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Gas price hike-I: Rangarajan Committee formula neutered to bring down the price cap

Oct 17: The gas price hike has come as a surprise to everyone. Even though it was anticipated, no one really knew that it would come this quickly. And no one ever anticipated that the government would tinker with the Rangarajan formula in a manner that the price of gas would be brought down from $9.54/mmbtu to just $5.6/mmbtu.
8The new formula adopted is: P = VHH PHH + VAC PAC + VNBP PNBP + VR PR VHH + VAC + VNBP + VR , where:
--VHH = Total annual volume of natural gas consumed in USA & Mexico.
--VAC = Total annual volume of natural gas consumed in Canada.
--VNBP = Total annual volume of natural gas consumed in EU and FSU, excluding Russia.
--VR = Total annual volume of natural gas consumed in Russia.
--PHH and PNBP are the annual average of daily prices at Henry Hub (HH) and National Balancing Point (NBP) less the transportation and treatment charges.
--PAC and PR are the annual average of monthly prices at Alberta Hub and Russia  respectively less the transportation and treatment charges.
The Rangarajan formula was modified in the following way:
8Removal of both the Japanese and Indian LNG import components in the formula.
8Consideration of Alberta Gas Reference price in place of Henry Hub Prices for Canadian consumption.
8Consideration of Russian actual price in place of National Balancing Point price for the Russian consumption considered under Former Soviet Union (FSU) countries.
8Consideration of appropriate deductions on account of transportation and treatment charges, etc., for different hub prices.
8The options of bi-annual and annual price revision instead of quarterly revision will be considered. The price will be effective prospectively from November 1, 2014.
8The gas price will be depicted in Gross Calorific Value (GCV) terms
8Clearly, the variables that caused the price of gas to go up have been taken out of the formula. India's LNG consumption is miniscule and therefore did not mention in the new formula. The indexation to the high priced Japanese price was cut out. Well head prices were worked into the formula by subtracting transportation and gas treatment and sweetening charges.
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Gas price hike-II: Will cost plus pricing stage a come back?

Oct 17: The new gas price will not be applicable for Ultra Deep Water Areas, Deep Water Areas and High Pressure-High Temperature areas.
8The government is not spelling out how exactly the gas price for these will be determined, except to claim that it will be at a premium which will be determined as per prescribed procedure. The procedure however has not been made public yet.
8The DGH will come out with a list of discoveries every year on which a premium will be given, is all that petroleum minister Dharmendra Pradhan is willing to concede. .
8How exactly will this premium be determined? No one knows yet.
8Like benchmarking gas prices to international prices, will the DGH benchmark the cost of production of gas from these kind of fields from across the world and take out an average price?
8Or more likely, will it be a field-wise price, depending upon the cost of production of gas from these fields?
8If cost of production is going to be the benchmark, the DGH will have to figure out the cost parameters of each of these fields, and that will entail getting into a cost plus regime, with a fixed return, of say 12%, or a certain rate over the RBI rate, on investment.
8Or will the price of gas be based on the Field Development Plan submitted by an operator, subject to correction when cost is audited.
8A cost plus regime will require a very robust cost vetting system so that there are no accusations of gold plating.
8A cost plus system will take the sting out of the exploration business in India as it will be equivalent to getting a return on money that is parked in a bank. There will be no upside and only a downside risk as money invested in exploration efforts that lead to no discoveries will not be compensated.
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Gas price hike-III: Government will have to come clean soon on the gas price premium

Oct 17: The government will have to come out quickly with a premium price for the Ultra Deep Water Areas, Deep Water Areas and High Pressure-High Temperature areas to spur investments.
8For at stake are several billion dollars of investment in the oil and gas space.
8Among those was investments planned by the RIL-BP combine and ONGC in deepwater and tight oil reservoirs, none of which will be viable at a cost price of $5.6/mmbtu.
8The immediate requirement is to give the right price for gas that is being produced --and flared -- by GSPC operated Deendayal field in block KG-OSN 2001/3.
8GSPC is ready to commence commercial supply but is refusing to do so unless it gets a minimum interim price of $8.5/mmbtu.
8In fact, the petroleum ministry has already allocated 0.8 mmscmd of gas from the filed to Nagarjuna Fertilizers' urea complex in Andhra Pradesh but GSPC is refusing the budge, claiming that it will not sell gas at the loss making price of $4.2/mmbtu.
8Even the current price of $5.6/mmbtu will not be enough, it seems.
8Now that the government has made it clear that there will be premium for deepwater fields, a new price will have to be established for GSPC before it begins supply.
8The moot point is what is the price going to be? Will it be benchmarked to the gas price given by GSPC under the Field Development Plan? If so, what will be the IRR that the DGH will take into account while determining the price?
8Or will the price be actually market driven, a value that is moderated by the DGH out of the prices elicited in an open bid from buyers by GSPC?
8These and several other questions will require answers in the days ahead.
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Gas price hike-IV: Pricing confusion needs to be cleared for pre-NELP blocks

