to shareholders excluding identified items benefited from increased production
volumes mainly from BG assets, lower operating expenses more than offsetting the increase related to the
consolidation of BG, and lower well write-offs. This was partly offset by the decline in oil, gas and LNG prices, and
increased depreciation mainly resulting from the BG acquisition, and weaker refining industry conditions.
Gearing, calculated as net debt (total debt less cash and cash equivalents) as a percentage of total capital (net
debt plus total equity), is a key measure of Shell’s capital structure at the end of the third quarter 2016 was
29.2% versus 12.7% at the end of the third quarter 2015. This increase mainly reflects the impact of the
acquisition of BG. A third quarter 2016 dividend has been announced of $0.47 per ordinary share and $0.94 per
American Depositary Share (“ADS”).
Integrated Gas earnings included a net charge of $317 million, primarily reflecting some $420 million related to
provisions for certain onerous tolling contracts in Europe and the United States, and impairments of some $310
million.
Upstream earnings included a net charge of $389 million, mainly reflecting impairments of some $530 million
primarily related to North American shale gas and in-situ properties, redundancy and restructuring charges of
8
$ million
2016 2015 Q3 2016 Q2 2016 Q3 2015
Income/(loss) attributable to shareholders 3,034 1,000 1,375 1,175 -7,416
Current cost of supplies (CCS)
adjustment for Downstream-533 1,002 73 -936 1,296
CCS earnings attributable to
shareholders32,501 2,002 1,448 239 -6,120
Identified items -2,889 -7,872 -1,344 -806 -8,496
CCS earnings attributable to shareholders
excluding identified items Of which:5,390 9,874 2,792 1,045 2,376
Integrated Gas 2,793 3,812 931 868 918
Upstream -2,758 -1,246 4 -1,325 -582
Downstream 5,904 8,224 2,078 1,816 2,617
Corporate and Non-controlling interest -549 -916 -221 -314 -577
Cash flow from operating activities 11,445 24,387 8,492 2,292 11,231
Basic Earnings per share ($) 0.39 0.16 0.17 0.15 -1.17
Basic CCS earnings per share ($) 0.32 0.32 0.18 0.03 -0.97
Basic CCS earnings per ADS ($) 0.64 0.64 0.36 0.06 -1.94
Basic CCS earnings per share excl.
identified items4($)0.7 1.57 0.35 0.13 0.38
Basic CCS earnings per ADS excl.
identified items4($)1.4 3.14 0.7 0.26 0.76
Dividend per share ($) 1.41 1.41 0.47 0.47 0.47
Dividend per ADS ($) 2.82 2.82 0.94 0.94 0.94
Nine months Quarters
931
4
2,078
1,375
-224
1,431 1,620
-300
200
700
1200
1700
2200
Integrated Gas Upstream Downstream Income/(loss)attributable toshareholders
$ million Comparative Aanlysis of BP & Shell
Shell Q3 2016 BP Q3 2016
some $80 million, and a charge of some $40 million related to the impact of the weakening Brazilian real on a
deferred tax position.
Downstream earnings included a net charge of $482 million, primarily reflecting impairments of some $160
million, redundancy and restructuring charges of some $140 million, and some $130 million related to other
items including a provision for certain onerous fixed take or pay contracts in the United States.
C. Comparison of BP and Shell
Royal Dutch Shell PLC and BP PLC posted better-than-expected third-quarter profits, joining other big oil
companies in showing progress in efforts to adapt to a world of cheaper crude as prices rebounded from lows hit
at the start of the
year.
Shell and BP's results
were important
landmarks for both
companies after a
tumultuous few
years. For Shell, the
sharp increase in
profit marked a
victory for
management,
demonstrating for
the first time the value the company's acquisition of BG Group earlier this year could bring.
BP's results were the first unmarked by significant charges related to the company's fatal blowout in the Gulf of
Mexico in 2010. The company is trying to move on from the accident after putting a final cost on the disaster of
$61.6 billion over the summer.
9
POOLING OF GAS – FERTILIZER SECTOR V.
