A fundamental shift in the geopolitics of oil

Last summer, Saudi Arabia put the final bolt in its largest-ever oil expansion project, opening a new field capable of pumping 1.2 million barrels a day – more than the entire production of Texas. The field, called Khurais, was part of an ambitious $60 billion program to increase the kingdom’s production to meet growing energy needs. 

It turns out the timing could not have been worse for Saudi Arabia. 

Only two years ago, consumers were clamoring for more supplies, OPEC producers were straining to increase their output, and prices were rising to record levels. But now, for the first time in more than a decade, the world has more oil than it needs. 

As demand slumped because of the global recession, Saudi Arabia was forced to shut about a quarter of its production. After raising its capacity to 12.5 million barrels a day, Saudi Arabia is pumping about 8.5 million barrels a day, its lowest output since the early 1990s. 

“2009 was painful for us as it was for everybody else,” said Khalid A Al-Falih, the president and chief executive of Saudi Aramco, the kingdom’s state-owned oil giant, and a company veteran who was promoted to the top post at the beginning of last year. “We experienced the same cash flow constraints that everybody did. But we adjusted quickly and, certainly, everything that was strategic to us was not touched.” 

The recession also precipitated a milestone for Saudi Arabia and the global energy market. While China’s successful economic policies paved the way for a quick rebound there, the recession caused a deeper slowdown in the United States, slashing oil consumption by 10 per cent from its 2005-07 peak. As a result, Saudi Arabia exported more oil to China than to the United States last year. 

While exports to the United States might rebound this year, in the long run, the decline in American demand and the growing importance of China mark a fundamental shift in the geopolitics of oil. 

“We believe this is a long-term transition,” Al-Falih said in a recent interview. “Demographic and economic trends are making it clear – the writing is on the wall. China is the growth market for petroleum.” 

Saudi officials have said they favor prices of around $80 a barrel. Despite soft demand and high inventories, oil futures in New York have averaged $75 a barrel over the last six months. On Friday, they closed at $80.97. 

In the United States, some experts believe that energy efficiency measures, as well as the government’s push for biofuels and its plans to limit carbon emissions, are putting the nation on a long-term path to lower oil consumption.

The American talk about energy independence rankles Saudi officials who maintain the goal is unrealistic and could end up damaging energy markets by undermining current investment, and thus leading to higher prices in the long run. Al-Falih said he welcomed energy efficiency measures but insisted that fossil fuels would dominate energy demand for decades. 

“I was here in the 1980s after the 1970s price shocks, and I remember all the debates,” Al-Falih said. “But ultimately the policies were reasonable. And the United States continues to search for that reasonable ground.” 

Saudi officials have recognised that structural changes are taking place in the United States. A few months ago, Aramco sold its storage depots in the Caribbean, a signal that it was abandoning the East Coast market, according to analysts. (The Saudis stopped striving to be the top foreign supplier to the United States years ago. The kingdom trails Canada, Mexico and Venezuela for exports to the United States.) 

That is not to say the Saudis are cutting ties with the United States. Aramco is expanding its Motiva refinery, in Port Arthur, Texas, which it owns with Royal Dutch Shell, to increase its capacity to 600,000 barrels a day. That will make it the largest refinery in the United States, overtaking Exxon Mobil’s Baytown refinery. Edward L Morse, an energy expert who heads global commodity research at Credit Suisse in New York, said the transformation was a healthy development in relations between Saudi Arabia and the United States. It also means the end of the “US discount,” where Aramco sold oil to American refiners for about one dollar a barrel less than to Asia. 

“The Saudis don’t see the need to subsidize their oil exports to the United States anymore,” Morse said. 

Last year, Saudi exports to the United States fell to 989,000 barrels a day, their lowest level in 22 years, down from 1.5 million barrels a day the previous year, according to the Energy Information Administration. Meanwhile, Saudi sales to China surged above a million barrels a day last year, nearly doubling from the previous year. The kingdom now accounts for a quarter of Chinese oil imports. 

Saudi Aramco recently inaugurated a huge refinery in the Fujian province, in the southeast coast of China, which is projected to receive 200,000 barrels a day of Saudi crude, and is looking at a second project in the northeast city of Qingdao. It is also planning to build two refineries in Saudi Arabia, as joint ventures with Total and ConocoPhillips, that are primarily destined to ship products to Asia. 

China is not alone in courting Saudi attention. After a visit in March to Riyadh by India’s prime minister, Saudi Arabia outlined a goal to double its exports to India. The kingdom already accounts for 25 per cent of the Indian market after its exports grew sevenfold from 2000 to 2008. 

“Oil flows are shifting from West to East, and Saudi supplies that used to go to Europe and the United States are now headed for Asia,” said Jean-Jacques Mosconi, the senior vice president for strategy at Total of France. 

Brad Bourland, a former State Department official who heads research at Jadwa Investment in Riyadh, said: “Saudi Arabia used to be very much an American story, but those days are gone forever. That’s just a reflection of a globalised world and the rise of Asia. They now see their relationship with China as very strategic, and very long term.” 

Some energy and security experts have pointed out that the Saudi government is keen on displacing Iranian oil sales to China to persuade Beijing to back tougher sanctions against Iran’s nuclear programme, a position that has the support of the United States. 

“We know the Saudis and others have delivered the message to the Chinese that instability in the gulf is not in their interest,” Douglas C Hengel, the deputy assistant secretary for energy, sanctions, and commodities at the State Department, said last week during a conference in Houston. 

But Jon B Alterman, a Middle East expert at the Center for Strategic and International Studies in Washington, said that the falling dependence of the United States on Saudi oil could turn into a problem for the Saudis, because the United States guarantees their security in the Persian Gulf. 