Oct 17: The petroleum ministry has made it clear that the revised gas price will be applicable to all gas produced from nomination fields given to ONGC and OIL, NELP blocks, such Pre-NELP blocks where PSC provides for ggovernment approval of gas prices and CBM blocks. 
8The following are the exceptions to which this policy would not apply:-
--Small and isolated fields in nomination blocks, given their peculiar conditions, guidelines for pricing of gas were issued in 2013 would continue to apply.
--Where prices have been fixed contractually for a certain period of time, till the end of such period. 
--Where the PSC provides a specific formula for natural gas price indexation/fixation.
--Such Pre-NELP blocks where Government approval has not been provided under the Production Sharing Contract (PSC).
8Here again, the definition is a little stretched. What category of fields would Cairn Energy's Barmer Block be in?
8Then again, the petroleum ministry has sent out a letter recently to Focus Energy, the operator of block RJ-ON/5, wherein the price of gas is to determined at arms length between GAIL, the buyer of gas, and the operator. Focus has demanded a price of $8.5/mmbtu, up from $5/mmbtu that it was charging earlier. Under what category will this price fall in?
8The pricing matrices for gas from the pre-NELP PMT and Ravva fields will also have to be re-looked in the context of the clarification given by the government yesterday.
8The government has clarified that in some pre-NELP blocks where government approval is required, the price of gas cannot go beyond the official $5.6/mmbtu whereas in others this price will not be applicable.
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Gas price hike-V: It is going to be a long wait for BP

Oct 17: The RIL-BP-Niko combine would continue to elicit a price of US $ 4.2/MMBTU till the shortfall quantity of gas is made good. 
8It is proposed that the difference between the revised price and the present price (US $ 4.2 per million BTU) would be credited to the gas pool account maintained by GAIL.
8Whether the amount so collected is payable or not, to the contractors of D-6, would be dependent on the outcome of the award of pending arbitration and any attendant legal proceedings.
8The capital cost recovery on the shortfall amount is under arbitration and only after the arbitration award is finally decided in favour of the contractors, and subsequently enforced through an Indian court, would they receive the price difference.
8The petroleum ministry has so far served cost recovery notices to the tune of $1.797 billion for creation of extra facilities which were not commensurate with either the reserves or existing rate of production of gas . As a first step, after the deductions, RIL was ordered to remit $ 115.26 million as additional profit petroleum up to the FY 2012-13.
8More than RIL, the company that is really on the mat at this juncture is BP. On a total investment of $7.2 billion to buy 30% stake in RIL's blocks, the multinational's return on investment has not been good. BP's share of profit petroleum at a gas price $4.2/mmbtu from the producing D-6 block is projected at a mere $24 million or so for 2014-15.
8Assuming that the arbitration battle is won, and the price elicited is $5.6/mmbtu, the profit petroleum figure will still not be enough to garner a reasonable return for BP.
8In this sense, BP's sunk cost is not going to bring in a great return, given that the price of gas from existing discoveries will remain capped and incremental output from them are unlikely to go up significantly.
8What BP is therefore looking at is a good return from additional investments that it will make in the new discoveries in the D-6 block and elsewhere to make up for the investment made.
8But here again, if the government were to merely give a fixed return on investment or fix a ceiling on the price, the multinational will elicit a perhaps justifiable return on the incremental money spent but not enough to recover the $7.2 billion that it had spent to get into the RIL blocks in the first place.
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Gas price hike-VI: WIll RIL drop arbitration proceedings over gas price increase?