Fertiliser accounts for large fiscal subsidies (about 0.73 lakh crore or 0.5 percent of GDP), the second-highest
after food. As per Budget 2015-16, only 17,500 crores or 35 per cent of total fertiliser subsidies reaches small
farmers. The urea sector is highly regulated which: creates a black market that burdens small farmers
disproportionately; incentivises production inefficiency; and leads to over-use, depleting soil quality and
damaging human health.
At present, there are 30 urea producing units in the country, out of which 27 units are gas based and three units
viz Mangalore Chemicals & Fertilizers Limited (MCFL), Madras Fertilizers Limited (MFL) and Southern
Petrochemicals Industries Limited (SPIC) are Naphtha based. Out of the total consumption of about 30 Million
Metric Tonne Per Annum (MMTPA) of urea, about 23 MMTPA of Urea is currently produced in the country. In
addition to domestic production of Urea, around 2 MMTPA is imported from Oman under the Urea Off-Take
Agreement (UOTA) which will continue upto 2020. The shortfall of about 5 MMTPA Urea is being met through
imports. Urea demand during 2017-18 is projected to be about 34 MMTPA and by 2024-25, it is expected to be
38 MMTPA.
Prior to July 2015, the price of gas supplied to fertilizer units varies from plant to plant depending upon the
combination of domestic gas and RLNG. So, there was no uniformity in input price. Further, there is wide
variation in the conversion efficiency of plants measured in Gcal/MT. As the variation in final urea production cost
is a result of variation in two factors (gas price and conversion efficiency), it is necessary to separate the two
effects. A uniform gas price at the input stage will achieve this objective and will help focus on improving plant
efficiency.
A. Fertiliser Pooling
Cabinet Committee on Economic Affairs (CCEA) for pooling of gas for Fertilizer (Urea) sector in its meeting on
31.3.2015, Government of India notified Guidelines for Pooling of Gas in Fertilizer (Urea) Sector. This pooling
mechanism came into effect from 1st July, 2015. Domestic Gas is to be pooled with RLNG to provide uniform
delivered price to all Natural Gas Grid connected Urea plants. Brahmaputra Valley Fertilizer Corp Ltd has been
kept outside the scheme. Empowered Pool Management Committee (EPMC) has been formed to monitor the
pooling. EPMC consists of:
• Additional Secretary, MoPNG – Chairman
• Joint Secretary (GP), MoPNG – Convener Member
• Joint Secretary, Dept. of Fertilizer – Member
• Joint Secretary, Dept. of Expenditure – Member
• Director General, PPAC – Member
• Executive Director, FICC – Member
• Director (Marketing), GAIL – Member
Its responsibilities constitute of following:
Approve the plant-wise gas supplies to be made under gas pooling mechanism
Approve the Liquefied Natural Gas (LNG) Purchase arrangements as required for the pooling purpose
Monitor optimum utilization of domestic gas for the pool
Monitor the efforts of authorized agency to procure LNG at competitive prices in a transparent manner
Decide the rate of Interest that FICC shall charge on the amount paid by FICC to Pool Fund Account
(PFA)
B. Phase of Pooling
Pooling to be carried out in two phases:
Phase I (2015-16 to 2017-18): Pooling of gas for existing units along with conversion units.
Phase II (2018-19 onwards): Pooling of Gas for all Gas based units including Brownfield / Greenfield units.
10
C. Functions of Pool Operator
GAIL (India) Ltd. has been designated as pool operator for this pooling. It shall have the following functions:
To collect the data regarding anticipated quantity of gas to be supplied to fertilizer units on quarterly
basis as per existing contracts.
Determine the additional quantity of R-LNG required for meeting the demand of fertilizer sector and
communicate the same to EPMC.
Determine Plant wise and uniform weighted average delivered cost of gas based on the anticipated
supply to be made as per existing contracts and additional quantity of R-LNG as decided by EPMC.
Determine actual plant wise delivered weighted average cost based on the information submitted to
pool operator by FICC.
Undertake bidding process as per the procedure determined by EPMC to source additional quantity of
R-LNG required.