“The Saudis are particularly concerned about the shape of the global market where all the growth comes from the east and all the security comes from the west,” Alterman said. 

China’s oil demand is set to grow by 900,000 barrels a day in the next two years. Chinese oil consumption reached 8.5 million barrels a day last year, compared with 4.8 million in 2000. It will account for a third of the world’s total consumption growth this year. 

While China is by far the fastest-growing oil market in the world, the United States is still the top consumer: Despite the slump, Americans consumed 18.5 million barrels a day in 2009. That amounts to 22 barrels of oil a year for each American, compared with 2.4 barrels for each Chinese. 

“To me, this is a long-term business,” said Al-Falih during the interview. “And that is how I look at the United States and China – as markets for commodities that will be in demand for years.”

Source: Economic Times

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Govt to review Reliance's gas allocation from KG basin

The Government intends to review the allocation of Reliance's gas produced from the Krishna Godavari (KG) Basin D6 field. It could re-fix allocation as per the amounts drawn so far by the customers.

Ministry officials told Business Line that the Petroleum Secretary, Mr S. Sundareshan, had conducted a review meeting recently on off-take of KG gas by the allottees.

He is understood to have asked them to come back in a fortnight's time with details on their off-take, and how much they can actually absorb.

A final view will be taken in mid-April, based on which a decision will be taken on the unused quantity. If necessary, a decision on re-allocation could be also considered, officials said.

Asked if there were any penal provisions in the Gas Sales and Purchase Agreement (GSPA) that Reliance has entered into with these customers for non-drawal of gas, sources said “no penal provisions have been provided for non-drawal of gas by the consumers during initial six months of the supply.”

RIL is currently producing 60-62 mscmd of gas, which has been allocated to identified customers from the priority sectors — power, fertiliser, steel, city gas distribution, gas-based LPG plants, petrochemicals sector, and refineries — based on a decision of an empowered group of ministers.

Reliance, which had planned to ramp up its production to 80 mscmd by March, claims that for want of customers and choked pipeline network, it has not been not able to do so.

2 categories of customers

There are two categories of customers — one comprising those who are drawing less than what they have been allocated, and two, those who were supposed to start drawing gas by March 2010 but are not ready to draw (mainly power units yet to be commissioned).

The need to review the allocation of gas has arisen due to these two reasons, sources said, adding that “this was restricting the allocation to those who needed gas. It needs to be considered whether volumes to such customers can be reduced and allocated to those who are already drawing gas and require more.”

At present, RIL is supplying almost 30 mscmd of gas to the power sector, 12.86 mscmd to fertiliser, 7.63 mscmd to refineries (including RIL's own refinery), 4.65 mscmd to steel, 0.64 mscmd to city gas distribution sector, 1.17 mscmd to petrochemicals (RIL's Hazira plant), 2.59 mscmd to gas-based LPG units.

Source: Hindu Business Line

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OPEC

Through co-ordination of production, the Organisation of Petroleum Exporting Countries (OPEC) stands as the single most important supply-side influence in global oil and energy markets. Accounting for around 42% of world oil production but over 55% of the oil traded internationally, OPEC has substantial influence over the direction of crude pricing, and one that looks likely to increase given that the countries that comprise OPEC account for almost 80% of the world’s proven oil reserves. At its simplest, OPEC effectively works as a supplyside swing, with the members seeking to co-ordinate their production through periodically agreed production allocations thereby ensuring that the market for oil remains roughly ‘in balance’ at a particular price band.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) – suspended its membership from January 2009; Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its membership from December 1992-October 2007; Angola (2007) and Gabon (1975–1994). OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

OPEC’s Charter

The OPEC charter -to coordinate and unify petroleum policies among member countries in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry’

How does OPEC work?

In essence OPEC works by virtue of its members collectively agreeing on the level of supply that is necessary to keep the market in balance and the oil price within a pre-determined range. Represented by the Oil and Energy Ministers of the OPEC member countries, the cartel meets at least twice a year to assess and review the current needs of the oil market and alter, if necessary, its level of production. Dependent upon market conditions, meetings

can, however, be more frequent. Introduced in 1982, through collective agreement each member of OPEC is allocated a production quota. Although OPEC has never defined how the production quotas of the different member countries are established they are believed to be representative of each country’s ‘proven’ reserves base, amongst others. The quota represents the oil output that a member state agrees to produce up to assuming no other restrictions are in place and assuming the country remains in compliance (which as the charter says is at the discretion of the member country). Frequently, however, different member states will produce well above or below their official quota, with production more likely proving representative of a member’s production capability then its actual quota level. Thus where Indonesia retains a production quota of 1.45mb/d, its current production capacity is little more than 850kb/d. By contrast although Algeria has a production quota of only 890kb/d, it regularly produces nearer

1.3mb/d.

What is established at each OPEC meeting is the extent to which OPEC believes that the world crude oil market is over or under supplied. In making this decision the organisation will consider inventories, expected demand and the current price of crude oil, amongst others. Politics will also invariably play its role. Having considered the supply position the organisation will then determine whether it needs to supply more or less crude to the market.

Should less supply be required it will set a production ceiling for the organisation as a whole with each member state agreeing a reduction in its current level of production (and vice versa). In this way OPEC seeks to ensure that the market is adequately supplied. Importantly, member countries must agree by unanimous vote on any such production ceilings and output allocations. A majority cannot overrule a minority and central to the OPEC charter is that each member country retains absolute sovereignty over its oil production. It should, however, be noted that Saudi Arabia’s clear dominance of production and ‘swing’ (or spare) capacity mean that its acceptance of policy will almost certainly be required if a proposal is to succeed.

