1. Pricing of Natural Gas Dr. Anthony Barker 03 October 2008 Taking upstream to the next level

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3. 3 Agenda Gas pricing benchmark – where are we? Gas pricing drivers LNG prices in India – linkages to the global market Power sector pricing scenario Key challenges / questions Conclusion

4. 4 Gas pricing benchmarks APM – ONGC produced / GAIL marketed gas –Producer price ~2/mmbtu PMT JVs –All gas to Govt. nominee @ PSC price Pre – NELP –Mutually negotiated prices NELP –Through price discovery and Govt. approval ◦Price of D6 gas @ $4.2/mmbtu LNG –PLL Term price to rise from Jan 2009 - ~$12/mmbtu by 2014 (Ex- Dahej (NCV) –Spot prices @ $21/mmbtu - $25/mmbtu Multiple pricing, segmented market - clarity?

5. 5 Gas price drivers Factors affecting domestic gas prices –Cost of supply plus a return –Investors friendly policies –Demand of gas at a price acceptable to bulk consumers –Price of substitute fuel Factors affecting LNG prices into India –Global supply demand situation –Price offered by JKT market –Crude prices –Re-gas capacity Domestic pricing also subject to global influences (coal)

6. 6 W. Africa Australia S.E. Asia Middle East Algeria Trinidad LNG Pipe Markets Source: BG Group Global gas trade – the recent past Industry evolution: from three main trade regions …

7. 7 W. Africa Australia Middle East N.Africa Trin / Ven Norway / Russia S. America Egypt Sakhalin Source: BG Group LNG Pipe Markets Primary (>20 mtpa) Secondary (<20 mtpa) Possible Existing & proposed LNG trade routes (by 2015) S.E. Asia Global gas trade - evolution … to a globalising gas industry – India choice of sources

8. 8 Spot LNG prices - Hazira Source: JCC prices India has accepted LNG spot pricing

9. 9 Power - gas displacing imported coal Source: ICF International 2006 Gas competes with imported coal Gas competes with domestic coal Gas Volume (mmscmd) - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 60120180245 Fuel Consumption in 2015 (TBTU) Coal-DomesticCoal-ImportedGas Lower the prices higher the potential utilization in the sector

10. 10 Gas vis-à-vis coal-fired power plants Indigenous gas to compete with imported coal Flexible mid-merit and base load operation for gas Optimised generation portfolio supports increased share of gas at affordable price There is a viable price point for gas-fired generation Low gas price does not sustain E&P activity

11. 11 4 5 6 7 8 9 10 201020122014201620182020 Year $/mmbtu Ex- KakinadaEx- Hazira Evolution of gas prices in the power sector* *assuming overall 45% available supply to power sector Generation capacity shortfall, gas priced at a premium Power supply/demand in balance & adequate transmission infrastructure - Gas competing with imported coal Power system equilibrium by 2015? Source: ICF International Power Sector Study 2008

12. 12 Long term gas supply/price sustainability India supply short until at least 2020 PSC regimes can drive a short plateau outcome –gas infrastructure stranded after 6 years? Need to consider –Unambiguous market pricing mechanisms –NELP stimulus – don’t pull back, it’s just beginning to bear fruit –PSC extensions – incremental investment to increase output Stranded gas infrastructure investment?

13. 13 Key challenges / questions Balancing stakeholders’ interests Implementation of Gas utilization policy –Impacts overall price realization to a player –Ensuring fair treatment to existing producers and future producers Uniform or Multiple pricing –Different for priority and non priority sectors Manual intervention can lead to unforeseen outcomes

14. 14 Conclusion To stimulate adequate supply - shift to market based pricing for domestic gas Transparent, adequate and clear policies to develop the natural gas market and infrastructure Adopt portfolio based approach in planning and pricing for the power sector Continue the reform process – do not pull back

15. 15 Thank you