Ensure that the quantity of domestic gas is not sacrificed in the pool for commercial interests
On the 1ST, of every month, declare uniform delivered pool price of gas for fertilizer (Urea) sector for the
month.
Maintain Pool Fund account (PFA).
D. Pool Operation Mechanism
Department of Fertilizers will determine the Plant-wise gas requirement on quarterly basis, 45 days prior to the
beginning of the quarter, for urea production and draw the total requirement of natural gas for urea sector,
which would be then informed to the Pool Operator as shown in the figure below:
E. Uniform Delivered Pool Price
On 1st of every month the pool operator will declare a uniform delivered pool price. For determining the uniform
delivered pool price the pool operator would first determine weighted average delivered price of individual urea
plants. The plant wise weighted average delivered price shall be determined considering the individual Unit-wise
delivered price of anticipated quantity of domestic gas and R-LNG to be supplied by pool operator as per the
decision of EPMC, during the month.
The pool operator shall consider the applicable taxes as per the most recent invoice and projected future prices
of different gases (the projection of gas prices for this purpose will be made by the pool operator based on the
projection of individual supplier) while calculating the delivered price. Then, a weighted average uniform
delivered pool price of all' fertilizer plants participating in the pool would be computed by accounting for
weighted average delivered price of all units participating in the pooling.
Fertilizer units to provide their projected requirement. DoF/FICC to vet plant–wise gas requirement for next quarter.
Fertilizer units to provide projected gas availability for next quarter under their existing contracts.
GAIL shall calculate & inform to EPMC the additional LNG quantity required for fertilizer units during the Quarter.
EPMC to decide & inform GAIL, LNG quantity to be imported & bidding process to be followed.
45 43 40
No of days to beginning of Quarter
Prior to beginning of a quarter: • Entry of quantity & anticipated delivered price of various gases to be consumed by various fertilizer
plants – by individual fertilizer units. • Opening of Pool fund Account by GAIL
11
F. Weighted Average Price Mechanism
Derivation of Unit-wise weighted average price (WAP):
Unit 1: WAP1 = (P1*V1+P2*V2)/(V1+V2)
Unit 2: WAP2 = (P3*V3+P4*V4)/(V3+V4)
Unit 3: WAP3 = (P5*V5+P6*V6)/(V5+V6)
For Unit U1
V1 and V2 = Anticipated volume of domestic gas and RLNG respectively as decided by EPMC
P1 and P2 = Projected price of domestic gas and RLNG respectively
For Unit U2
V3 and V4 = Anticipated volume of domestic gas and RLNG respectively as decided by EPMC
P3 and P4 = Projected price of domestic gas and RLNG respectively
For Unit U3
V5 and V6 = Anticipated volume of domestic gas and RLNG respectively as decided by EPMC
P5 and P6 = Projected price of domestic gas and RLNG respectively
Derivation of Uniform Delivered Pool Price for all units i.e. Fertilizer sector
WAP = WAP1*(V1+V2) + WAP2*(V3+V4) + ………./(V1+V2+V3+V4+…….)
Name of Plant’s Presently Being Offered Under this Scheme:
NFL - Vijaipur-I, NFL-Bhatinda, Kribhco – Hazira, Indo-Gulf –Jagdishpur, IFFCO - Aonla-I, IFFCO-Kalol, KSFL-Shahjahanpur, CFCL Gadepan-I, CFCL-Gadepan-II, TCL-Babrala, GNVFC, Bharuch, RCF-Thal and SFC-Kota.
G. Downward trend in pooled gas prices to benefit the industry
The price of pooled gas for urea units have fallen to about US$6.5-6.6/MMBTU during April-May 2016 from ~ US$7.2-
7.3/MMBTU during Feb-Mar 2016 due to a further 20% reduction in the domestic gas prices w.e.f. April 1, 2016 and
subdued spot gas prices. This lowers the cost of production of urea, which in turn would reduce the subsidy burden for
the Government. As per ICRA research estimates, for a fall of every US$ 1/mmbtu in gas price, the retention price of
urea would reduce by Rs. 1800-2000/tonne. Hence, reduction in the pooled prices to US$6.5-6.6/ mmbtu should lead
to subsidy savings of ~Rs.15-16 billion for the Government for H1 FY2017 (assuming the currency to remain stable).