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Oil’s well in Rajasthan

Cairn India (CIL) on Tuesday last issued an update on its main RJ-ON-90/1 block in Rajasthan. In-place oil and recoverable oil estimate in RJ-ON-90/1 is up by 5%. However, the big news was a big jump in prospective resources representing exploration upside in RJ-ON-90/1. Risked recoverable prospective resources are up 7x to 250mmboe—million barrels of oil equivalent—(unrisked up 20x to 2.5bn boe). Peak oil output is also now expected to be 240k barrel per day (b/d) up 37% over old guidance. CIL has also tied up sales volume of 143k b/d with four refiners and has guided ramp up to 125k b/d in 2H 2010. CIL’s PO is raised 11% to Rs 336 to factor upsides. We retain Buy on CIL.

Recoverable reserves up 5%; 7x jump in exploration upside: In-place oil estimate in RJ-ON-90/1 has been raised by 5% from 3.8 bn boe to 4 bn boe and 2P reserves and contingent resources by 5% to 1.14 bn boe. The rise is in the low permeability Barmer Hill formation, for which CIL has also submitted declaration of commerciality. However, the biggest surprise is the sharp jump in exploration upside potential in RJ-ON-90/1. Gross unrisked prospective resources are up 20x to 2.5bn boe from 125mmboe in June 2006 while risked recoverable prospective resources, which we value, are up 7x to 250mmboe.

Peak output up to 240k b/d;143k b/d sales volumes tied up: CIL has also raised the peak output estimate in RJ-ON-90/1 to 240k b/d from the earlier guided 175kb/d and the expected 190-2,000k b/d. Peak oil output in Mangala may now be 150k b/d vis-à-vis earlier estimated 125k b/d. CIL also announced that sale volume of 143k b/d have been tied up with four refiners. This includes only the old refinery of Reliance but not its new refinery.

PO up 11% to Rs 36 on higher output & exploration upside: CIL’s PO is raised 11% to Rs 336 to factor in higher output and exploration upside.

Rajasthan oil sales tie up update: CIL announced today that it had tied up sales arrangements with four refiners for 143k b/d of Rajasthan oil supply. The four refiners are IOC, MRPL, Essar and RIL. CIL management has confirmed that sales tie up with RIL is only for its old 660k b/d refinery currently. Rajasthan oil sales have not yet been tied up with RIL’s new refinery based in a special economic.

zone (SEZ). CIL has not disclosed refiner-wise break-up of 143k b/d of Rajasthan oil sales volume tied up. However we estimate the break-up as follows: MRPL 8k b/d; IOC 30k b/d; Essar Oil 30k b/d; RIL 75k b/d

We believe that there is enough demand for Rajasthan oil production to ramp up to revised peak of 240k b/d. 143k b/d of supply has already been tied up. The balance 97k b/d of oil demand is expected from Essar Oil, which is expanding refining capacity by March 2011. RIL’s 590k b/d new refinery based in the SEZ, which operated at 115% utilisation rate in July-December 2009 0.68-1.04m b/d of new refining capacity expected to be added by March 2013. Existing PSU refiners are upgrading their refineries to make them more complex.

Essar Oil has indicated that it would like to use 60k b/d of Rajasthan crude from April 2011 once it completes the ongoing expansion of its refining capacity. As discussed, no sale agreement has yet been tied up with RIL’s new refinery based in a SEZ. We believe it could use 0.5-0.55m b/d of Rajasthan crude.

In-place & recoverable oil estimate upgrade: In-place oil estimate in RJ-ON-90/1 block has been raised by 5% to 4 bn boe from 3.8 bn boe earlier. In-place oil estimate in MBA is unchanged at 2.1 bn boe. However, in-place oil estimate in small and low permeability fields in Rajasthan is up to 1.9 bn boe from 1.7 bn boe earlier.

2P reserves and contingent resource estimate in RJ-ON-90/1 has been raised by 5% to over 1.14 bn boe from 1.09 bn boe earlier. 2P reserves and resources in MBA are unchanged at over 1 bn boe. 2P reserves and resources in small and low permeability fields in Rajasthan are up to 140mmboe from 84mmboe earlier.

The rise in in-place and recoverable oil in RJ-ON-90/1 is mainly in Barmer Hill formation, a low permeability formation in Rajasthan. This is based on successful hydraulic simulation test in a gas well in Raageshwari. This has encouraged Cairn to replicate hydraulic fracturing in the Barmer Hill formation. A pilot hydraulic fracturing programme is planned in Barmer Hill in 2010. CIL has submitted declaration of commerciality for Barmer Hill.

Sharp jump in exploration upside: Estimate of gross unrisked prospective resources in RJ-ON-90/1 has jumped up to 2.5bn boe from June 2006 estimate of 125mmboe. The gross risked recoverable prospective resources in RJ-ON-90/1 have also jumped 7x to 250 mmboe from June 2006 estimate of 35 mmboe

Source: http://www.financialexpress.com

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Rationalise natural gas prices

The ministry of petroleum and natural gas is mulling an increase in the price of natural gas (under APM) produced by national oil companies (ONGC and OIL) and is reportedly in the final stage of decision-making. The ultimate objective, however, is to bring parity between the APM price ($1.79 per mmBtu) and the price of the gas produced from KG basin ($4.20 per mmBtu) by 2013 in a phased manner. There are indications that the gas procured from different sources might be pooled or averaged out to make the price uniform for all consumers. Given that natural gas is a sunrise sector and is at its nascent stage, this measure would facilitate in the removal of multiple distortions in its source-based pricing. Of course, the national oil companies would be the obvious beneficiaries, but the decision might invite flak from the key consuming sectors.

