LNG PRICING POLICIES, STRUCTURE, FORMULAS, AND APPLICABILITY LES STRUCTURES, LES FORMULES ET L APPLICATION DES POLITIQUES DE PRIX DU GNL

Transcription

1 LNG PRICING POLICIES, STRUCTURE, FORMULAS, AND APPLICABILITY LES STRUCTURES, LES FORMULES ET L APPLICATION DES POLITIQUES DE PRIX DU GNL Anwar Ahmed El Missirie Engineering for the Petroleum and Process Industries (ENPPI) Nasr City (11411), Cairo, Egypt ABSTRACT LNG has established a niche for itself by matching remote gas supplies to markets that both lacked indigenous gas reserves. In general, a gas pricing policy has to satisfy three objectives: efficiency of resource allocation, satisfaction of specific target beside consideration of social equity. Economic price of any good-gas included is determined by the intersection of its aggregate demand and supply curves. Framework of gas pricing includes major participants in gas production in upstream side, gas processing, transmission and distribution among different consumers in downstream side. Upstream gas pricing formulas & scenarios are discussed to develop minimum supply price Economic downstream gas pricing normally faced by both social and market forces in developing countries where major gas reserves exist. Gas tariff system in applied different countries are discussed where three schools can be followed: cost plus, market value or price of displaced fuel. Challenges for bringing gas pricing to economic level are shown and discussed. Finally concept of natural gas planning is illustrated to reach economic and satisfactory prices to all parties concerned. PS1-Sp.1

2 LNG PRICING POLICIES, STRUCTURE, FORMULAS, AND APPLICABILITY INTRODUCTION Natural gas occupies a curious position in the international energy market. Like oil, it can fulfill a wide range of energy needs from premium feedstocks. Unlike oil, however, its costs of transport are high so that the major proportion of it is consumed in the country where it is produced. There is no World Price of natural gas. Although there must be An Environmental Premium attached to gas which is a cleaner fuel than oil or coal and which is excluded from this study, energy planners should include a relative environmental costs and benefits of gas in project appraisal. In most cases in developing countries, systems of producer pricing and taxation have been borrowed from the oil industry which becomes an obstacle to gas development. Other questions in gas development are allocation of gas among competing uses, sequence of field development, the reduction of flaring and the speed of depletion. Obstacles for gas development, which slowed gas market penetration, are: structure of gas costs due to large up front investment before gas started to be used. misperceptions about the best use of gas. inappropriateness of domestic gas prices due to disagreement between utility pricing models and depletable resource pricing models. geological link between gas and oil. So the approach is to consider gas value and consequently its price and uses depending on local demand and supply conditions in order to suggest policies and practices that enhance prospects of rapid gas development and economic gas use. 1.0 NATURAL GAS ECONOMICS 1.1 Natural Gas Characteristics Natural gas is a natural, non-renewable resource and belongs to a particular class of primary commodities. It is used either as a fuel or feedstock for petrochemicals production include fertilizers, Here below is comparison between natural gas and other similar commodities as a fuel Table 1, theses characteristics will affect its pricing. PS1-Sp.2

3 Table 1. Natural gas and other fuel comparison Natural gas Liquid fuel Coal State Gas Liquid Solid Liquefication/ liquefiable to LNG & - Gasifiable Gasification GTL Transmission - in pipelines up to - in pipelines - in small parcels up to certain diameters - in small parcels to giant tankers - in dedicated vessels giant tankers VLCC/ - as LNG ULCC - in trucks in small parcels as LNG Freight High(large gap between FOB & CIF) moderate low Exploration International Trade Price Transportation fuel Other uses - dry/wet - flared or reinjected - inshale/deep water - onshore/offshore - limit rigid market (priority to domestic market - limited export/ import terminals - wet - inshale/deep water - onshore/offshore - flexible tradable in world market in spot, physical forward and future - wide spread export/ import terminals - onshore - surface/ underground - wide spread export/ import terminals - no international - international prices - international prices prices but different depend on destination & bilateral deals - in cars and trucks - in cars, trucks, ships, N/A air crafts - commercial - residential - electric power generation - industry - petrochemical feedstock - commercial - residential - electric power generation - industry - petrochemical feedstock - limited - limited - electric power generation - limited -petrochemicals feedstock (gasification) 1.2 Economic Features of Gas Since natural gas is gas and not liquid or solid, it is difficult to transport. Upstream consequences include: * it moves through fixed pipeline/lng chains ties buyers and sellers. * its limited security of offtake and supply creates long term agreements. * consequently its upstream pricing is regional with no international arbitrage and dependant on supply/demand down stream consequences. * its need for large volume offtake creates wholesaling transmission companies and distribution companies. * marketers have a natural monopoly. PS1-Sp.3

