Gas Price Benchmarking in India Factoring sourcing and development options for LNG,CBM and Shale Gas

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1 Gas Price Benchmarking in India Factoring sourcing and development options for LNG,CBM and Shale Gas June 2014 Copyright 2013, All rights reserved

2 USD/MMBTU Gas Price Benchmarking in India 2 Base $3.4 per mmbtu Gas price at Henry hub in 2012, shale gas discovery has changed scenario Gas prices vary according to destination and prevailing market conditions, There are regional hubs of trading; No Standard Benchmarking for gas pricing in India Exhibit 1:Gas price divergence in global scenario Japan UK USA *US prices are Henry Hub prices Source: BP statistics The huge difference in gas pricing across European countries, USA and Asian market shows that pricing does not follow a set pattern. This is not reflective of demand supply scenario prevailing in world market as source destinations are quite different than the consuming centres. Generally gas as a source for oil substitution is used for pricing formation. LNG prices which is hovering around $16 to $18 for Asian market, makes it sourcing to Indian destination unsustainable for price savvy Indian consumers. There is no standard gas pricing in India and no formula which can justify the gas pricing in India. The different pricing based on cost plus, profit petroleum, NELP and Pre NELP have not been able to solve the anomalies in the sector. While the pricing is driven by the consuming sectors such as power and fertiliser, its time to come up with a market driven pricing benchmarked to Indian conditions and demand supply situation. The recent decision of CCEA to increase the price to $8.4 per mmbtu for all sources as per Rangarajan committee's pricing formula lacks any sound logic. Currently, gas based power projects are running at a PLF less than 25% with zero supply coming from KG-D6. The dwindling supply from KGD6 has forced power sector to demand equal prioritization and diversion of new gas discovery and existing gas from other sector towards it. This sends wrong signal to the market and the investors at large. While gas producers see a their top line grow significantly with the recent price hike, it will be having adverse impact on the consuming sectors. 120 Actual Consumption 100 (MMSCMD) Exhibit 2: Indian Power plants suffering on account on deficit gas supply 0 70% PLF (MMSCMD) 90% PLF (MMSCMD) Source: MOPNG and *Current PLF at 25% due to near zero supply from KG D6 Copyright 2013, All rights reserved

3 Gas price Benchmarking in India 3 Case Pricing Formation worldwide is based out of gas on gas pricing formation and oil price indexing for long term contracts, the scenario is changing now Exhibit 2: Price Formation worldwide for gas 4% 5% 6% Gas on Gas 35% Regulation below cost 16% Regulation on socio political basis Regulation on cost of service basis Bilateral monopoly pricing others 34% Source: BP and Price Formation worldwide:- The above exhibit shows that near about one third volume of gas being priced on gas on gas that is market based and similar amount being regulation below cost. India on the other hand employs different mechanism for gas pricing and there is no standard. The current hike, however will be applicable to all sources of gas. Will it be a right step forward or not? Only time will judge. Concerns remain about the motive of the government which speaks in double tone. This price would be applicable to gas producers but there is no clear indication on how to treat gas consumers who are price averse always. Implications at large Subsidy burden would be many fold on governments pocket Pressure on profit margin for fertiliser sector, problem in working capital arrangement Gas based power would be dearer; Discoms may opt out of purchasing from gas based generation RIL will be the major beneficiary Stakeholders are confused at this stage amid contradicting statements from different ministries. This is the time India should ponder about its gas pricing strategy and should look for coming up with some set standards and benchmarks to do gas pricing in India taking into all other sources such as LNG,CBM and shale gas options both from domestic sources and international sources. X-port/ The sourcing and development of these Logistics Eqp. futuristic options would decide the future course of gas pricing in India. Suppliers with its price factor benchmarking Engineering report would evaluate all options available considering the Indian factors & Erection and dig deep into the LNG,CBM and shale gas options available to come up with price benchmarks for Indian Scenario. Copyright 2013, All rights reserved $ 8.4 per mmbtu Will be the price of gas from April 1,2014 after the recent hike by CCEA

4 Objective Results Gas Price Benchmarking in India 4 Exhibit 4: DIFFERENCE reports delivering domain knowledge, market insights & future outlook S Difference Germinates from minds that think fresh to evolve path finding guide for all stake holders through quality information & analyses S Service Difference Emanates from seamless integration of domain expertise with first hand industry knowledge and customized research solutions at a very competitive cost Gist of the report in.pdf format for ready use Objective & Results Business Stakeholders/ Participants Free Author support on report & Competitive cost Customized Solution Gas Price Benchmarking in India: Taking a dip and finding out the government role in fixing price for natural gas in India, what would it imply for private producers like RIL? How the international market is shaping up moving from oil price indexation to mark to marker pricing? How India will fare in developing its own benchmarking in gas price and international? What would be the impact on recent gas price increase to overall economy vis-à-vis to gas consumers across sectors? Exhibit 5: Objective & Results Experts Insights/ Market view Validated data & analysis & Services Framework Desk Opportunity mapping & Market sizing Reports First hand sector knowledge & inputs Primary research inputs from F2F interviews 1. Study of international gas price formation and trade 2. India's import dependency on gas and how that would impact gas pricing in India 3. Impact Analysis of recent price hike on all stakeholders 4. What would be the hike in corresponding prices in power, CGD which would affect end users directly? 5. Will it plug the gap of ever increasing demand supply mismatch? 1. To track the world market changes in terms of sourcing and pricing options for gas 2. To asses the LNG volume and its possible pricing for India 3. Direct and indirect impact on all key stakeholders 4. To predict the quantum of increment that will burn a hole in consumers pocket 5. To validate governments hypothesis on supply side projection due to gas price hike Copyright 2013, All rights reserved