Natural gas is mainly used in power generation, fertiliser, city gas, petrochemicals & refineries, steel and sponge iron industries. Fertiliser and power plants consume around 70% of the total gas supply and command preferential allocation of APM gas, the price of which is proposed to go up. As natural gas is one of the most cost-effective fuels for fertiliser plants, gas-based fertiliser (urea) production accounts for the lion's share of total production. The government clearly prefers the use of natural gas to naphtha for the fertiliser sector as it would eventually help in pruning the piling subsidy bill. Furthermore, lower input costs would also allow government to mull the process of complete decontrol of fertiliser pricing.

As the end-use of fertiliser is regulated and given its strategic importance in terms of food security, the bigger question is whether the proposed increase in APM gas price is uneconomical from an operational point of view. In this context, an earlier analysis carried out by Goldman Sachs when this proposal of price rationalisation first came to the fore in 2007 demonstrates that even at the price of $6 per mmBtu (which far exceeds the price that may result from rationalisation through pooling), natural gas continues to be more competitive than other conventional high-priced inputs for fertiliser production.

The current gas-based power generation capacity in India is around 14,900 mw, which is about 10% of the total installed capacity. However, operating existing gas-based capacity at a plant load factor (PLF) of 90% or more would demand an amount of gas that far exceeds the current allocated supply. Thus, most of the functional projects are operating at sub-optimal PLF. Moreover, some gas-based power projects have been shelved or are pending commissioning due to non-availability of gas. But, with RIL already reaching a record level of production and superseding the threshold figure of 100 mmcmd from its D6 block in KG basin (in December 2009), such deficit related problems are likely to be sorted out. In other words, gas-based power plants would have to diversify their sources even if that amounts to an eventual increase in input cost. The analysis carried out by Goldman Sachs in 2007 (based on the then cost of power generation) inferred that even at $4.75 per mmBtu (higher than the base price of KG basin gas), natural gas-based plants are not uneconomical to operate as compared to imported coal-based or non-pithead coal-based power plants. However, the continued dominance of pithead coal-based power plants remains indisputable. The implications on viability and competitiveness of gas-based power plants, on account of movements to market-based prices in future would, however, be contingent upon the tariff regime in the power sector (whether it is capable of absorbing the increased gas price) and on the availability of enhanced flexibility to offload the available capacity of gas-based power plants (say, by operating partially or fully as merchant enterprises and marketing their capacity to inter-state or intra-state traders). The implication on affordability would also depend upon whether the power sector manages to substantially reduce its transmission and distribution losses.

The array of distortions in the natural gas sector do not allow the sector to thrive and send a wrong signal for the investors to invest in exploration and production business in the country that is so crucial to promote this viable and cleaner alternative. Moreover, given that the production of existing fields generating APM-gas is already dwindling, the key consuming sectors would eventually have to diversify their input basket towards other sources of natural gas even though they command higher prices. Thus, the gas price rationalisation is unlikely to hurt the consuming sectors much in the medium to long term and could be considered a step in the right direction.

Source: Financial Express
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ONGC board ‘notes' three oil, gas finds

The ONGC board, which met on Thursday, took note of three oil and gas discoveries that were reported in March by the company. Of these, two discoveries were on the east coast and one in Gujarat.

These blocks were given to ONGC prior to the New Exploration Licensing Policy (NELP) regime, on nomination basis.

According to a statement issued by the company, the board took note of a discovery in South Mahadevapatnam-1 in East Godavari district, Andhra Pradesh, which flowed gas from two intervals at the rate of 6,883 cubic metres/day and 15,384 cubic metres/day.

The second discovery was in well GSKW-6 in Krishna Godavari shallow offshore, which flowed oil and gas from two intervals.

In the first interval, the flow was 52.3 cubic metres/day of oil and 1, 40,616 cubic metres/day of gas; in the second interval, it was 74.4 cubic metres/day of oil and 68,736 cubic metres/day of gas.

A small quantity of 7.02 cubic metres/day of oil flowed through a third interval, the statement said.

According to the statement, the third discovery was in Gujarat, in well South Kadi-155, which flowed 30 cubic metres/day of oil.

Clears capex investment

The board has approved a capex investment of Rs 3,241.03 crore for first phase development of Cluster-7 marginal fields in the western offshore. The scheme envisages development of three marginal fields B-192 (oil), B-45 and WO-24 (oil and gas), located in BH-DS block of Mumbai Offshore.

ONGC says that the first phase envisages installation of four new fixed well platforms and drilling of 20 development wells from which the cumulative production of oil and gas for 16 years is expected to be 9.73 million tonnes and 4.52 billion cubic metres, respectively. The project is scheduled to be completed within 35 months and first oil is expected in March, 2012.

The statement says that the board also gave its nod to an R&D pilot project for exploration of shale gas (unconventional natural gas and major future source of on-land gas), costing an estimated Rs 128 crore, in the Damodar Basin where ONGC has ventured into exploration and production of coal bed methane.

The board also gave its go-ahead for procurement of five open-hole and four cased-hole production logging units with hi-tech technology costing Rs 419.03 crore. This is to replace the existing logging units which have outlived their useful life and are technologically obsolete.

Source: Hindu Business Line

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Fertiliser subsidy may go up despite price decontrol

The move to decontrol prices of all non-urea fertilisers with effect from April 1, as part of the changeover to a nutrient-based subsidy (NBS) regime, is supposed to help lessen the Centre's subsidy burden.

But if the new rates of subsidy applicable on different fertilisers from the coming fiscal are compared with their existing levels, a somewhat different picture emerges. In most products, the subsidy payable to fertiliser companies will actually go up.

Take di-ammonium phosphate (DAP), where manufacturers and importers are currently given a concession of Rs 10,245 a tonne in return for selling at a controlled maximum retail price (MRP) of Rs 9,350 a tonne.

In the event of decontrol, companies will technically enjoy the freedom to set their own MRPs. Notwithstanding that, the Centre has decided to enhance the subsidy they would receive on DAP sales by 59 per cent to Rs 16,268 a tonne.