4 * governments historically have sustained monopolies for security and safety reasons. * its downstream prices traditionally regulated. Fortunately in the last decades some changes had happened due to the new atmosphere of globalization and its consequent tough competition in gas markets. These changes are mainly: (i) governments seeking greater competition. (ii) governments prepared to regulate to create competition. (iii) increasing gas supplies. (iv) widening of markets especially power generation. LNG business characteristics are: (i) large and diverse reserves. (ii) ability to develop markets. (iii) technical to develop markets. (iv) great financial strength. (v) willingness to invest. (vi) customers with commitment. (vii) allied partners. 2.0 THE PRINCIPLES OF GAS PRICING Gas pricing can be a complex and controversial subject. * Its complexities comes from an array of different considerations : (i) from setting producer prices high enough to tempt the risk takers into exploration and production. (ii) to creaming off some of the resource rent for the government. (iii) to finding equitable transfer prices between gas producers and utilities. (iv) to devising complex tariff structures to reward large consumers for shifting off peak. (v) to protecting small consumers from monopoly exploitation by the utility. The whole chain of prices, from the gas explorer to the small consumer, must reflect, and properly distribute, the economic gains from gas development. * The controversies over gas pricing generally arise from two reasons: (i) monopoly or monopsony prevails as there may be many potential consumers but they have one supply thus the uncumbered market place rarely provides clear signals to both parties on the value of the gas. For this reason, the gas market is regulated oftenly by governments. (ii) the chain of transfer points that separate the first producer from the final purchaser. Because of this potential for complexity and controversy, it is easily to lose sight of the basic economic principles that bear upon questions of gas pricing. None the less, we believe that the basic theory is a useful starting point to provide a common frame of reference into which modifications can be introduced. PS1-Sp.4

5 2.1 Objectives of Gas Pricing Prices set by a central authority are generally based implicitly or explicitly, on three sets of objectives. (i) the efficiency of resource allocation, economic efficiency require that the real cost of energy to the society be reflected in the prices that guide the decisions of producers and consumers of that energy. When this principle is violated, energy consumption can rapidly get out of hand, particularly that of industrial and other large consumers. Subsides translate into a serious financial handicap. (ii) the satisfaction of specific financial targets, a financially viable gas utility is one that has the capacity to finance, through its own resources and its ability to service borrowing, the expansion of its operation in line with the development of the market. It is usually possible to devise a set of tariffs whose structure satisfies efficiency criteria and whose average level meets the financial needs. (iii) consideration of social equity, this may be conflicting with previous objectives and may lead to contradictory results. So it is important to review the relative suitability of gas tariffication as a tool to achieve each of the three objectives. Subsides should be the last recourse to correct the deficiencies of direct income transfer mechanisms and must be rigorously limited in order to safeguard the objective of financial viability. 2.2 The Level of Gas Prices The overriding criteria for gas pricing should be economic efficiency the first step in setting or changing gas prices is to determine the economic price of gas in the particular country or region on question The Economic Price of Gas * the economic price of any good-gas included is determined by the intersection of its aggregate demand and supply curves. For many goods, that value is simply the price resulting in an open market place through the bargaining of many buyers and sellers. For goods that are traded internationally such as oil or wheat, the economic price in a small country is often determined almost independently of the local demand and supply conditions. Unfortunately there are many reasons why the economic price of gas generally cannot be so easily observed: (i) it is not widely traded commodity owing to its high transport costs involved. (ii) it is not a perfect substitute for all petroleum products, so the fuel oil equivalent price of gas is not always an appropriate short-cut estimate for the economic price of gas. (iii) in domestic markets for gas, political and economic factors have generally led to price regulation because of monopolistic production and distribution. (iv) it is depletable commodity so depletion premium has to be included in the opportunity cost. * economic price of -gas is the production cost of raw gas less the net benefit derived from liquid separation plus the transmission cost (depend on location of the user) plus the depletion premium. PS1-Sp.5