Assuming domestic gas prices remain at US$6.3-6.4/mmbtu for the entire year FY2017, the subsidy savings for the GoI
would be about Rs.30-32 billion for FY2017.Further, lower pooled gas prices favourably impact the profitability of
revamped urea capacities earning import parity based pricing. As the domestic gas and LNG prices are expected to
remain subdued in the near term, pooled gas prices may also remain muted and would be beneficial for the industry
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CARBON PRICING AND INDIA VI.
A. Why Price Carbon?
Climate change is a negative externality and can be a cause of market failure. In this case prices do not reflect the
full costs of producing a product or service.
To fix negative externalities:
The government should tax the producer of the externality at a rate equal to its social cost. (Arthur
Pigou, Economist, Cambridge economist).
Creating a market for the externality, by assigning tradable property rights, could solve the problem
more efficiently (Ronald Coase, Economist, University of Chicago). Carbon markets were born from this
concept.
How a carbon price reduces emissions in an economy (William Nordhaus, Economist, Yale University):
Raising the market price of carbon provides strong incentives to reduce carbon emissions through four
mechanisms.
First, it provides signals to consumers about what goods and services produce high carbon emissions
and should therefore be used more sparingly.
Second, it provides signals to producers about which inputs (such as electricity from coal) use more
carbon, and which inputs (such as electricity from wind) use less or none. It thereby induces producers to
move to low carbon technologies.
Third, high carbon prices provide market signals and financial incentives to inventors and innovators to
develop and introduce low carbon products and processes, which can eventually replace the current
generation of carbon-intensive technologies.
Finally, carbon pricing lets the market decide where emission reductions will come from. “By pricing
carbon, governments wisely defer to private firms and individuals to find and exploit the lowest cost
ways to reduce emissions (Robert Stavins, Economist, Harvard University).
Without a strong price signal, there is simply no hope for making the vast number of decisions in a remotely
efficient manner.
B. Carbon Tax Vs. Carbon Market
The fundamental difference between a carbon tax and a carbon market is which market variable it fixes – price or
quantity. A carbon tax fixes the price of carbon emissions and lets the quantity fluctuate. While a carbon market
fixes the quantity of carbon emissions and lets the price fluctuate.
X denotes a relative advantage
C. History of Flexible Global Carbon Pricing
The 1997 Kyoto protocol was intended to lead to global cap-and-trade. But a year later Cooper (Professor of
International Economics at Harvard University) pronounced it “bound to fail” and proposed a “common carbon
emissions tax,” and Nordhaus (President of the American Economic Association and the Sterling Professor of
Economics at Yale University) called it a “dead duck,” and proposed a “harmonized carbon tax.” Most others lined
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up behind some form of tradable permit system. Global carbon pricing grew out of Cooper’s and Nordhaus’s
proposals.
D. COP 21 & Carbon Pricing
2015 witnessed an historic global step forward in taking action on climate change. World leaders reached in Paris
to participate COP 21 for keeping the global average temperature increase well below 2°C. As of May 1, 2016,
162 intended nationally determined contributions (INDCs), representing 190 Parties, had been submitted to the
UNFCCC. These INDCs outline the intended national efforts toward reducing greenhouse gas (GHG) emissions.
More than 90 of the submitted INDCs include proposals for emission trading systems (ETSs), carbon taxes and
other carbon pricing initiatives.
In addition, Paris saw the launch of the Carbon Pricing Leadership Coalition (CPLC). The CPLC brings together
governments, business and non-government organizations (NGOs) that seek to take action to accelerate the
global uptake of carbon pricing.