Oct 17: Now that the government has cleared the logjam over the gas price increase, will the RIL-BP-Niko combine drop the arbitration proceedings seeking a gas price increase?
8The new gas pricing formula is nowhere near what the contractors had asked for, but yet does it make sense for them to carry on with the battle?
8The government has promised a still-to-be unveiled price for gas that is going to be produced from deepwater discoveries.
8If a good enough premium is indeed given, should they still go ahead with the arbitration process?
8It will perhaps not make sense to go on battling the Narendra Modi government beyond a point.
8For even if a favourable award is elicited from the Arbitration Tribunal, there will still be a problem in enforcing the award in India.
8In this context, the recent Supreme Court judgement
that any foreign arbitration award can be tested against the principle of public good has far reaching implications.
8There is a distinct possibility that even if the RIL-BP consortium were to obtain a decision to set an arms length gas price, its enforceability can be struck down by Indian courts on the ground that it goes against public policy.
8The government is likely to argue that keeping a cap on gas prices -- or prescribing a formula that dictates a low gas price -- is a part of an overall public policy to subsidize power and fertilizers for the poor.
8Allowing a free rise in gas prices would mean raising the prices of urea and power to a point where they may not be in the interest of the public, the argument will run.
8The contractor combine faces two hurdles now: one of convincing the arbitration tribunal that the cap in gas prices is against the provisions of the Production Sharing Contract signed by the contractors with the Union of India and then to go on to convince an Indian court that it is in public interest to allow them the freedom to set the gas price.
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Gas price hike-VII: Will private players remain incentivised in the North East?

Oct 17: The North East will continue to receive gas at 60% of the cost of gas elsewhere in the country.
8The centre will subsidize the gap but not just for ONGC and OIL but also for other private sector companies operating in the North East.
8This is meant to incentives investments in E&P blocks in the Nortrh East.
8But it remains a moot point whether the private sector will be happy with a $5.6/mmbtu price tag for gas in the North East.
8Difficult terrain, bad weather, raging militancy and lack of manpower push up the cost of production in the North East
8Private operators may find the cost of doing E&P work too prohibitive even at a gas price of $5.6/mmbtu.
8Only time will tell whether the incentive will work for the private sector.
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Gas price hike-VIII: Modi government switches from NCV to GCV terms

Oct 17: The Modi government eventually heard the plea made by the E&P operators that the gas price be fixed on Gross Calorific Value (GCV) terms instead of the current petroleum ministry practice of pegging it on Net Calorific Value (NCV) basis.
 8The E&P industry had argued that the GCV standard had also been prescribed by the Petroleum and Natural Gas Regulatory Board (PNGRB).
 
8The PNGRB had said that all upstream entities should follow the ISO:6967-1:1983(E) code for accounting of gas in energy terms based on Gross Calorific Value (GCV).
 
8The regulator had expressed concern that different codes and standards (ISO, GPA, etc.) were still being followed by upstream suppliers of natural gas and LNG, instead of the prescribed ISO standard.

 
8The result is a variation in calculations of calorific value (CV) of gas at delivery and re-delivery points.
 
8ONGC, among others, had expressed difficulty in implemeng the PNGRB sponsored ISO standard, primarily since price of natural gas notified by ministry is on an an NCV basis and PNGRB had notified regulations for accounting energy on GCV basis. This, it was claimed, would result in a duplication of effort while calculating calorific values with resultant inconsistencies in the denomination of gas prices and pipeline tariffs. 
 8Then again, it had been argued that worldwide gas prices, particularly at Henry Hub and at the National Balancing Point (NBP) -- on which the new domestic gas price would be based -- were reflected on GCV basis.
 
8The petroleum ministry was initially reluctant to switch over on the ground that current formula -- SP (in $ / mmbtu) = 2.5 + (CP - 25) A 0.15 -- was expressed in NCV terms, based on the thermal equivalence of natural gas with crude oil.
 