6 * for gas rich country (reserve constraint is not binding) the economic price is illustrated as follows: Raw Gas Production cost Value of liquids Dry gas Production cost Transmission Depletion premium Economic price * in gas short or gas surplus the economic price of gas can be derived more directly from its replacement value in the market place (for gas short regions) or its long term marginal cost of production (for gas surplus regions Gas Prices Levels * the economic price of gas is an essential bench mark for pricing analysis but it is only a starting point. Gas prices must be viewed as a coherent set of signals linking all actors in the gas chain: producers, pipeline operators, distributors and consumers and its analysis should be considered for corresponding prices in the network. * in developing such set of prices, there are three basic questions: (i) whether the framework should be set from bottom up or from top down. Should one start with the cost of production and add on margins (industrialized countries) or pitch consumer prices correctly and work backward (gas-short countries)? As a general rule, the economic price of gas is estimated at the point of consumption and using it as a bench mark will therefore lead to topdown approach to pricing. (ii) where the government should extract taxes, only from producers or only from consumers?. This question is important especially for gas short countries where the rental element to be taxed away is large but even for gas surplus countries, the government may wish to use the gas sector to raise revenue for the rest of the economy. As a general rule, the tax element should pushed as far upstream as possible i.e. to gas producer. This best preserves the signal of the economic price to the sets of buyers and sellers along the chain (iii) how to take account of other domestic energy prices in determining the appropriate pitch of gas prices. In countries where the prices of competing fuels do not reflect their economic scarcity (because of either subsides e.g. developing countries or taxes e.g. developed countries). It will be important to link the various levels of gas prices not only to each other but also to the competition. For example, if fuel oil prices are heavily subsidized but the government wishes to encourage gas exploration and development, it may be possible to finance consumer price subsides by a profit tax on producers, while the producer price is set near the (higher) economic value of gas. PS1-Sp.6

7 In each level, there are important questions of the price structure and the related contract provisions such as: take-or-pay, penalties for non delivery, etc. with long term investments being made by both producers and consumers of gas. These must guarantees on deliverability and purchases which when properly formulated, can speed penetration of gas into existing and new markets by reducing uncertainties. Therefore gas pricing policy should include the consideration of non-price clauses involved in the purchase and sale of gas. 3.0 UPSTREAM GAS PRICING POLICIES Framework of gas pricing is illustrated in Fig. 1. * Elements of upstream gas pricing are: Base prices, indexation, floor prices, capacity charge (load factor), currency adjustment, lag periods and price preview clauses.. * Gas pricing indexation yardsticks differs as established by bilateral agreements In Europe (Rotterdam & Wiesbaden) linked with oil products prices mainly fuel oil and gas oil while Algeria linked with crude basket. Recently some linkage is known with coal (Norway), electricity via inflation (France) and gasoline is introduced in the formulae (Algeria) FiG (1)) GAS PRICING FRAME WORK Gas Producers Wellhead Prices/Border Prices LNG Train Tanker Receiving Terminal Transmission Companies )Local Distribution Companies ( LDCs End Use Prices Power Companies Industry Commerce Homes 3.1 Pricing Formulas LNG is usually sold on the basis of pricing formula which usually links pricing of LNG to the price of crude oil. The exact formula are usually considered commercial secrets, typical formula will have the following structure: Price paid (on day 1) = base price x ( MPI-1 ) + A MP Where MPI-1 is the market price of specified coktail of crude oils imported on a specific day I-1), MP is the market price of the specified coktail of crude oils imported on day one of the contract, A is an adjustment factor often with specified limits. PS1-Sp.7

