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Energy
India
No whirlpools, thankfully. An inter-ministerial committee has rejected ‘price’ pooling
of natural gas, either at an overall level or by sectors. Other key points—(1) recognition
of essential consumption of gas by LPG/C2-C3 extraction units, (2) preferential
allocation of domestic gas to core sectors and (3) market-linked pricing for future gas
supplies. We find the recommendations progressive and positive for the long-term
development of the sector. Pooling is an outdated socialistic concept, in our view, and
would have undermined the development of the gas sector.
No pooling mechanism for natural gas pricing
An inter-ministerial committee in its final report on policy for pooling of natural gas prices has
recommended against price pooling mechanism at an overall level or by sectors. We see this is as a
progressive move and are relieved that the committee has decided against a concept of pooling
gas prices in India. Please see our April 8, 2011 report titled Gone with the gas for our views
against the concept of pooling. Our key concern against pooling is a consequent distortion of the
market mechanism and relapse to statist policies. Stringent state controls have already constrained
the Indian oil and gas sector.
Preferential allotment of domestic gas supply to core sectors
The committee has recommended the preferential allotment of natural gas available for allocation
to the priority sectors—fertilizer and power. However, the committee has recognized that internal
consumption in oil and gas fields, pipelines and LPG/C2-C3 extraction are indispensible and any
allocation of domestic gas supply will be done after catering to these segments. Thus, we rule out
any diversion of gas from GAIL’s LPG and C2-C3 extraction units. We also note that the committee
has ruled out any substitution of present R-LNG supplies by domestic gas for the core sectors.
Cap on domestic gas supply to CGD/CNG and other non-priority sectors
The committee has suggested a cap on the off-take of domestic gas by CGD/CNG sectors at 6
mcm/d versus gas supply of 7 mcm/d in FY2011 and 5.3 mcm/d in June 2011. The committee has
also recommended a cap of 5 mcm/d for domestic gas supply to other non-priority sectors versus
18.4 mcm/d of gas supply in June 2011. The amount of 5 mcm/d of domestic gas is provided to
safeguard the interests of suppliers from potential disputes/litigations from the existing gas supply
contracts/obligations. The current requirement as well as the incremental demand from the noncore
sectors should be met by R-LNG imports. The residual domestic gas supply of ~10 mcm/d (see
Exhibit 1) should be preferentially allocated to meet the incremental demands of fertilizer and
power sectors.
Market-linked pricing for potential domestic gas supplies
The committee has suggested the computation of the gas price for future supplies to be based on
an average of 12-month trailing US Henry-Hub prices and producer netback value (excluding
shipping, liquefaction and associated charges) for Asia-Pacific LNG. New domestic natural gas
supplies should be priced at a premium or discount to the computed market-linked price while
ensuring (1) an adequate incentive for investment in the E&P sector and (2) fairness for the endconsumers.
Competitive markets for R-LNG to remove inefficient pricing
The committee has suggested providing an option for large R-LNG consumers to source their own
supply of LNG. This will create a competitive market for R-LNG and will remove the prevailing
inefficient pricing.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Energy
India
No whirlpools, thankfully. An inter-ministerial committee has rejected ‘price’ pooling
of natural gas, either at an overall level or by sectors. Other key points—(1) recognition
of essential consumption of gas by LPG/C2-C3 extraction units, (2) preferential
allocation of domestic gas to core sectors and (3) market-linked pricing for future gas
supplies. We find the recommendations progressive and positive for the long-term
development of the sector. Pooling is an outdated socialistic concept, in our view, and
would have undermined the development of the gas sector.
No pooling mechanism for natural gas pricing
An inter-ministerial committee in its final report on policy for pooling of natural gas prices has
recommended against price pooling mechanism at an overall level or by sectors. We see this is as a
progressive move and are relieved that the committee has decided against a concept of pooling
gas prices in India. Please see our April 8, 2011 report titled Gone with the gas for our views
against the concept of pooling. Our key concern against pooling is a consequent distortion of the
market mechanism and relapse to statist policies. Stringent state controls have already constrained
the Indian oil and gas sector.
Preferential allotment of domestic gas supply to core sectors
The committee has recommended the preferential allotment of natural gas available for allocation
to the priority sectors—fertilizer and power. However, the committee has recognized that internal
consumption in oil and gas fields, pipelines and LPG/C2-C3 extraction are indispensible and any
allocation of domestic gas supply will be done after catering to these segments. Thus, we rule out
any diversion of gas from GAIL’s LPG and C2-C3 extraction units. We also note that the committee
has ruled out any substitution of present R-LNG supplies by domestic gas for the core sectors.
Cap on domestic gas supply to CGD/CNG and other non-priority sectors
The committee has suggested a cap on the off-take of domestic gas by CGD/CNG sectors at 6
mcm/d versus gas supply of 7 mcm/d in FY2011 and 5.3 mcm/d in June 2011. The committee has
also recommended a cap of 5 mcm/d for domestic gas supply to other non-priority sectors versus
18.4 mcm/d of gas supply in June 2011. The amount of 5 mcm/d of domestic gas is provided to
safeguard the interests of suppliers from potential disputes/litigations from the existing gas supply
contracts/obligations. The current requirement as well as the incremental demand from the noncore
sectors should be met by R-LNG imports. The residual domestic gas supply of ~10 mcm/d (see
Exhibit 1) should be preferentially allocated to meet the incremental demands of fertilizer and
power sectors.
Market-linked pricing for potential domestic gas supplies
The committee has suggested the computation of the gas price for future supplies to be based on
an average of 12-month trailing US Henry-Hub prices and producer netback value (excluding
shipping, liquefaction and associated charges) for Asia-Pacific LNG. New domestic natural gas
supplies should be priced at a premium or discount to the computed market-linked price while
ensuring (1) an adequate incentive for investment in the E&P sector and (2) fairness for the endconsumers.
Competitive markets for R-LNG to remove inefficient pricing
The committee has suggested providing an option for large R-LNG consumers to source their own
supply of LNG. This will create a competitive market for R-LNG and will remove the prevailing
inefficient pricing.
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