Likewise, the subsidy on mono-ammonium phosphate (MAP) has been raised by a whopping 104 per cent and that on triple super phosphate (TSP) by 38.5 per cent. Earlier, there was no subsidy on ammonium sulphate (AS), whereas now it has been fixed at Rs 5,195 a tonne, benefiting Gujarat State Fertilisers & Chemicals and Fertilisers and Chemicals Travancore.

Additional subsidy

Moreover, companies would be entitled to an additional subsidy of Rs 300 a tonne if they fortify their fertilisers with boron and Rs 500 in case of zinc. The current regime does not extend any such sops on secondary and micro-nutrients.

The only major product whose subsidy has been slashed, by over Rs 4,700 a tonne, is muriate of potash (MOP). Under the NBS, the Centre has fixed a per kg subsidy of Rs 23.227 on nitrogen (N), Rs 26.276 on phosphorous (P), Rs 24.487 on potash (P) and Rs 1.784 on sulphur (S).

These, in turn, have been linked to the import parity prices of urea, DAP, MOP and sulphur, taken at $310, $500, $370 and $190 a tonne, respectively and at Rs 46-to-the-dollar.

The lower subsidy on MOP – and thereby the ‘K' component in complex fertilisers – is mainly due to Indian importers contracting material for 2010-11 at almost $100 a tonne below the rates negotiated for this fiscal. The accompanying table shows that the subsidy rates have been increased for even many complexes, excepting those not containing any ‘K'.

“The higher subsidies would make it very difficult for us to raise MRPs. In fact, we have been sounded out to keep any hikes to within Rs 30 a bag, i.e. Rs 600 a tonne,” an industry official told Business Line.

Source: Hindu Business Line

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Industry-specific uniform gas price under study

The option of having an industry-specific uniform gas price is being considered by the stakeholders, including industry players and the Government.

“Deliberations are going on between the stakeholders, on the draft report submitted by a Spanish consultant regarding the feasibility of uniform gas pricing. One of the options being considered is an industry-specific (power, fertiliser and others) uniform ,” an official source said.

The Government is looking at the feasibility of a uniform price regime for gas and GAIL Ltd was asked to conduct the study. GAIL had appointed a Spanish consultant, Marcados Energy Market Pvt Ltd, to undertake a study on the feasibility of such a proposal, including legal and technical issues to be addressed in case of a uniform price. The final report is expected next month.

Pooled price

Explaining the concept of industry-specific uniform gas price, sources told Business Line that “it would mean that the end-consumers of the said sector, whether it is fertiliser or power, get gas at the pooled price derived for that industry category.” In other words, if the allocation of gas for the power sector is 40 million standard cubic metres a day (mscmd), a pooled price from all the gas sources would be worked out for that quantity.

Agreeing that this may not be easy, sources said, “Dynamics of such a pooling price are being worked out. There are a lot of legal and technical issues that need to be addressed, such as the pricing regime should not violate the contract, whose network should be utilised for the purpose, and who will be nominated to buy the gas. It has to be a transparent pricing mechanism.”

Currently, there are different types of gas pricing regimes – gas sold at administered price, under production-sharing contract such as those from joint venture fields, under the New Exploration Licensing Policy, as well as R-LNG (re-gassified liquified natural gas). Thus, the delivered price ranges from $2 per million British thermal units (mBtu) to more than $7/mBtu.

Source: Hindu Business Line

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Natural gas from Krishna-Godavari basin for south India from 2012

Union Petroleum Secretary S Sundareshan on Saturday that south India will start getting natural gas from the Krishna-Godavari basin from 2012. 

The Ministry of Petroleum and Natural Gas had called for a meeting of Reliance Industries Ltd (which owns the gas fields) and Gas Authority of India Ltd (which lays pipelines) about ten days ago and told them to implement the project in a “strict timeframe”. 

Reliance has been authorised by the government to lay a pipeline from Kakinada to Chennai and this pipeline would further extend to Tuticorin. Reliance would also lay a pipeline between Chennai and Bangalore, he told a press conference here. 

The gas would start flowing to Tamil Nadu anytime between March 2012 and the end of that year, he said. There would be connectivity to Madras Fertilisers Ltd and SPIC, he said, referring to the two fertiliser companies, whose operations are suffering for want of natural gas.

On the issue of pricing of petroleum products, he said, “It is not possible to insulate consumers continuously from the volatile international crude price and the government has to take a hard decision in the future.

At present, subsidy component for petrol is Rs.5 per litre, for diesel Rs. 3, for kerosene Rs. 16 and for LPG Rs. 260 a cylinder. Due to under-pricing the government had incurred an expenditure of Rs.45,000 crore in the current financial year. Poor people were forced to pay for supplying subsidised petrol and petroleum products to those who were affluent. 

Increasing demand 

The Secretary said oil marketing companies were fully geared to meet the increasing demand for petroleum products, which had been increasing at 15 per cent per annum for petrol, 8 to 9 per cent for diesel, and 10 per cent for LPG. In Tamil Nadu every year there had been a 10 per cent increase of LPG consumers. The State had achieved a coverage of 75 per cent in respect of LPG supply in the State, which might increase to 83 per cent in the next four or five years. 

There was no shortage of LPG supply in the State and new connections were being released to prospective consumers without any waiting list and efforts were being made to supply refills expeditiously.

To meet future demand, infrastructure was being augmented and LPG storage facilities were being put up in Coimbatore, Ilayangudi, Tiruchi, Ennore and Gummidipoondi, he added.