8 Based on published data, two distinct formulas are used in Arabian Gulf region in Qatar and Oman Qatar pricing formula in contracts with Japan calculates LNG price by taking the Japanese custom cleared price of a basket of crude and multiplying with a factor of or 6.73 MMBTU/bbl of oil. A fixed factor is then added to the price which is between $ $ 0.9/MMBTU (usually $ 0.8) to take account for the relatively fixed transportation costs for the gas. Price floor built in which is the oil price link below which gas was to be sold at a fixed price of $ 3.6/MMBTU. Which is equal to the sales price at about $ 17.5 per barrel of oil Oman price formula calculates LNG prices on the basis of the Japanese customs clearing price of crude oil on a FOB basis to be multiplied by a factor of or a conversion factor of 6.6 MMBTU/bbl of oil. It does not contain a fixed element nor does it specify a minimum price. It leads to a steeper link between gas and oil prices which is illustrated in Fig. 2. The two graphs cross at an oil price of $ 14.5 per barrel Figure 2. OIL PRICES AND LNG SALES PRICES ($/MMBTU CIF Minimum supply prices Designed average prices are determined for the average unit produced for Qatar LNG. Minimum desired oil price $/bbl 10.5 NGL price ($/MMBTU) 1.77 LNG price ($/MMBTU) 1.82 Production cost upstream ($/MMBTU) 0.65 Production cost ($/MMBTU) 1.88 downstream Minimum supply price ($/MMBTU) 1.81 (*) (*) average between NGL & LNG prices. PS1-Sp.8

9 3.2 Pricing Scenarios Typical LNG pricing scenarios are illustrated in Fig. 3. FIG 3 PRICING SCENARIOS Standard LNG Pricing LNG Pricing With Floor LNG Pricing With Cap LNG Price LNG Price LNG Price Crude Price Crude Price Crude Price LNG Pricing With Collar Fixed Price LNG LNG Pricing With S-Curve LNG Price LNG Price LNG Price Crude Price Crude Price Crude Price LNG pricing has been complicated because of the secrecy demanded by both buyers and sellers as to the contract details, in particular the applicable escalation clauses. No. two contracts are alike resulting in a wide range of pricing. The pricing structure differs in Japan, Europe and the U.S. because of the interfuel competition in these markets Japan Price of LNG imports in Japan is linked in several ways to its level of the delivered cost of crude oil to Japan. As 75% of imported LNG serves as fuel for electricity generation and therefore is competing with lower valued energies such as low sulfur fuel oil and coal. Desire to diversify energy sources accounts for growth of LNG imports. LNG s position is improved as Japan import an extra tax on crude and fuel oil (17 cent/mmbtu). Future import contracts will be based on 85-90% of crude oil prices. In general CIF LNG price (weighted average) was $ 55.03/MMBTU compared with crude oil CIF price of $ 4.65/MMBTU Europe Primarily in France gas sells in competition with gas oil in residential and commercial markets, low sulfur fuel oil for industrial steam raising and coal for power generation. LNG imports to Europe to the extent that deliverability exceeds demand, compete more and more directly with Russian pipeline gas. Some examples of Binary Agreements are: * Algeria - France Base price: $3.18/MMBTU as of April 1986 PS1-Sp.9