8Eventually however, the GCV benchmark was adopted.
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World Bank estimates about 12% decline in global fertilizer prices in 2014

Oct 17: Fertilizer prices are projected to decline almost 12 percent in 2014 on capacity expansion in the United States, according to the World Bank’s (WB’s) ‘Commodity Markets Outlook’ report for October 2014.
8The report says: “the recent energy revolution and the resulting lower natural gas prices in the U.S. is impacting the global fertilizer industry. Many fertilizer companies are building plants in the U.S. to utilize lower natural gas prices, including a recent corporate deal between a U.S. and an European fertilizer company, which, if finalized will form world’s largest producer of nitrogen fertilizer.”
8It adds: “The fertilizer price index is expected to decline 11.5 percent in 2014 and an additional 3.5 percent next year. Such declines come on top of the 13 percent drop in 2013. Yet, individual components of the index will follow different paths. Phosphate rock and potassium chloride will decline almost 25 percent each in 2015, urea will average 6.5 percent lower, but TSP and DAP will make some moderate gains. This outlook is based on the assumption that natural gas price in the U.S. will increase moderately.”
8The WB report notes that “Although fertilizer prices reversed their downward path in 2014Q3 (up 4.9 percent), they are 6 percent down since a year ago and 60 percent lower since their mid-2008 all-time high.”
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MOEF might exempt bentonite sulphur projects from environ clearance

Oct 17: The planning and implementation of bentonite sulphur projects would become a smooth and time-saving business if Ministry of Environment and Forests (MOEF) formalizes observations made an experts committee into a policy decision.
8MOEF’s expert appraisal committee (EAC) for industrial projects recently “noted that proposed product –Bentonite Clay will be used as micro-nutrients in the manufacturing of fertilizer. Manufacturing process involves only blending and no chemical reactions take place. The Committee suggested such proposal cannot be considered as chemical fertilizer as there in no chemical reaction involved.
8Such proposal may be exempted from environment clearance process.”
8EAC made this observation while considering terms of reference for EIA study on Rashtriya Chemicals and Fertilisers Limited’s (RCF’s) sulphur benotnite plant to be located at its Trombay complex in Mumbai.
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MOEF panel recommends issue of green nod for Matrix Fertilizers' expansion

Oct 16: A project appraisal committee of Ministry of Environment and Forests (MOEF) has recommended grant of environmental clearance for phase II of Matrix Fertilizers and Chemicals Limited (MFCL).
8At its meeting held during 31st July-1st August 2014, the Committee took note of the company’s reply to its queries. In its letter dated 25th April, 2014, the company informed the Committee that it has “obtained principle expression of interest from Essar Energy Ltd. for the supply of required CBM equivalent to 84000 mmbtu/per day from thei Raniganj and Rajmahal CBM blocks.”
8After detailed deliberations, the Committee recommended the project for environmental clearance with a slew of specific conditions.
8The phase-II project envisages setting up of a 2530 tonnes per day (tpd) ammonia plant, a 4430 tpd urea plant and a gas-based 67-MW captive power plant. The project would increase the urea capacity at the company’s it upcoming fertilizer complex at Panagarh, Burdwan district, West Bengal to 3 million tonnes per annum (mtpa) from 1.4 mtpa.
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Matrix urea project hit by time and cost overruns

Oct 16: Matrix Fertilizers and Chemicals Limited’s (MFCL’s) greenfield gas-based urea plant at Panagarh in West Bengal has suffered major cost and time overruns, forcing the company to seek additional funding and rescheduling of payment of loans.
8Credit Analysis & Research Limited (Care Ratings) thus downgraded the company’s credit rating.
8According to Care Ratings, “The revision in the rating assigned to the bank facilities of Matix Fertilisers and Chemicals Ltd (Matix) factors in the deterioration in its credit profile on account of delay in starting pre-commissioning and commissioning activities on account of non-availability of CBM gas (feedstock). The scheduled commercial operations date (COD) was April 2014. The debt repayments were scheduled to start after a moratorium of fifteen months from the COD i.e. from July, 2015.”
8A Care Ratings’ release says: “However, the delay in gas supply has resulted in the company seeking revision of COD and debt repayment schedule by two years. On account of delay, the project cost is expected to increase by Rs 1106 crore. At the same time, the company has approached bankers for additional funding of Rs.737 crore (primarily on account of IDC and pre-operative expenses).The ratings also factors in relatively high regulatory risk associated with the fertilizer industry.”
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Oct 15: FAO to observe 2015 as International Year of Soils to safeguard soil health   Details
Oct 15: World Soil Charter moots policy initiatives for sustainable soil management   Details
Oct 14: DOF backs out of the guaranteed purchase of urea from proposed plants   Details
Oct 14: ICRA expects only 4 new urea plants under amended NUIP   Details
Oct 13: UPBSN seeks global offers for supply of gypsum   Details
Oct 13: CIL trying to resume production at its cyclone-affected Vizag unit   Details
 
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