5 Gas Price Benchmarking in India 5 Key Queries Resolved What would be the top-line and bottom line impact of gas price hike? How would it change their investment in E&P activity? What would it imply for the gas transporting agencies like GAIL? What prompts the Government to take this decision at this stage? When will India have its gas pricing benchmarking to international standard? What will be India s role in international gas trading in medium to long term scenario agencies, FI institutions Gas Producers Upstream, Midstream and Downstream Companies Associated Industries LNG traders Gas Consumers Power, fertiliser & CGD companies Govt. & Regulatory Bodies/ Discoms What would be the financial burden on consuming sectors? Whether Power industry would absorb such an increase? What would be the possible increase in CGD prices? What would be the gain in terms of royalty and profit petroleum? What will be the subsidy outgo? What will be the tariff increase per unit for discoms? How would it impact LNG trading to India and its associated infrastructure? Will there be drastically reduction in LNG imports? How would it affect cross country pipeline projects for India? Must buy for Gas Producers E&P agencies Gas Consumers CGD operators Petrochem and other industries LNG Traders Power Distribution Companies Fertilizer Companies FII s/banks Copyright 2013, All rights reserved Government bodies Educational Institutions NGOs Port Developers Consultants firms Bodies/Institutes Industry associations Textile companies Fuel Benchmarking Series- Predicting fuel scenario and its pricing for strategic business decision making

6 Contents & Coverage Executive Summary 1. Worldwide Gas market o Major Regional Markets USA UK Europe Asia o Major Gas Producers o Major Gas importers o International Gas Trade 2. International Gas Trading o Regional Market Henry Hub NBP Japan Netback o Long Term Contracts o Spot Market 3. Price Discovery of gas worldwide o Oil price indexation ( Substitute pricing) o Market linked ( Gas on Gas Pricing) o Bilateral negotiations o Cost Plus Basis ( Regulated) 4. Gas Scenario in India o Major gas producers o Major Gas Consumers Power Fertiliser LNG CGD Industrial and others o Demand Supply Analysis Projected Gap 5. Existing Gas Pricing in India o APM and Non APM o NELP and Pre NELP o CBM Pricing 6. Rangarajan Formulations on Gas Pricing o Salient features o Proposed Formulas Average Producers net back for Indian imports World Average netback to producers o Arguments in favor of final formula 7. Hike of gas price by GOI o Logic behind the hike o Timeframe and the roadmap o Gas price for the producers Gas Price Benchmarking in India 6 o What is in store for consuming sectors? o Projected Subsidy burden o Role of Kelkar Committee after Impact Analysis of gas price hike on stakeholders o Upstream Sector, Midstream Sector, Downstream Sector o Power, Fertilizer,LNG and CGD sector. o Associated Sectors 9. Sourcing and Development of LNG Impact analysis of new pricing mechanism o LNG Sourcing and its pricing options USA 2015 & beyond Middle East 2015 & beyond o LNG Infrastructure ( Status and Planned) o LNG Contracting Will new gas pricing change the course o Growing demand in A-PAC region In store for India o Aggregator Model : Way forward to surrogate pooled pricing for LNG 10. Gas pricing mechanism impact on CBM development o Status so far in India o Will new pricing mechanism boost CBM Changing paradigm from 2002 to 2020 o Soaring gas demand of India CBM as crucial source o Status of reserves so far explored and awarded 11. Gas pricing mechanism impact on Shale gas development o Status so far in India o Shale Gas & Regulatory Hindrances o Benefits of new gas pricing mechanism of Shale gas exploration in India o Soaring gas demand of India Shale gas as crucial source 12. Benchmarking Indian gas price with world market o Market Predictions Short to Medium Term Long Term o Long term contracts link to Henry Hub for market price discovery o Benchmarking gas price with LNG import o The diminishing effect of gas price linked to oil indexation 13. Alternative Arrangements o Gas Price Pooling: Viability Check o Gas Swapping: Issues and Challenges 14. s Perspective o What it needs to take for benchmarking gas pricing in India? o How the global market for gas will play a significant role in gas pricing in India? o Shale gas to be a game changer in India Copyright 2013, All rights reserved