10 Escalation: related to evolution of basket of eight crudes (50% French importers, 50% LNG exporting countries. Corrective factor K installs, equal 1 but designed to increase/decrease to bring LNG FOB price into parity with crude oil. * Algeria - Belgium Base price: $ 3.25/MMBTU CIF * Algeria - Spain Base price: $ 3.4/MMBTU in 1986 contract includes a clause stipulating that it will never pay more for Algeria LNG than any other customer to Sonatrack. * Libya- Spain Base price: $ 3.8/MMBTU CIF in 1986 * Alaska - Japan Base price: $ 4.75/MMBTU in 1985 * Malaysia - Japan Base price: $ 4.82/MMBTU in DOWNSTREAM GAS PRICING POLICIES Natural gas price policies occupy a prominent place in the current market oriented restructuring of the gas industries in the developing countries. Current levels and structure of gas tariffs and prices in the majority of these countries deviate significantly from market oriented ones with potentially serious consequences for prospects of its industry. It is difficult to imagine successful market restructuring and diversture of the industry, increasing foreign investment, promotion of energy efficiency, and diversification of gas supply and intensification of competition which must be the long term goals of most policy markers. In a somewhat improved economic climate, the governments have so far undertaken selective restructuring and privatization measures in their gas industries. Furthermore, some changes to the legal, institutional and policy frame works governing the operation of gas companies and gas markets have been implemented. Gas tariff system is the only option for gas pricing due to natural monopoly present in gas sector. Hence prices cannot be set optionally by market forces, due to need to fairly allocate huge fixed costs. Goals of tariff system are: * recover cost of service. * fair division of costs among customers. * encourage effective use of energy. * promote competitiveness of natural gas in the energy market. Tariff setting is not an exact science. Goals can be conflicting and so it is needed to set priority of goals. PS1-Sp.10

11 The current state of the gas industries in the developing countries is characterized by the following: * prevailing monopolistic structure coupled with mostly ad-hoc direct government intervention. * absence of competition and foreign participation with few exception. * inconsistency in gas tariff system. * gas prices below economic or international levels. 4.1 Pricing Policies In all pricing approaches the allocation and distribution issues are interwined. The ideal policy system attributes the allocation function to prices and distribution to taxes and subsidies. Increasing openness and market economics rules have augmented the importance of the natural gas competitiveness in the energy market. Ecological & technological benefits of natural gas stimulate its further use which can be carried out successfully only if the natural gas proves to be competitive with other fuels that can substitute it. This can be achieved only with the help of a proper tariff system and a related well-balanced taxation of alternative fuels. Three schools can be followed for tariff system: (i) Cost plus or LRMC pricing (long term marginal cost). (ii) Market value. (iii) Price of displaced fuel (mainly for power stations) Cost Plus Principle The setting of natural gas price for customer categories or individual customers will be made by dividing total costs among all customers with regard to costs the customer has caused for his specific offtake. So maximum daily rate of an individual customer is the most important element. Costs of service are divided in three categories: * commodity (or energy) to recover fuel cost (unmetered rate, flat rate or step & block rate) and this represent 5%. * demand (or capacity) cover fixed costs and calculated on the peak of demand/capacity and this represent 35%. * customer costs (metering and maintenance) and this represent 60%. Chain of production of natural gas consists of production (reserve management, processing & gathering), transport, storage, distribution & marketing and are different for various categories of users mainly industry, feedstock, power generation and residential as shown in Fig. 4. PS1-Sp.11

12 FIG 4 PRODUCTION CHAIN COSTS ALLOCATION For commodity charges different rates for estimated cost are used: * unmetered rate; charged to customers that are not metered. An estimation of amount to be used is made. * flat rate is a fixed charge per m 3 of gas. * step rate is a rate that consists of a fixed charge per m 3 of gas and its value is determined by amount of gas used by the customer e.g. 30 cent for the first 1000m 3 then 25 cents for amounts exceeds 1000m Market Value Principle Price is determined by finding acceptable or competitive price when considering possible use of an alternative fuel. So sum of natural gas price (operating and capital costs) should be equal to sum of a substitute fuel price (operating & capital costs). This may result in different prices depending on various categories of customers according to their various uses of natural gas, offtake quantities, efficiency fuel use, quality of produced output, and environmental conditions Displaced Fuel End user prices in Europe for household are given in Fig. 5. PS1-Sp.12

