Nomura research :: Indian oil & gas weekly

CCEA is likely to consider gas pricing decision this week
While a gas price hike was on the agenda for CCEA’s meeting last week,
the matter was not considered due to the absence of the petroleum
minister.
Nomura view: The CCEA is likely to take up the gas pricing issue this
week. Ahead of the crucial meeting, there seems to be hectic lobbying, we
believe. The fertiliser ministry has seemingly agreed to a price of
USD6.78/mmbtu. But, the power ministry is vehemently opposing a price
hike (especially an APM hike). Private players, on the other hand, are
seeking import parity prices (USD12-14/mmbtu). While we don’t see much
rationale for an APM hike, we think the GoI will opt to play it safe and raise
APM prices also.
Muted consumption growth in May; decline for LPG, kero and diesel
Total petroleum product consumption grew by 2.3% y-y in May. But, all
controlled products saw a y-y decline: LPG (-5.5%), kerosene (-2.1%) and
diesel (-0.1%). Published numbers indicate a sharp 31% y-y growth for
gasoline. Such a sharp increase seems erroneous, in our view. For more
details, please see Fig 24 inside.
May-13 production: Oil declines 2% y-y; gas declines sharp 19%
ONGC’s oil production declined by 1% y-y. The decline in Oil India’s oil
production was much sharper at 5% y-y. Rajasthan block’s oil production
remained flat at ~175kbpd. ONGC’s gas production saw a sharp 4% y-y
decline in May. Private/JV sector gas production declined sharply by 42%
primarily due to the KG-D6 field. For details, please see Fig 17-22 inside.
Brent declined to ~USD100/bbl, SGP complex GRM at USD8.5/bbl
 Crude – The average Brent at USD104/bbl was flat w-w. But over the
weekend, Brent declined sharply to ~USD100 due to weak economic
data, a strong dollar and the US Fed’s comments on the scaling back of
the quantitative easing programme. Henry-Hub gas price increased by
3% w-w to USD3.9/mmbtu.
 Refining – SGP complex margins increased (the eighth successive
weekly increase) by 3% w-w to USD8.5/bbl, driven by firmed up middle
distillates. From April-end, SGP complex margins are up ~78%.
 Petrochem – Ethylene prices were flat w-w.
Key stock movements
 Except for Cairn, all other O&G stocks under our coverage declined w-w.
 PLNG and IOCL sharply underperformed the market by ~5% w-w.
Nomura research
 Quick Note - Asia polyester chain - Recovery is unlikely near term

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Key news and events from the past week
India and companies
CCEA defers decision on domestically produced natural gas pricing (Business
Line, 21 June)
The Cabinet Committee on Economic Affairs on Friday deferred a decision on
domestically produced natural gas pricing. Finance Minister P. Chidambaram said after
the CCEA meeting that “the paper (agenda) was there. But, the Minister for Petroleum &
Natural Gas, M. Veerappa Moily had to go to Agartala. Hopefully, we would like to take a
decision next week when the Minister is back.” Moily was in Tripura for the inauguration
of ONGC’s power plant by President Pranab Mukherjee. What is amusing is the fact that
the issue of gas pricing was pushed as part of additional items to be considered by the
CCEA on June 20, at the behest of the Petroleum Ministry. On June 19, the Petroleum
Ministry had circulated the CCEA note for considering the fixation of domestically
produced natural gas based price on the recommendations of the C. Rangarajan
Committee on Production Sharing Mechanism in the Petroleum Industry.
Power ministry against a gas price hike (Financial Express, 24 June)
The power ministry has strongly opposed the proposal to increase the price of domestic
natural gas especially that which comes from the fields of national oil firms like ONGC
and OIL India where the pricing is regulated by the government as per the administered
price mechanism (APM) regime. Currently, a proposal is under consideration to hike the
price of domestic gas to $6.77 per mmbtu from the existing $4.22 per mmbtu level. Gasgenerated electricity has to compete with cheaper power produced from coal for market.