Since 2015, four new carbon pricing initiatives have been implemented or scheduled for implementation:
The Republic of Korea ETS started on January 1, 2015;
The Portugal carbon tax entered into force on January 1, 2015, covering all energy products used in
non-EU ETS sectors; On January 1, 2016, British Columbia launched an ETS that will cover the liquefied natural gas (LNG)
facilities that are currently under construction, once they become operational;
Australia is back on the carbon pricing map with the introduction of a safeguard mechanism to limit and
price emissions on July 1, 2016. This establishes a new ETS, following the abolishment of the Australian
Carbon Pricing Mechanism in 2014.
A major step forward for carbon pricing took place in 2015 with China developing its plans for a national ETS.
Chinese President announced in September 2015 that the national ETS will commence in 2017.
In addition, Mexico announced that they will allow the implementation of a national carbon market starting in
2018. Canada is exploring options for carbon pricing on a national level.
As shown by World Bank, in 2015, governments raised about US$26 billion in revenues from carbon pricing
initiatives. This represents a 60% increase compared to the revenues raised in 2014, which was estimated to be
about US$16 billion. Carbon prices span a wide range from less than US$1/ tCO2e to US$137/tCO2e. The total
value of ETSs and carbon taxes in 2016 is just below US$50 billion. If the Chinese national ETS is implemented,
early unofficial estimates suggest that the total value of ETSs and carbon taxes could potentially double to about
US$100 billion.
Over 1,000 companies reported to CDP in 2015 that they are currently using an internal price on carbon or plan
to do so within the next two years. Of these companies, 435 disclosed the use of internal carbon pricing in
2015—almost triple the number compared to 2014. The largest increases came from companies located in
emerging markets—particularly Africa and Asia.
Summary map of existing, emerging and potential regional, national and subnational carbon pricing initiatives
(ETS and tax):
Carbon pricing is mentioned in paragraph 137 of the COP decision, which recognizes the “important role of
providing incentives for emission reduction activities, including tools such as domestic policies and carbon
pricing.” Article 6 of the Paris Agreement is particularly relevant for carbon markets.
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International demand for Kyoto
credits—Certified Emission
Reductions (CERs) and Emission
Reduction Units (ERUs)—are almost
exhausted. The European Union (EU),
which was the biggest source of
demand historically, has most likely
already fulfilled its demand for
international credits.
E. Carbon Pricing and India
India is currently the third largest
polluting country in the world,
emitting 2407 million tCO2 as of
2015. It is expected to contribute 6%
of global GHG emissions by 2020.
India ratified the Kyoto protocol in
2002; however, as a developing
country, it was not required to
submit any obligatory reduction
commitments. India did submit, in
2009, a voluntary target for reducing
the emissions intensity of its GDP by
20-25% relative to 2005 levels by 2020.
The basis of India’s climate policy framework is its 2008 National Action Plan on Climate Change (NAPCC), which
specifies eight national objectives for 2017 that center on improving. India’s ‘Perform Achieve and Trade’ (PAT)
initiative, which resembles an ETS, is currently completed its first phase (2012-2015), which was considered a test
phase. What distinguishes India’s PAT from traditional cap-and-trade systems is that cap-and-trade usually
entails an absolute cap, whereas PAT specifies energy targets that are intensity-based. India also has a Renewable
Energy Certificate (REC) trading system, which is a non-ETS, market-based mechanism to fight climate change.
India taxes carbon that include -
The National Clean Energy Cess on Coal
Excise duties on fossil fuels
Derived impacts from PAT
REC/RPO and other schemes
India has not yet established a carbon market or carbon pricing policy Indian government has historically
opposed taking on mandatory, absolute emissions reduction targets on the grounds that climate change is a
problem caused by developed countries. According to P Upadhyaya, TERI (2010), if such a mentality were to
continue to dominate, “it would not be possible to achieve consensus for a cap-and-trade system in the near
future.”
F. What is the carbon pricing opportunity for Indian business?
Economic Survey 2014-15 states India’s Green Actions from Carbon Subsidy to Carbon Tax. The recent steep
decline in international oil prices is seen by many as an opportunity to rationalize the energy prices by getting rid
of the distorting subsidies whilst shifting taxes towards carbon use. This will not only be a fiscally prudent
measure but also an opportune time to introduce measures such as carbon taxes, which are still the most potent
instruments in dealing with the threats of climate change.