Source: The Hindu

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Artificial Low Prices Can Deteriorate Evolving Gas Market in India

Prices of commodities like silver, gold, oil etc. are uniform world over. Policies issues and demand & supply surge in one region affect the prices of these commodities globally. Increase or decrease in price of these commodities can affect the overall economy of any country. For example, when the gold import was banned in India -- a major importer of gold – gold prices shot up substantially in the domestic market as compared to the world market, on the back of strong domestic demand. Huge quantum of gold bought at cheaper rates from international market was smuggled into the country and sold at higher prices. The Government was loosing considerable amount of due to lack of any duty structure. Later, when the Government liberalized the market, the smuggling vanished gradually as there was no difference in the gold prices in India and the world market.

The above example signifies the impact of policies on the economy and pricing of commodities. However, Natural gas is one of the commodities prices of which vary with regions and markets. Similarly, the pricing formula/strategy also varies with countries, markets and even with different contracts. Markets like the US and Europe are considered to be matured gas markets. Gas prices in these regions are market driven. When the gas demand in the region is high, gas price rises and when the demand is low, price settles down. Gas price, in these regions, surges during the winters on the back of staggering energy demand whereas it cools down during the summers as the energy demand dips during the season. Natural gas, in these regions, is used extensively for various household and industrial purposes and priced rightly compared to the price of substitute fuel and with respect to demand.

Pricing of gas has always been an issue globally except these matured markets. Gas prices in most of the developing markets are regulated and kept artificially low to support to domestic industries. However, the strategy of keeping the price low can turn into market spoiler and erode the prospects of developed market even before the evolution. A case in point of deteriorated gas market due to low prices could be taken from Russia. Russian gas market is highly regulated by the Russian Government and the prices are artificially kept at extremely low levels. This has resulted in investors being unable to recover their cost through gas sale. Low prices have not only damaged the gas market of Russia but also dampened the growth of Coal-Mine-Methane (CMM) and coal market of the country. As the gas prices are relatively low priced in Russia, it has become unviable for the investors to put in their money in CMM business. Productivity of CMM in Russia is 3-5 times lower than that in the US, Canada and Australia. Also, because gas prices are kept artificially at low levels, the coal prices are unable to compete with the gas prices. Thus, the country has witnessed very low competitiveness in coal-fired power generation.

Artificially kept low gas prices can deteriorate any gas market particularly an evolving one like India. Low gas prices not only discourage the investors to take high risk for their investment due to low rate of return but also do not provide any incentive for industries to switch over from costly and environmentally hazardous liquid and solid fuels.

Historically, gas prices in India have been highly regulated and kept under the Government influence. Even today, a major chunk of domestically produced gas, particularly from the fields operated by state-run ONGC and OIL, is under-priced through Admistered Price Mechanism (APM). In fact, demand from certain quarters, of late, has been made to sell the gas produced from RIL operated prolific KG D-6 block at discounted prices. Gas sold from the fields of public sector upstream companies at discounted rates compared to their private sector peers has not only impacted the financial health of these companies but also dis-incentivised the state-run firms to keep the production intact from depleting fields.

Government’s constant intervention in regulating the prices of petroleum products and natural gas has led to poor response from global upstream companies during the last two NELP rounds i.e. NELP VII and NELP VIII. Under NELP VII, companies bid only for 45 blocks of the 57 blocks offered, whereas out of the 70 blocks offered under the NELP VIII, meager 36 blocks attracted bids from interested parties. The poor response to NELP clearly depicts the concerns of upstream companies about the pricing and other policies of the Indian Government. A fair market driven pricing would have rather attracted major upstream companies to the Indian sedimentary basins.

A fair example of market getting evolved due to market-driven pricing system would be power market of in the country. Before the liberalization of power market, the power tariffs were highly regulated, thus leaving only handful of state-run players in generation and distribution business. This resulted in sluggish growth of power generation in the country. Lack of substantial distribution infrastructure due to low level of margins prevented the companies to enter into distribution business and henceforth deprived million of households from access to electricity. Power sector reform brought along reform in power tariff structure. Power trading started with reform in power sector. The electricity tariff under this regime is driven by the demand and supply factors. The price reform opened the doors for numerous private sector players who ventured into generation and distribution business. Competition in the market resulted increased power generation, betterment in power distribution infrastructure and improved the quality of supply. Improved market dynamics due to change in pricing strategy is evident from the fact that after the introduction of Electricity Act 2003 power generation in the country grew continually at 5% and above rate, which was struggling at 3.1% in 2002-03.

The examples stated above infer that low gas prices are detrimental for market particularly an evolving market like India. Therefore, the Indian Government needs to open up the gas market completely and allow the gas prices to be driven by market forces. Gas price needs to be priced competitively compared to its alternate fuels. Moreover, as the hydrocarbon exploration is an extensively capital intensive and high risk business, the gas pricing must reflect encouraging vibes for risk-taking investors. Policies with respect to the gas market should be formed bearing in mind the right-pricing strategy for the industry as well as the investors.

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Levy Can Replace Ad hoc Subsidy

India meets 82% of its energy requirements through imports. Though the country made great strides towards energy security by discovering over a billion tonne plus reserves, it still has to go a long way to meet the needs of the world’s second fastest growing economy. This puts tremendous pressure on state-run energy explorer Oil & Natural Gas Corp, which is in charge of exploring resources within the country and abroad. ONGC chairman & managing director RS Sharma takes stock of the achievements of the company and the problems faced by it in an free-wheeling interview with ET. Excerpts: 

How do you defend the Rs 28,000-crore subsidy outgo, which is against shareholders’ interest? 

You will appreciate that subsidy mechanism is not a unique phenomenon in India. A large number of developing countries opt for subsidizing the consumer. In India’s case, making energy available at an affordable cost is a priority for the government. To support this endeavour, ONGC was made to contribute Rs 28,225 crore last fiscal. 