In that context, the power ministry has argued that any price beyond $5 per mmbtu will
not be affordable for the power sector. In light of that argument, the ministry has added
that there should not be any increase in the price of APM gas being supplied to the
power sector. It has argued that oil PSUs have already recovered their costs from these
fields.
Gujarat State Petroleum Corp seeks government nod to sell KG gas at $13
(Economic Times, 23 June)
Gujarat government company GSPC has asked the Central government to approve its
plans to sell natural gas from a field in KG basin at $13-14, three times the current gas
price. The Gujarat State Petroleum Corp (GSPC) on June 10 wrote to Oil Secretary
Vivek Rae seeking early approval for an imported LNG-linked pricing formula for the
5.24mmscmd of gas it plans to produce from its Deen Dayal West (DDW) gas field in
block KG-OSN-2001/3 later this year. Stating that the company and its partners have
already spent around $2.8 billion on the DDW gas field, GSPC Managing Director Tapan
Ray asked Oil Secretary to accord approval to the arm-length market price that was
discovered in an e-tender in February. He told Rae that GSPC had on April 2 submitted
the price formula and an approval is now needed so as to help the company begin the
commercial production of gas from DDW field in the second half of 2013-14.
Nomura view: The CCEA is likely to take up the gas pricing issue this week. Ahead of
the crucial meeting, there seems to be hectic lobbying. The fertiliser ministry has
seemingly agreed to a price of USD6.78/mmbtu. But, the power ministry is vehemently
opposing a price hike (especially APM hike). Private players on the other hand are
seeking import parity prices (USD12-14/mmbtu). While we don’t see much rationale for
an APM hike, we think the GoI will opt to play it safe and raise APM prices also.
Arbitration not yet commenced in KG-D6 output fall (Economic Times, 20 June)
Nearly a year after arbitrators were appointed to decide whether Reliance Industries can
be penalised for producing less than target, the arbitration has not yet commenced, the
Petroleum Ministry has said. The Government had in May last year disallowed
USD1.005 billion expense of RIL on the flagging KG-D6 gas fields for not implementing
the approved field development plan. RIL had contested the move saying the Production
Sharing Contract (PSC) does not provide for such a penalty in case of a shortfall in
production, and slapped an arbitration notice. The then Oil Minister S Jaipal Reddy had
in June 2012 decided to join the arbitration proceedings and appointed former Chief
Justice of India Justice V N Khare as the government's arbitrator. RIL had appointed
former Chief Justice of India S P Bharucha but a third neutral referee has not yet been
appointed and arbitration is yet to commence, the Oil Ministry said in a Chronological
Sequence it released to rebut CPI leader Gurudas Dasgupta's allegation of Oil Minister
M Veerappa Moily trying to sabotage the arbitration to help RIL.
Nomura view: In our view, such controversies further vitiate the atmosphere, and can
delay the E&P approval process and gas pricing decisions. Also, with the petroleum
ministry under pressure to show that it is not giving any preference for private
companies, the government will likely find it difficult to agree to a higher gas price (than
the USD6.78 being contemplated for all domestic gas) for NELP blocks like KG-D6, in
our view.
Indian court orders GAIL to implement the Kochi-Kottanad-Bangalore-Mangalore
natural gas pipeline project on time (Energy Business Review, 17 June)
The Madras High Court (HC) has ordered the Gas Authority of India (GAIL) along with
the Union and the State governments to quickly implement the Kochi-KottanadBangalore-Mangalore natural gas pipeline project in the state of Tamil Nadu. The HC
order came after a public interest writ petition was filed by a Madurai-based advocate S.
Thamizharasan seeking speedy implementation of the gas pipeline project. The
petitioner through his counsel P. Veerakathiravan alleged that the machinery to install
the gas pipeline had reached Coimbatore, Salem, Erode, Namakkal, Dharmapuri,
Krishnagiri, and Tirupur districts, but the project has been stalled due to the noncooperation of the state government.
