Pricing formula for domestic natural gas could not have been more wrong and other weekly energy roundups
Gas News Commentary: September – October 2016
India
The pricing formula for domestic natural gas that appeared to be a one way bet on the upside just a year or two ago could not have been more wrong. Every single international price component that was included in the price formula has gone down since the formula was conceived. Domestic gas producers are reporting loss on natural gas production as the price is now lower than the cost of production. Price of domestic natural gas was cut by 18 percent to $2.5 per mmBtu based on its gross heat value for six month period from October. Average cost of production for ONGC was reported to be about $5.14 per mmBtu. The price of domestic natural gas is revised every six months in the financial year starting in April. The current formula for price includes weighted average price of gas exporting countries such as USA, Mexico, Canada and Russia. But bad news for producers is always good news for consumers as they can expect CNG for their vehicles and PNG for their cook stoves to be cheaper.
Meanwhile, the MEA announced that India and Russia had agreed that an industry level working group led by Gazprom will work to create an ‘energy bridge’, essentially pipelines, for potential Russian gas supplies to be transported to India during the recent India-Russia talks on the side-lines of the BRICS summit. About a decade ago, we had said in one of our reports on transporting Central Asian gas to India that it was in Russia’s interest to facilitate the flow of Central and West Asian gas towards the South Asian market to reduce the threat of competition in its lucrative markets of Western Europe and potentially also the USA. Now that these markets are looking less lucrative, it is probably in Russia’s interest to facilitate the flow of natural gas to the relatively more lucrative South Asian and Indian markets.
Rest of the World
On the international front the most intriguing news was that Turkey and Russia would work to start the construction of the second pipeline on the Turkish Stream project provided there is sufficient demand from European markets. Turkey and Russia signed a bilateral agreement to build the Turkish Stream undersea gas pipeline, which will allow Moscow to strengthen its position in the European gas market and cut energy supplies via Ukraine. The Turkish Stream project was conceived in 2014 in response to the EU’s objection to the South Stream pipeline which was supposed to be laid on the bottom of the Black Sea from Russia into Turkey and Germany. Following the shooting down of a Russian bomber in Syria by Turkey, the project was frozen. Russian gas meets approximately 60 percent of the Turkish gas market needs. The Turkish Stream infrastructure is ready on the Russian side for the supply of gas into the line going to Turkey. In its current form, each of the two lines have a capacity of 15.75 BCM per year.
Another interesting development in the gas market was that the Asian LNG price had risen on account of increased demand from India and South Korea. Prices for November delivery traded at $5.75 per mmBtu helped by a surge in gas prices at Britain’s benchmark gas market which is seen to influence Asian LNG markets. GAIL (India) Ltd is reportedly negotiating delivery of five cargoes for October-December delivery. According to experts, price sensitive Indian importers were nearing their cut-off points, potentially resulting in tenders going un-awarded which may dampen prices. South Korean import of LNG has risen on account of shut down of four nuclear reactors with a total capacity of over 2 GW following an earthquake.
Staying on earthquakes, the government of Netherlands has reportedly limited extraction of natural gas from Groningen, the EU’s largest gas deposit, over threat of earthquakes. Netherlands is struggling to contain tremors linked to gas production by a joint venture of Exxon and Shell that has reportedly damaged thousands of homes. Groningen’s decline may have broader implications for the European gas market, which would have to rely more on imports from outside the EU. The Netherlands produced 3.85 TCM of gas since the discovery of the Groningen deposit in 1959, more than total global production last year. Output fell to 52 BCM in 2014 the lowest level since the early 1970s compared to 84 BCM in 2013.
The TAPI pipeline appeared to gather momentum with Turkmenistan signing a $700 million loan agreement with Islamic Development Bank to finance the TAPI gas pipeline project.
SEA\LNG, the cross-industry coalition established to promote the use of LNG as a marine fuel, said that the LNG sector was ready for the future emissions constraints on the shipping industry and that it supported the implementation of the MARPOL Annex VI for the prevention of air pollution by ships. LNG emits zero SOx and virtually zero particulate matter. Compared to existing heavy marine fuel oils, LNG can, depending on the technology used, emit 90 percent less NOx and 20-25 percent less CO2. The coalition believes that LNG will become a fuel of choice for vessels operating in global trade lanes, as well as in ECA zones, where LNG is already gaining a foothold. According to SEA\LNG, there are currently 86 LNG-fuelled ships in operation worldwide (excluding LNG carriers) and a further 95 on order.
There was also news on the intriguing geo-political and geo-economic contest between Russia and the USA two of the World’s largest energy producers and exporters. Gazprom, that generates more than a half of its revenue in Europe, reportedly observed that in the European market ‘US LNG was losing’ against Gazprom’s pipeline gas deliveries. Gazprom is said to believe that Latin America would become one of the main markets for US LNG in the medium and long term.
So far three US LNG cargoes were delivered to European including one to Turkey. Gazprom operates Russia’s only LNG plant, built within the Sakhalin II project, which currently has an annual production capacity of 9.6 MT. Gazprom is reportedly interested in increasing the LNG share in Gazprom’s portfolio with the purpose of expanding sales geography and boosting gas exports.
NATIONAL: OIL
Delhi HC rejects Cairn’s plea to export surplus crude oil
October 18: The Delhi High Court (HC) refused to allow Cairn India Ltd to export surplus crude oil from its Barmer oil fields in Rajasthan. The court had earlier reserved its verdict on a petition filed by Cairn seeking to export the surplus crude, produced under a production sharing contract (PSC) with Oil and Natural Gas Corp (ONGC), as benchmark prices offered in India were far lower than the prevailing global rates.
Source: Business Standard
RIL plans shutdown of FCCU in DTA unit of Jamnagar refinery for maintenance
October 18: Reliance Industries Ltd (RIL) informed that it was planning to shut down the fluidized catalytic cracking unit (FCCU) in the DTA unit of its Jamnagar refinery for “routine maintenance & inspection activities”. The shutdown is being planned from second week of November 2016 for about five weeks.
Source: Business Standard
Pakistani agents making calls to executives at oil installations to extract key details
October 18: Indian oil installations are on Pakistan’s radar. The Intelligence Bureau (IB) has advised the oil ministry to step up safety and information shield at important energy installations after it intercepted a conversation in which a Pakistani spy was heard extracting information from an oil industry executive. IB recently intercepted a conversation in which a Pakistani operative, posing as an officer of India’s external intelligence agency, the Research & Analysis Wing, engaged on phone an executive managing a sensitive hydrocarbon pipeline in Rajasthan and sought finer details about the facility. IB has warned that several Pakistani spies are making pseudonymous calls from across the border as well as within India to executives at oil installations to extract details. It suggested that oil industry executives be sensitised so they do not end up sharing vital information. The oil ministry said the home ministry handles internal security matters and will take appropriate action. Indian Oil Corp (IOC) said the country’s largest refiner has sensitised its officials and security personnel at refineries in North India in this regard.
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