As far as the rationale of sharing subsidy, I would like to mention that the entire oil production for ONGC is coming from the nominated fields for which ONGC does not share any kind of profit petroleum as stipulated in the production sharing contracts (PSCs) under NELP. 

As such we consider subsidy as the government’s take from the nominated blocks. However, we resent the ad hoc manner in which subsidy is calculated and imposed. All along we lobbied hard with the government for evolving a pre-defined mechanism for subsidy sharing. 

Do you have a way to protect the inter-ests of both the government (the largest shareholder) and minority shareholders? 

We have suggested that the subsidy should be taken in the form of a special levy on a calibrated scale. The expert group constituted by the government for recommending a viable system for fuel pricing (chaired by Kirit Parikh) has accepted our recommendations in this regard. As per this calibrated formulation, the special levy be imposed once crude oil price crosses $60/bbl. 

There have been no major oil finds in the recent past. What is your strategy to enhance oil & gas production? 

You are right to the extent that major oil finds are elusive. But that is the global phenomenon. However, in recent years we have accreted substantial quantity of hydrocarbon reserves in the country. As a result, we have been able to maintain positive reserve replacement ratio consistently for the last five years. In the last six years, we have established more than 1 billion tonne of in-place hydrocarbon reserves in our domestic fields, out of which Ultimate Reserves are 330 MT. 

ONGC’s Vision 2020 focuses on strengthening the core activities i.e., exploration and production of oil & gas. ONGC is focusing on three strategic goals. To double the volume of hydrocarbon reserves from 6 billion tonne to 12 billion tonne by 2020, to enhance global recovery factor from 28% to 40%, and to access 20 MMT per annum equity oil from abroad. 

Time-bound plans have systematically been rolled out and are at various stages of implementation. Improving reserve replacement ratio remains the first priority. Production enhancement, arresting the decline in matured fields and expeditious development of discovered fields are the other priorities. 

ONGC Videsh has acquired major assets such as Imperial Energy and Satpaev block. But some criticised ONGC for paying high for these assets....

Any acquisition has to be seen in terms of its lifecycle objectives and achievements. From this perspective, we strongly believe that OVL pays a fair price at the time of acquiring assets. Let it be clearly understood that OVL goes through a very professional due diligence process for evaluating opportunities and arriving at the offer prices. 

What is OVL strategy to ensure acquisition of global oil & gas assets; especially in the light of aggressive Chinese firms? 

Each company follows its own strategy given its circumstances and conditions — both external and internal. Therefore it would not be appropriate to compare them with others. OVL has a long-term mission of securing equity oil and gas for the country. At the moment, OVL is all set to exceed strategic goal of 20 MMT per year of oil and gas by 2020. 

ONGC is also working towards generating new (other than conventional) hydrocarbon assets such as gas hydrates. What is the progress in this direction? 

ONGC is actively pursuing energy from new sources like – coal bed methane (CBM), underground coal gassification (UCG), shale gas, gas hydrates, etc. Our CBM Pilot project in Jharia pilot commercial production since Jan’2010. 

ONGC is also taking up a pilot project in the Damodar basin for shale gas exploration. As far as gas hydrate is concerned we are looking for technology breakthrough for its exploitation. 

As far as alternate energy sources are concerned, ONGC has already commissioned a 50 mw wind power project at Bhuj, Gujarat and is now planning to set up a 10 mw Photo Voltaic Solar farm. Besides, ONGC Energy Centre has launched research projects in several new alternative sources of energy including thermo-chemical generation of hydrogen, bioconversion of coal/oil to methane gas, solid state lighting, solar thermal energy etc. It has also joined hands with Uranium Corporation of India Limited (UCIL) for exploration and exploitation of uranium in India and abroad.

Source: Economic Times

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Oil above $82 after Saudi minister’s statement

Oil extended gains to above $82 a barrel on Wednesday, rising to within $2 of this year's high as Saudi Arabia's oil minister described prices as beautiful at Opec's production meeting in Vienna.

The Organisation of the Petroleum Exporting Countries (Opec), which pumps roughly one in every three barrels of oil, is expected to leave output targets in place at its meeting on Wednesday. US crude for April delivery was up 51 cents at $82.21 a barrel by 0954 GMT, after settling up $1.90 at $81.70 on Tuesday. London Brent crude rose 55 cents to $81.08.

Since agreeing to curb output to below 25 million barrels per day (bpd) in December 2008 as the financial crisis intensified, Opec has seen prices rally from lows below $40 a barrel to a peak of $83.95 at the start of this year.

But while prices are now above the group's target of $75 a barrel, Opec's Ecuadorian President Germanico Pinto said before the meeting there is still a long way to go before the group will feel at ease with the market due to fears of a double-dip recession.

The oil minister of Saudi Arabia, Opec's largest producer and the country with the world's largest proven oil reserves, appeared more relaxed.

Ali al-Naimi, speaking before the start of the meeting, said global oil demand will grow by about 1 million bpd by the second half of this year and said ministers were in agreement that there is no need for the group to change its oil output. Good demand, reliable supply, beautiful prices—we are very happy, Naimi said. Naimi has previously said prices around $75 a barrel are necessary to encourage investment in future oil supplies to cope with booming demand from emerging economies, and are ultimately good for both producers and consumers. The world is going to need a lot energy, all kinds of energy, Naimi said on Wednesday.

But rising prices at the pumps have threatened to squeeze consumers still struggling in the aftermath of the worst recession for 70 years.

Retail gasoline prices in the United States soared to their highest level in nearly a year and a half last week and could soon top $3 a gallon, the US Department of Energy said on Monday. Unemployment in the world's largest energy consumer is almost 10%.

