GAIL (India), having firmed up LNG import contracts that can potentially be more remunerative than others, is willing to offer its customers the option to select the pricing mechanism.
The idea is to work out the thresholds where the sales would likely remain profitable to it in each mechanism — linking a gas index such as Henry Hub, benchmarking to a crude oil index or a fixed price.
The flexibility, the PSU reckons, would give the much-needed comfort to industrial users of the fuel, especially the medium-sized ones, so that their vulnerability to fluctuations in gas price is somewhat hedged.
Explaining the mechanism, a company official said that a customer that buys gas from the public sector firm can opt from several options such as linking the price to gas index (Henry Hub) or crude oil (Brent/Japanese Crude Cocktail) or a fixed price. This pricing mechanism would apply to the imported gas supplied by GAIL, while domestic gas would continue to be priced as per government notified pricing norms.
“This (pricing options) would limit the volatility of international prices (in terms of their impact to the GAIL customers). We have gone in a big way to the international market and so there are various rates that we can offer to the customers. If they want, they can link their price to a transparent index such as Henry Hub or Brent,” said BC Tripathi, chairman and managing director of GAIL.
Tripathi said the company is working on a fixed cost model with some hedge to it. “We are trying to give options depending on customer's business model and their ability. We are ready to offer them fixed price or financial hedging instrument,” he explained.
Currently, the landed price of imported gas on India shores varies from $12/mmBtu to $15/mmBtu depending on LNG bought on long-term contract or from the spot market. Customers pay additional $1-3/mmBtu for re-gassification, transmission, VAT and other state levies.
At present, there is a wide gap between the price of indigenously produced and imported gas. But, after the implementation of the Rangarajan-based pricing regime, which has been put on back burner by the election commission till model code of conduct in place, the gap would be bridged. Currently, gas produced from domestic fields costs $4.2-$5.7/mmBtu, under the administered price regime.
“Today, LNG is nowhere available less than $14/mmBtu. It is mostly linked to crude oil price. A single political disturbance can push prices up. We have now offered this to customers. In some places they are very upbeat, especially those who want to have a fixed price,” Tripathi added.
GAIL has transmission capacity of around 225 mmscmd. However, its pipelines are operating at about 45-50% capacities at 100-105 mmscmd. This is due to non-availability of domestic gas and limited users of imported gas.
The firm has set its eyes on small and mid-sized industrial customers rather than the big power and fertilizer units, which have restrictions on the end-product price. Companies across cement, steel, glass making, refineries and petrochemical sectors are open to use LNG.
In December 2011, GAIL signed a deal with Cheniere Energy Partners to buy 3.5 mtpa of LNG from Sabine Pass Terminal in Louisiana, US, on FoB basis. Deliveries would start between March-August 2018. In April 2013, GAIL booked another 2.3 mtpa capacity to export LNG from Dominion Cover Point terminal in Maryland, delivery of which is expected from September 2017. Both these contracts are for 20 years.
India is expected to witness significant surge in LNG usage in the next five years, said a recent KPMG study. The global consulting firm envisaged that India's LNG demand would increase from 12.5 million tonne a year in 2010 to around 35 million tonne per annum in 2020. There are significant opportunities in gas transmission when government is targeting to expand city gas network to cover 250 cities by 2020.
The idea is to work out the thresholds where the sales would likely remain profitable to it in each mechanism — linking a gas index such as Henry Hub, benchmarking to a crude oil index or a fixed price.
The flexibility, the PSU reckons, would give the much-needed comfort to industrial users of the fuel, especially the medium-sized ones, so that their vulnerability to fluctuations in gas price is somewhat hedged.
Explaining the mechanism, a company official said that a customer that buys gas from the public sector firm can opt from several options such as linking the price to gas index (Henry Hub) or crude oil (Brent/Japanese Crude Cocktail) or a fixed price. This pricing mechanism would apply to the imported gas supplied by GAIL, while domestic gas would continue to be priced as per government notified pricing norms.
“This (pricing options) would limit the volatility of international prices (in terms of their impact to the GAIL customers). We have gone in a big way to the international market and so there are various rates that we can offer to the customers. If they want, they can link their price to a transparent index such as Henry Hub or Brent,” said BC Tripathi, chairman and managing director of GAIL.
Tripathi said the company is working on a fixed cost model with some hedge to it. “We are trying to give options depending on customer's business model and their ability. We are ready to offer them fixed price or financial hedging instrument,” he explained.
Currently, the landed price of imported gas on India shores varies from $12/mmBtu to $15/mmBtu depending on LNG bought on long-term contract or from the spot market. Customers pay additional $1-3/mmBtu for re-gassification, transmission, VAT and other state levies.
At present, there is a wide gap between the price of indigenously produced and imported gas. But, after the implementation of the Rangarajan-based pricing regime, which has been put on back burner by the election commission till model code of conduct in place, the gap would be bridged. Currently, gas produced from domestic fields costs $4.2-$5.7/mmBtu, under the administered price regime.
“Today, LNG is nowhere available less than $14/mmBtu. It is mostly linked to crude oil price. A single political disturbance can push prices up. We have now offered this to customers. In some places they are very upbeat, especially those who want to have a fixed price,” Tripathi added.
GAIL has transmission capacity of around 225 mmscmd. However, its pipelines are operating at about 45-50% capacities at 100-105 mmscmd. This is due to non-availability of domestic gas and limited users of imported gas.
The firm has set its eyes on small and mid-sized industrial customers rather than the big power and fertilizer units, which have restrictions on the end-product price. Companies across cement, steel, glass making, refineries and petrochemical sectors are open to use LNG.
In December 2011, GAIL signed a deal with Cheniere Energy Partners to buy 3.5 mtpa of LNG from Sabine Pass Terminal in Louisiana, US, on FoB basis. Deliveries would start between March-August 2018. In April 2013, GAIL booked another 2.3 mtpa capacity to export LNG from Dominion Cover Point terminal in Maryland, delivery of which is expected from September 2017. Both these contracts are for 20 years.
India is expected to witness significant surge in LNG usage in the next five years, said a recent KPMG study. The global consulting firm envisaged that India's LNG demand would increase from 12.5 million tonne a year in 2010 to around 35 million tonne per annum in 2020. There are significant opportunities in gas transmission when government is targeting to expand city gas network to cover 250 cities by 2020.
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