Further, in the petition, it was mentioned that the Union Ministry of Transport and GAIL
had spent huge amounts of public money for the project, but the state failed to provide
the necessary administrative support to implement the project in Tamil Nadu. In 2007,
the Indian Ministry of Petroleum and Natural Gas gave the authorization to install the
pipeline, following which GAIL laid a gas grid covering more than 10,000km in various
parts of India. The petitioner fears that if the Southern Gas Grid is not laid in the state, it
will be totally cut off from the National Gas Grid and the state will not get the natural gas.
The gas pipeline will supply compressed natural gas (CNG) that is expected to reduce
pollution.
Oil & gas markets
Rosneft’s $270bn oil deal set to make china the biggest market (Bloomberg, 21 Jun)
OAO Rosneft signed a $270 billion supply deal with the China National Petroleum Corp,
making the Asian nation Russia’s biggest market for oil. State-run Rosneft, the biggest
publicly traded oil producer by output, will get a $70 billion prepayment under the deal,
and will supply about 360 million metric tons of crude to China over 25 years, President
Vladimir Putin said at the St. Petersburg International Economic Forum. The deal,
following a government accord in April, will redirect Russia’s oil away from Europe,
where demand is stagnant, to the world’s second-biggest crude market after the US.
IEA sees growth of natural gas in power slowing over the next 5 years (IEA, 20
June)
Natural gas will continue to increase its share of the global energy mix, growing at 2.4%
per year between now and 2018, the IEA said in its Medium-Term Gas Market Report
(MTGMR). However, the projected growth rate is lower than the IEA’s forecast last year
of 2.7%, due to persistent demand weakness in Europe as well as difficulties in upstream
production growth in the Middle East and Africa. At the same time, the report sees gas
emerging as a significant transportation fuel: Thanks to abundant shale gas in the United
States and amid more stringent environmental policies in China, gas is expected to do
more to slow oil demand growth than electric vehicles and biofuels combined.

“Even though we have revised our growth estimates downwards, the ‘Golden Age’ of gas
remains in full swing,” said IEA Executive Director Maria van der Hoeven. “Gas is
already a major fuel in power generation, but the next five years will also see it emerging
as a significant transportation fuel, driven by abundant supplies as well as concerns
about oil dependency and air pollution. Once the infrastructure barriers are tackled,
natural gas has significant potential for clean-energy use in heavy-duty transport where
electrification is not possible.”
“The persistent tightness of LNG markets is a major concern as it limits the contribution
of gas to sustainable energy security,” Ms. Van der Hoeven said. “It also highlights the
need to tackle energy subsidies and improve energy efficiency in major producing
countries as well as to adopt supportive policies for LNG investment.”
PIRA Energy: Asian LNG demand heads towards summer peak buying (LNG World
News, 19 June)
PIRA’s analysis of natural gas market fundamentals has revealed that Asian demand is
heading towards summer peak buying: Time is running out to secure last minute spot
deals ahead of the Asian summer peak, and it appears that buyers with last minute
requirements for July and August remain unruffled, particularly as Shell has just
announced the end of a May 19 force majeure for Nigeria LNG and operators of
Norway’s Snohvit announced that the plant will be shipping LNG again in coming days.
Asian spot price assessments for July are still hovering in place after gaining some
strength in recent weeks on prolonged Nigerian shortfalls.
Strong deep-sea naphtha inflows to worsen Asia supply glut (ICIS, 24 June)
Asia is expected to receive close to a million tonnes of deep-sea naphtha supply from
the western markets in July, further compounding the heavy supply situation that has
been weighing on regional prices, traders said. The shipments may be more than what
Asia could absorb at a time of a declining Chinese economy, traders said. Straining the
supply situation further, Indian refiners are estimated to export 750,000-800,000 tonnes
of naphtha supplies in July, traders said. The volumes are slightly higher than the
750,000 tonnes shipped out this month, they added. Lacklustre gasoline-blending
demand in Europe led to earlier surplus bookings of naphtha supplies to Asia, traders
said.