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.
Source: The Times of India
Petrol pumps to go on blackout in Rajasthan
October 18: Rajasthan Petroleum Dealers Association (RPDA) will join the countrywide protest of Petrol Pump Dealers against the meagre hike in Dealer Margin given by Oil Marketing Companies, Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp. In accordance with the nationwide agitation, a blackout will be observed by all petrol pumps in entire Rajasthan on October 19 from 7:00 pm to 7:15 pm. In case the demands are still not met there will be another blackout on October 26, during same time for same duration. However, the demands still remain unanswered then claim that there will be no purchase of fuel on November 3, 2016 from the oil companies followed by a complete closure of petrol pumps on November 15.
Source: The Times of India
India discussing $15 bn petroleum investments with Nigeria
October 17: India is discussing a mega investment opportunity worth around $15 billion with Nigeria focusing on a range of petroleum sector initiatives including crude purchase, refining partnerships and exploration and production in the African nation. The proposals were discussed in a meeting between Oil Minister Dharmendra Pradhan and his Nigerian Counterpart Emmanuel Ibe Kachikwu. The investment proposal may also cover opportunities for long-term contracts for supply of crude to Indian PSU companies from Nigeria and also possibilities of executing city gas distribution and liquefied petroleum gas infrastructure projects by Indian PSU companies in Nigeria. During the meeting, both the sides agreed to strengthen the existing cooperation in the oil and gas sector, particularly to explore investment opportunities for Indian public and private sector companies in Nigeria. The ministers agreed to sign a Memorandum of Understanding in December to firm up the initial talks.
Source: The Economic Times
Govt grants BP licence to set up petrol pumps in India
October 16: Government has formally granted a licence to BP Plc, Europe’s third-biggest oil company, to set up 3,500 petrol pumps in India, making it the 10th company to enter the lucrative fuel retailing sector. The company was granted a formal licence on October 14. The UK-based firm, as also Haldia Petrochemicals Ltd, was given approval by the Oil Ministry to retail petrol and diesel. The company had in January this year won in-principle approval to retail aviation turbine fuel (ATF) to airlines in India.
Source: Business Standard
No alarming situation due to rising oil prices in global market: Oil Minister
October 15: Oil Minister Dharmendra Pradhan said there is no alarming situation in India following rising oil prices in the international market, which has crossed the psychological barrier of $50 per barrel. Market watchers fear that the rising oil prices, which had crossed $50 per barrel, would adversely affect the India market. He said government has taken steps to link the oil price to the market and hence there was no such alarming situation.
Source: The Economic Times
Rosneft-led group to buy India refiner Essar for $12-$13 bn
October 14: A group led by Russian oil major Rosneft will acquire India’s Essar Oil in a $12 to $13 billion deal including debt, strengthening the ties between the world’s largest oil producer and the world’s fastest growing fuel consumer. The deal helps Russia to deepen economic ties that stretch back to the Soviet era. Rosneft will get a 49 percent stake in Essar and the two investors — European trader Trafigura and a Russian fund UCP — will hold another 49 percent in equal parts, the sources said, adding that the valuation included about $4.5 billion in assumed debt. Essar Oil operates a 400,000 barrel per day oil refinery in Vadinar on India’s west coast and sells fuels through its 2,470 filling stations in India. The two oil traders have a combined experience of more than 20 years with the Indian refiners. Rosneft and Trafigura are the latest international oil companies after Royal Dutch Shell and BP to enter the Indian fuel retailing market.
Source: Reuters
Kerosene subsidy likely to decline 25 percent this fiscal year
October 13: India’s kerosene subsidy is poised to fall sharply as higher supply of cooking gas and rural electrification have encouraged the government to cut supply of the inefficient and polluting fuel that is often diverted to adulterate diesel. The Centre is reducing kerosene supply by 5% a quarter which, along with additional voluntary cuts by some states, small increases in retail prices, and roll out of direct cash transfer for beneficiaries, is estimated to reduce sales and subsidy by 25% by the end of this fiscal year. The oil ministry said the decline in kerosene consumption this year would be the steepest ever. Consumption has been shrinking in lower single digits annually for a decade. Sale of subsidised Kerosene, meant for lighting and cooking for the poor, fell 4.2% to 6.8 million metric tonnes in 2015-16. But this year until August, the fall has been much sharper at 10%. In August, the consumption fell 17%. State oil companies have added about 1.4 crore new cooking gas subscribers so far this year. The oil ministry expect an additional 5% reduction in kerosene consumption with some states taking voluntary cuts and the launch of direct transfer of kerosene subsidy helping reduce diversion.
Source: The Economic Times
India gets first Iranian oil parcel for emergency reserves
October 13: India has received the first parcel of Iranian oil to partly fill its strategic storage in southern India, Mangalore Refinery and Petrochemicals Ltd, which imported the very large crude carrier (VLCC), said. MRPL shipped in 2 million barrels of Iranian oil in the VLCC Dino. India will fill half of the storage with 6 million barrels of Iranian oil while continuing talks with United Arab Emirates and Saudi Arabia for the remainder. A second parcel to be procured by Bharat Petroleum Corp is scheduled to arrive around October 25. India is building emergency storage in vast underground caverns at three locations in southern India to hold a total of 36.87 million barrels of crude, enough crude to cover almost two weeks of demand.
