Natural Gas Price pooling Report by PINC Research

Higher prices could hamper the future demand for gas. We can see that at present there are atleast 15 different natural gas prices in India. Hence, there exists lot of price differential in different end-user sectors. Infact, consumers in the same sector also are subject to different prices. To bring about uniformity in gas prices and protect consumers from excessive volatility in gas prices, MOPNG has proposed gas price pooling.

GAIL has hired an independent entity “Mercados” to perform research on the subject of implementing gas price pooling in India. In Feb 2010, Mercados came out with its report on the same and has suggested several options that can be implemented in India. Based on their analysis, it was observed that some of the options would not be practically feasible to implement. Among the options considered, two basic variants were considered feasible for further evaluation under the given circumstances. Thus, GOI intends to introduce gas pooled pricing by end of 2012 their argument being price pooling can serve the objectives of introducing substantial quantities of new LNG supplies on account of reduction of volatility.

Gas Price pooling raises a number of concerns:

As high-priced LNG would be pooled with low-priced domestic gas, LNG negotiators would tend to enter into commercially unattractive contracts considering that RLNG would be easily absorbed in the Indian market under the pooling mechanism.

Secondly, under NELP, most private players have the freedom to set natural gas prices. However, pooling of prices curb this freedom leading to legal hassles.

NTPC and many others have opposed the idea of pooling of gas prices for power sector as proposed by the petroleum ministry creating a fear of litigation issues wrt to pooling.

WORLD MARKETS EXISTING AND EMERGING CONTOURS

Gas availability is expected to increase to 255mmscmd (including LNG) by 2015 from current supply of 156mmscmd in 2010. Boost in domestic supply is expected from KG-D6, ONGC and GSPC's new fields. Despite the increase in domestic supply, demand (expected ~350+mmscmd by 2015) is far likely to supersede supply. To plug in the increasing demand-supply gap, 100+ mmscmd LNG capacities are expected to be on stream by FY15. Additional upcoming liquefaction capacity across the globe, evolving technology like Shale gas and Coal bed methane should further improve the gas supply scenario in future.

FAVOURABLE GLOBAL LNG DYNAMICS IN PLAY

In 2009, LNG constituted 8% (243bcm) of total world natural gas production of 2987bcm. Of the total natural gas trade volume (through pipelines and shipment) of 877bcm, LNG constituted 28%. Major countries exporting LNG are Qatar with 19% share, followed by Malaysia, Indonesia, Australia, etc. The major countries importing LNG are Japan with 36% share, followed by South Korea, Spain, France, etc.

LNG in Asia and India - Asia is the largest LNG importing region. Japan has been a major LNG importer since the first introduction of Alaska LNG to the country in 1969. LNG has been mostly traded under long-term contracts. In particular India and China face limited natural gas reserves and import dependency is expected to rise in the future.

As India does not have any pipeline connection, all the gas currently imported is LNG. Current operational LNG import capacity is 13.5 mtpa (18 bcm). In 2010, India imported 12.3 bcm of LNG from Qatar (under a long-term contract), Australia, Trinidad and Tobago, and Russia as well as from a few other countries. LNG was imported at the two operational terminals (Dahej and Hazira). LNG imports have been growing as can be seen below. This trend has continued in 2010 with LNG imports rising from 11.6 bcm in 2009.

SHALE “GALE” – ABUNDANCE OR MIRAGE?

Shale Gas Reserve: According to geologists, there are more than 688 shales worldwide in 142 basins. At present, only a few dozen of these shales have known production potentials, most of those are in North America. The potential volumes of shale gas are thought to be large and widespread, the resource has not yet been quantified on a national level for most countries. This is likely to impact the natural gas markets particularly in the United States and Europe, and also LNG (Liquefied Natural Gas) markets worldwide.

The most credible studies ( BGR 2009) put the global shale gas resource endowment at about 16,110tcf or 456tcm compared to 187tcm for conventional gas. It is assumed that nearly 40% of this endowment would be economically recoverable. The US and the Canada together account for over 32% of the total estimate. European resource estimates, on the other hand, are not very impressive at slightly over 6% of the estimated global resources, and China and India on current estimates hardly reach a 2% share each.

China: Set a target for the country to identify 50 to 80 shale gas prospects and 20 to 30 exploration and development blocks by 2020

Launched national shale gas research centre

Aims at having 1 tcm of proven shale gas resources by 2020 and build 15 to 30bcm(~94mmscmd) of production capacity and produce 8 to 12% of China’s natural gas from shale gas wells by 2020

China and India: Both China and India have numerous gas shale basins that are only now starting to be evaluated. Just recently, Shell and PetroChina announced plans to jointly evaluate and develop the gas shales in Sichuan Province.

Other Countries: Gas shale exploration is underway in many other parts of the world, including Australia, New Zealand and Southern Africa where Statoil, Chesapeake and Sasol recently announced their plans.

Shale Gas pricing: The shale gas cost has been estimated to be between $6 - $9/mmbtu. This is still considerably lower than for the supply of LNG from Iran or Qatar, which is estimated to reach US$13 at the point of delivery.

Analysis:

Shale gas resources in the United States will keep natural gas prices relatively low for an extended period of time. Longer periods of lower gas prices will likely result in additional demand for gas from the transportation and power generation sectors. More relevant to India opportunities will arise to lock in long-term gas supply at competitive prices.