The recent measures by the Government of India to decontrol diesel prices while at the same time increasing
excise duty on petrol and diesel periodically to match the declining global prices reflects a proactive stance in
this direction.
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Figure shows under-recoveries—
a measure of the subsidy arising
from lower domestic prices
compared to international
prices—has been eliminated.
And in a series of actions since
October 2014, excise duties have
been imposed on diesel and
petrol. Previously, the coal cess
was doubled from Rs. 50 per ton
to Rs. 100 per ton, also adding to
the set of green actions taken by
the government. Translating this
into a carbon tax equivalent using the IPCC emission factor suggests that the carbon tax is around US$ 1 per ton
(increase from US$ 0.5 per ton in 2014). Further the cess on coal production has been increased from Rs 200 per
tonne to Rs 400 per tonne in 2016-17.
Excise duties on petrol or
diesel also act as an implicit
carbon tax—by putting an
effective price on emissions.
For example, more fuel a car
burns, and the greater the
emissions, the greater the tax
paid. There is a price signal to
reduce fuel burnt, and hence
CO2 emissions.
In addition to serving as a
carbon tax, an excise on petrol
and diesel may, of course, also price other externalities associated with burning petrol or diesel. This includes
congestion costs (from using vehicles), noise and local air pollution (of various forms) which can be deeply
damaging for health. Estimated damages from carbon emissions are dwarfed by those from the other unwanted
side effects. At the high end of available estimates, climate change impacts are only 7 per cent of the costs
associated with congestion and air pollution. In many countries the latter reasons have often motivated the
taxation of fossil fuels than a carbon tax.
In India, the recent change in direction from subsidisation to taxation of fossil fuels is of course related to
revenue and macro-economic considerations but they are also consequential in their climate change impact. One
can potentially estimate the carbon tax equivalent of excise duty increases in India and thereby calculate CO2
emission reduction
benefits.
The carbon tax
equivalent of the excise
duty and subsidy
removal was estimated
using standard
emission factors from
the literature
Utilizing the emission
factors, the carbon tax
equivalent of net excise
duty (subtracting the
amount of under-
Petrol under-recoveries and excise duties, 2012-2015 (Rs/Lt)
Implicit Carbon Tax from Increasing Excise duty on Petrol & Diesel
(USD/ tCO2)
Diesel under-recoveries and excise duties, 2012-2015 (Rs/Lt)
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recoveries from excise duty) for petrol and diesel is presented below:
Recently published “Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST)” states that:
“It is now growing international practice to levy sin/demerit rates—in the form of excises outside the scope of the
GST--on goods and services that create negative externalities for the economy (for example, carbon taxes, taxes
on cars that create environmental pollution, taxes to address health concerns etc.). As currently envisaged, such
demerit rates—other than for alcohol and petroleum (for the states) and tobacco and petroleum (for the
Centre)—will have to be provided for within the structure of the GST. The foregone flexibility for the center and
the states is balanced by the greater scrutiny that will be required because such taxes have to be done within the
GST context and hence subject to discussions in the GST Council.”
G. Conclusions and key messages
India has cut subsidies and increased taxes on fossil fuels (petrol and diesel) turning a carbon subsidy regime
into one of carbon taxation.
This has significantly increased petrol and diesel price while reducing annual CO2 emissions.
But there is still a long way to go with potential large gains still to be reaped from reform of coal pricing and
further reform of petroleum pricing policies.
On the whole, the move to substantial carbon taxation combined with India’s ambitious solar power program
suggests that India can make substantial contributions to the forthcoming Paris negotiations on climate
change.
Note:
The data and information in the report is sourced from websites and documents available in public
domain and doesn’t purport to be official view of government or any organization. Sincere efforts have
been made to present correct data; however, errors and omissions, if any, are regretted and the same may
please be brought to the notice of Energy Desk for necessary corrective action.