Oil prices were boosted further by news that Russian state oil major Rosneft faces an export deadlock after bankrupt rival YUKOS won.US and British court injunctions making cash payments to Rosneft in the West very complex, market sources told Reuters on Wednesday.

Rosneft declined to comment on the injunctions, which trade and industry sources said were part of a legal battle between YUKOS and the Russian government, which dissolved YUKOS and sold most of its assets to Rosneft after putting increasing pressure on the company between 2003 and 2007

Source: Financial Express

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Fertiliser sector awaits reform

The existing fertiliser pricing system is a fiscal burden on the government, apart from not benefiting the producers. Decontrol would encourage production and balanced nutrient use.

In its meeting held on February 18, 2010, the Union Cabinet took following three important decisions: To increase the maximum retail price (MRP) of urea by 10 per cent; decontrol prices of all other fertilisers; and move to a nutrient-based subsidy (NBS) regime.

The above policy decisions are being interpreted as an indication of the government's intention to liberalise the fertiliser sector, granting freedom to the manufacturers in pricing and making available to farmers a diverse basket of products to suit their soil and crop needs. How far is this true?

UREA PRICE INCREASE

The increase in MRP of urea from Rs 4,830 per tonne to Rs 5,310 per tonne, a meagre Rs 480 per tonne or Rs 24 per bag (one bag contains 50 kg), has come after a long gap of eight years (the price was last revised in 2002).

The Expenditure Reforms Commission (ERC), which laid down the blueprint for reforms in the fertiliser sector in 2000 (the government had then decided to implement its recommendations in toto), wanted urea price to be totally decontrolled by 2005-06. Five years later, we are nowhere near achieving this objective.

The government is yet to divulge its mind on what it proposes to do to with the convoluted New Pricing Scheme (NPS) — a new incarnation of the quarter-century-old retention price scheme (RPS) — that was launched in 2003 for making subsidy payments to urea manufacturers.

The NPS places manufacturing units into six categories, namely, pre-1992 gas; post-1992 gas; pre-1992 naphtha; post-1992 naphtha; fuel oil/LSHS based and plants based on mixed fuel. Though the scheme intends one retention price for each category, in reality, unit-specific prices are offered.

Had the government followed the ERC road-map, these categories would have disappeared way back in 2005-06. All producers would have in fact, been attuned to market-based prices.

MYTH OF DECONTROL

It is claimed that the producers of all fertilisers other than urea (there are 18 in all, mostly complex fertilisers containing N, P & K nutrients in varying proportions) will have the flexibility to fix their respective MRPs. This is a myth.

Till now, as in the case of urea, the MRPs of all these fertilisers are fixed by the government. For complex fertilisers, since last year, these are determined on the basis of the per unit nutrient price of N, P & K derived from MRP of urea, DAP & MOP, respectively.

Since these MRPs are way below reasonable cost of supply, the difference is reimbursed as subsidy to the producers. For DAP and MOP, the subsidy is calculated with reference to their respective import parity price (IPP).

Now, when the government says that manufacturers will have the freedom to fix MRP, it must be understood that it is not dispensing with subsidy. The latter will continue to receive subsidy; only the manner of determination will change under the proposed NBS.

How can the government grant subsidy (accounting for 50 per cent or even more of the producer's realisation) and yet not have a say in the MRP? The fact of the matter is that it will continue to control MRP as well.

In August 1992, based on the JPC (Joint Parliamentary Committee) recommendation, the government had de-controlled all ‘P' & ‘K' fertilisers. Producers were free to fix MRPs, but they were not to get subsidy.

Since cost of supply was substantially higher than what the farmers were paying before decontrol, in the absence of subsidy, producers had no option but to raise MRP. That led to a huge backlash, and in less than a month the government resurrected subsidy as an “ad-hoc concession”. It reintroduced control on MRP as well.

There is no reason to believe that circumstances have changed. The government has sought an assurance from the manufacturers that during kharif 2010, they would not increase MRP of the so called de-controlled fertilisers or keep the increase, if any, to the bare minimum — and the latter have no option but to follow the diktat.

Under NBS, the government is likely to determine subsidy on per tonne basis only on the ‘N', ‘P' and ‘K' content of any fertiliser. These would be benchmarked to the IPP of urea, DAP, MoP. NBS avoids detailed costing thus making system simpler and more transparent.

NUTRIENT-BASED SUBSIDY

NBS expected to come in force from April 1, 2010 (provided the inter-ministerial group is ready with the details by then). But it is unlikely to unleash the energies of manufacturers.

This is because the government has done little to address the basics. The biggest stumbling block under existing dispensation (for all fertilisers) is the inability — of even the best among all producers — to fully cover the reasonable cost of supplying fertilisers to the farmers.

When there is an increase in production cost (due to a steep increase in the cost of raw materials), the government does not permit the required adjustment in subsidy, due to fear of increase in fiscal deficit, and in MRP, due to fear of political backlash.

These imponderables will dominate during 2010-11 as well. The government is determined to lower fiscal deficit to 5.5 per cent and proposes to have a tight leash on fertiliser subsidy. Faced with opposition even from within UPA, it may not even permit increase in MRP.

WAY FORWARD

Direct payment of subsidy to farmers is not on the government's radar. This most crucial reform of the fertiliser sector is pending for close to a decade; it brooks no further delay.

The government should also remove pricing and distribution controls on all fertilisers including urea. This will attract investment in production capacity.

Continued imbalance in the NPK ratio is the outcome of excessive use of urea as a result of its low MRP vis-à-vis MRP of P & K fertilisers, all of which are controlled by the government. This can be corrected only in a market-based regime for retail prices.

The decontrolled regime will make a big dent on the ballooning subsidy bill. Besides, direct payment of subsidy to the farmer will encourage judicious use of fertilisers.

Source: Hindu Business Line
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