Source: The Hindu
NATIONAL: GAS
India gets a brand new O&G basin, Kutch Offshore, after 31 yrs
October 18: Nearly 31 years later, India is expecting to get oil and gas (O&G) production from a new basin — Kutch Offshore — starting 2017-18. Till now, only seven out of 26 sedimentary basins in India are under production. Cauvery basin was the last to come on stream in 1985. ONGC is carrying out exploratory work in the Kutch Offshore basin and has so far discovered one trillion cubic feet of natural gas. The Kutch Offshore is a shallow water acreage where ONGC has reached the appraisal stage. In the Kutch Offshore sedimentary basin, ONGC has four blocks bagged under the New Exploration Licensing Policy (NELP) auction regime, while another 700-800 square kilometre of nominated area is available for exploration and production activities. Currently, seven out of 26 sedimentary basins are under production. Oil Minister Dharmendra Pradhan said that India has suffered because exploration surveys have stopped since the past more than two decades. The NDA government has now launched the National Seismic Programme, which includes survey of virgin areas and reassessment of hydrocarbons, and bringing all kind of data to National Data Repository. ONGC produced 22.368 million tonnes (MT) of crude oil in FY16 against 22.264 MT in FY15. However, the gas production scenario continues to be grim with output falling to 21.2 billion cubic metres (bcm) in FY16 from 22.02 bcm in FY15.
Source: The Financial Express
Gazprom sees new LNG deal with GAIL in six months
October 15: Russia’s Gazprom chief executive officer (CEO) Alexei Miller said he hoped to renegotiate a deal to supply liquefied natural gas (LNG) to India’s GAIL (India) Ltd within the next six months. The two companies are discussing a change to the period in which Gail has to increase its off-take to 2.5 million tonnes of LNG per a year, as agreed under a previous contract, Miller said.
Source: Reuters
India to double LNG import capacity to 50 MT a year: Oil Minister
October 13: India plans to more than double its liquefied natural gas (LNG) import capacity to 50 million tonnes (MT) a year, Oil Minister Dharmendra Pradhan said. It has a capacity to import 21 million tonnes of the super-cooled fuel currently. As the nation moves to a gas-based economy, India wants to increase the share of natural gas in its energy mix to 15 percent in the next three-to-four years from 6.5 percent now, Pradhan said.
Source: Reuters
ONGC, United Energy said to vie for $2 bn Chevron asset
October 13: Oil & Natural Gas Corp (ONGC) and Hong Kong-listed United Energy Group Ltd are among bidders for Bangladesh natural gas assets being sold by Chevron Corp. United Energy submitted a joint offer with Chinese conglomerate Orient Group Inc. The gas fields, which could fetch as much as $2 billion, have also drawn interest from Brightoil Petroleum Holdings Ltd.
Source: Bloomberg
NATIONAL: COAL
US college to study coal movement of Chhattisgarh district
October 18: A unique ‘Coal agitation’ by a group of villagers in Chhattisgarh demanding that the local community be given mining rights on natural resources has caught the attention of an American college, which plans to take up a study on the social movement. Started about five years ago on Gandhi Jayanti, more than 1000 villagers of Gare, Saramal and Khamharia of Tamnar block in Raigarh district broke the coal law like Mahatma Gandhi led the movement against British Raj’s salt law. Every year by breaking the coal act, people of village Gare emphasize their stand that they have the right over coal of their land.
Source: The Economic Times
Coal ministry opposes NITI Aayog’s draft Energy Policy
October 18: The coal ministry has raised reservations over the draft National Energy Policy, which favours aligning domestic coal prices with international rates. The ministry is scared of this forward-looking policy because it would lose control over coal prices and would no longer be able to maximise profit for Coal India Ltd (CIL). NITI Aayog’s National Energy Policy is aimed at curbing imports by increasing production of renewable energy in the country fivefold to 300 billion units by 2019 and tripling coal production to 1.5 billion tonnes. Coal imports are envisaged to come down by 10% by 2022 and by 50% by 2030. According to NITI Aayog, once inputs have been provided by everyone, it is not necessary to reach a consensus on all issues.
Source: The Economic Times
Coal import declines 6 percent to 16 MT in September
October 16: Coal imports fell six percent to 16.1 million tonnes (MT) in September over the same month last year owing to higher prices of the fossil fuel in the international market. The demand for coal in India is not rising as per expectation as overall economy is not growing in the way it was expected to grow, leading to lower-than-expected demand for steel and cement, consequently the lower demand for power and coal, the mjunction services said.
Source: Business Standard
CIL to go totally digital by December end
October 14: Coal India Ltd (CIL) will go totally digital by the end of December. This follows the coal ministry earlier announcing that it has decided to move all papers and documents to digital format November 1 onwards.
Source: The Indian Express
India’s coal output to miss govt target of self sufficiency
October 13: India’s coal output will miss government’s ambitious target of self-sufficiency on the back of delays in opening up of commercial mining to private sectors and slow approvals for new state miners, a report said. The country is eyeing 1.5 billion tonnes of coal production by 2020, of which 1 billion tonnes would come from Coal India Ltd (CIL). According to a report by BMI Research, the country will remain in coal deficit up to 2020, although the deficit will narrow from 191 million tonnes (MT) in 2016 to 163 million tonnes by 2020. However, India will surpass the US as the world’s second largest producer of coal during 2016-20, increasing the market share from 9.8 percent in 2016 to 12.7 percent by 2020 as CIL ramps up output to meet the domestic power demand of the country, the report said.
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