13 FIG 5. END USER PRICES IN EUROPE (HOUSEHOLD Price of competing fuels for different customers is given in Table 2. Typical gas border prices are given in Table 3 Table 2. Price of competing fuels (1997) $/MMBTU Industry Household Elec. generation Country Light Light Gas Fuel Gas oil oil Elec. Gas Fuel Japan U.S.A Germany Spain Turkey U.K Egypt PS1-Sp.13

14 Table Gas Border Price ($/MMBTU) By Pipeline As LNG Italy Belgium France Germany Netherlands Spain U.K Av. E.U Japan U.S.A Competitive gas pricing for an individual user is given below for boiler fired by low sulfur heavy fuel oil (DM/ton). commodity (low sulfur fuel oil cost) 200 demand 11.8 preheating 6.6 pumping & atomization 3.5 storage 1.7 customer costs (maintenance & cleaning 3.8 Total cost of service environmental cost of fuel oil (clean air act) 80 fuel oil efficiency penalty 3 cost of conversion to gas (14.8) Competitive gas price Elements in tariff prices is shown Ffig. 6. Tariff system in Europe identifies differently customers and cost of services as shown in Table 2. FIG. 6 COMPEFITIVE GAS PRICING PS1-Sp.14

15 Table 4. Different European cost of services Central & Eastern Europe Western Europe Customer groups 100% 100% More than 2 categories 54% 100% Capacity charges Standing charge Commodity charge Residential 8% 22% Non- resid. 23% 33% Residential 23% 66% Non- resid. 23% 66% Unmetered 100% 0% Flat rate 100% 77% Block rate 0 11% Step rate 8% 44% Interruptible 8% 77% 4.2 Typical Tariff System Examples of tariff system in some countries are given in Table 3, while gas prices levels are given in Table 4. Most of countries mainly in Europe started to apply negotiated rate concept (called in U.S. recourse rate) where a pipeline files traditional cost-of-service rate are used. All firm capacity customers have the right to that recourse rate if they choose otherwise they can negotiate with the pipeline for better rate agreed with the pipeline for the duration of the contract. Cost of services basically includes operation & maintenance costs beside administrative & overhead, depreciation, taxes (income & sales taxes) and return. Characteristics of negotiated rate are: (i) Permit wide variety of rate designs (may be for each customer). (ii) Permit seasonal rate (winter, peak, summer, minimum). (iii) Permit flat rates. PS1-Sp.15

16 Table 5. Typical Tariff System Country Regulator Basic mechanism Tariff structure Indexation Russia Gas from (state) Inflation, tax policy, reform to self financing and sharp interest rate. Germany State Market value oriented Italy SNAM (state) Two parts formula, standing charge and commodity charge. Mexico State - subsidies will be paid by government - gas shut off for non payers. - franchises for twelve years. - by pass permitted U.S.A. State and federal - transparent pricing - service obligation - industry is vertically integrated. - distributors are protected from competition. - unbundled gas service Czech Trans gas Regulator supreme cost of gas Albania ALPETROL Uniform for all end users except residential Kazakstan State & Uniform for all end Lithuania regions LIETUVOS DUJOS users depend on yearly consumption - taxes at fixed (30%) -other taxes & profit (50%) - service costs (20%) - capital charges - operating expenses. - maintenance expenses - environmental credentials. - others (security) Incentive rate mechanism Negotiated rate subject to competition - import gas price. - own consumption & loses. - transit fees and storage costs. - other costs and profit. Depend on cost of gas production New methodology based on cost of production transport and distribution Armenia State Uniform Depend on cost of services (imported gas price, operational expenditure, profit and taxes) Pegged to changes in price of gas oil and fuel oil renewed every quarter. Review every five years according to values of related goods & services, taxes and efficiency. Transparent negotiated rates and competition no rate regulation. Yearly adjustment till reach world level Normalized Periodic review PS1-Sp.16

17 Table 6. Typical End Users Gas Prices Country Resid. Comm. Indust. Border price Fuel oil 1% S Gas oil 0.2% S $/m 3 $/MMBTU W. Europe Poland Mexico 0.24 U.S.A Slovenia 0.6 Czech Albania Kazakstan < Lithuania Belgium France Germany Italy Netherlands Spain U.K Denmark 100% light heavy oil 110% fuel oil Benefits of negotiated rate concept are: (i) For pipelines, dealing with capacity and permit them to compete better with electric utilities. (ii) For distributors, would be able to abandon straight fixed variable rates (SFV). (iii) For producers & marketers increased gas consumption for electric generation facilities. On the other hand, negotiated rates have limitations: (i) Rates are not confidential. (ii) Rates can not be unduly discriminatory. (iii) Pipelines must ensure that cost based services will not be degraded. (iv) No additional cross subsidies are allowed. (v) Pipelines must assure that cost-based rates remain current and updated. 4.3 Challenges for Bringing Gas Pricing to Economic Level - Low initial gas prices as energy- is considered a basic commodity usually under control of state. - Inflation, raise prices will contribute to increase in inflation. Gradual increase will contribute more to inflation than one-time big increase and may lead to government sharp criticism by the public and price raise will be eroded by inflation. PS1-Sp.17

18 - Redirecting subsides, when gas prices are below economic level gas industry has to be subsidized by the state, if flow of subsidies is altered to go directly to end consumers which can be either of general nature or specifically dedicated for a gas market segment or through direct social support. Redirecting subsidies has several advantages, provide incentives to gas industry to focus on making profit instead of relying on subsidies, increase customer awareness of the value of product leading to more efficient use and finally price transparency will be improved. - Energy saying, gas metering had led to more than 30% in energy saving in Eastern Europe instead of norm rate. - Social acceptability, liberalization of consumers good prices to led to big price increase and its negative social effect was limited as shortages disappeared and quality improved. Natural gas as basic energy commodity and no body can do without it so governments are always hesitant to increase gas prices (which is different from motor fuels as it is not basic need for every body) as prices on economic level need about 25% of average income. Sound gas industry is the prerequisite for securing gas supply supporting economic growth. It is important to avoid impression that raising gas prices will increase revenues for foreign investors. Gas prices increase is important only as a logical consequence of consistent policy to strengthen local gas industry. - Non payment, this is striking problem in Russia as 30% of gas consumers are non payer but the problem is less severe or very small in Western Europe, so raising prices will not do enough to improve profitability of the gas industry. 4.4 Gas Price Increase Gas prices increase were implemented through two strategies: - One-time big price hikes (300/1000% in Russia, 53% in Hungary). - Gradual price adjustment (Czech, 10-15% annually up to end of this decade). Economics in developing countries need to rely on the gas price policy knowledge and experience from market economics. Price policies in Germany and France have attracted substantial interest In Germany, market value-oriented pricing in the framework of intensive interfuel0 competition. The criteria which determine the competitive price include competitive fuels prices and cost incurred by user for converting energy delivered into heat (capital, operating & maintenance expenses). In France, gas-pricing policies is based on a basic inequality, stipulating that sales prices should not be lower than cost and not higher than market value. Advantages of market value oriented pricing are: preventing market imbalance, protecting customers, fair apportions infrastructure costs, suitably distributes market risks, generate optimum gas penetration and effectively prevents buses. PS1-Sp.18

19 5.0 LNG COST REDUCTION LNG may need to compete with alternative fuels on a total cost basis in addition to being more environmentally friendly. For example coal and fuel oil is a competing fuel for power generation. Also LNG competes with pipeline gas in several markets technological innovations enabled LNG plants to run safely, efficiently and cost effectively. Significant cost reductions have taken place in LNG projects mostly resulting from train size increases, increased competition and better project execution. LNG price is squeezed between competing fuel prices and higher LNG production costs. Potential for significant cost reductions remains in all elements of LNG value chain as illustrated in Fig. 8. One of promising area for further cost optimization is better use of the hot flue gases from gas turbines for power to generation is combined cycle power plant, another promising area for cost optimizations is better use of the cold, thereby closing the circle. Examples are: FIG 8 LNG COST, VALUE CHAIN Gas Distribution & Marketing Field Development 10-20% Liquefaction 25-35% Shipping 15-25% Receiving Terminal 5-15% Power Generation 25-35% * power plant cooling water-lng vaporization integration. * utilities and common facilities integration. * power supply to LNG terminal and revaporization other many diverse uses of the LNG cold are illustrated in Fig. 9. PS1-Sp.19

20 FIG NATURAL GAS PLANNING No doubt that linkages between various aspects of gas development is important to all parties involved in gas production use investment planners must use an analytical frame work that is multi-dimensional and which incorporates historical as well as expected variables. Development of natural gas, a non renewable fuel and one that requires large, up-front investments for its transportation and use raises complex questions of gas allocation and investment strategy which must be faced at the pre-investment stage of development. Example of these complex questions are: * should gas be used for electricity generation to replace imported gas oil or should a gas-based fertilizer plant to be built to replace imported urea? * would the high cost of a city gas distribution network be justified by the very high and growing cost of kerosene and LPG used in households? * if gas reserves are large should the country try to attract commercial partners for an LNG export or would it be better to keep the gas in the ground to satisfy future growing domestic markets? * as a producer of fertilizer or petrochemicals for export could the country compete with supplies from Middle East where production based on associated gas? * would the high cost of GTL transportation fuels justified by the very high and growing cost of gas oil and gasoline. PS1-Sp.20

21 There are two things to be noted about such questions (i) they are essentially economic rather than technical. (ii) they are long term sector strategy i.e. can the penetration of gas as an oil substitute be achieved and how could be phased out because gas infrastructure is lumpy, it should be designed on the basis of total long run gas demand. Scope and Focus of Gas Planning Model Gas planning model (GPM) given in Fig. 10 will depend on the complexity of the country s energy sector and the size of its gas reserves relative to domestic demand. FIG 10 COMPONENTS OF GAS PLANNING MODEL GPM is expected to have the following scope: * it is a preliminary planning tool that produces specific recommendations for the next steps in gas developments and becomes the basis management information system for strategic analysis. * once the basic GPM framework has been set up, it can be easily updated to accommodate better or more recent data. * it can be used to test quickly effects of alternative investment decisions. PS1-Sp.21

22 GPM should cover three areas. (i) it should develop a profile over time. (ii) It should identify, evaluate and rank alternative packages of gas using projects and related investments. (iii) Consistency checking and sensitivity analysis should be undertaken. 7.0 CONCLUSIONS AND RECOMMENDATIONS - Goals of Gas Pricing Policies are to ensure efficiency of resource allocation, satisfaction of specific target beside consideration of social equity. - Characteristics of Natural Gas as different from liquid crudes and fuels imply its pricing policy for satisfaction of specific target beside consideration of social equity. - Economic Level of Gas Pricing should be followed to encourage gas exploration and development. Especially it is an effective way for energy conservation. - Gas Planning Model specific for each country is to be developed to ensure economic use of gas. ACKNOWLEDGMENTS The author express his deeply grateful to all persons helped him in preparation and review of this article especially Nahed El Alfi, Naglaa Samir, Aiman Nabet and Gomaa Abdul Murid. REFERENCES - R. Maabro The Pricing of Natural Gas ECES Paper no. 26 May IEA Natural Gas Information 1998 edition. - Petroleum Economics World Gas Yearbook 1999 P ECES Gas Prices, Price Systems Eurostat 4D 1995 P D. Julius/A. Mashayeskki The Economics of Natural Gas Oxford Institute for Energy Study Publications Oxford Institute of Energy Studies Financial Risks and Rewards in LNG Projects NG 3 April C. Freedenthal High Energy Prices Merit High Expectations Pipeline & Gas Journal October 2000 P A. Avidon LNG Links Remote Supplies and Markets Oil & Gas Journal June 2, 1997 p Hydro Carbon Processing LNG World Overview March 1987 P. 124-B PS1-Sp.22