Why gas price linked to crude wonآ’t work

Vol 7, PW 13 (10 Sep 03) Midstream & Downstream

Petronet-LNG's decision not to bid for the gas supply part of the NTPC tender is significant.

Power sector officials see it as vindication of their theory that a gas price linked to crude oil is unsuited to India's power sector. "The Japanese Crude Cocktail price linkage (adopted by RasGas for Petronet-LNG) will never work in India's power sector," says a power official.

"It would be suicidal. Do we want another Dabhol - with its negotiated LNG price which finally failed in the market" PETROWATCH is also reminded that there's only a political and no economic rationale to global crude oil price fluctuations.

"And, JCC is not the only formula to determine gas prices. The US follows the Henry Hub formula which is more logical while gas prices are also linked to the price of Brent crude." The JCC is used to price gas for Japan and South Korea, "because there gas is meant to replace costlier naphtha in the power sector." But this logic, we are told, does not hold true for India.

"Here naphtha was meant to generate power only as a temporary arrangement till gas became available. The argument that gas will replace costly naphtha is spurious in India." Coal is the real competition to gas in India.

The fuel cost for a coal-based power station at a coal mine pithead in India is about Rs0.70 per KwH. But this cost almost doubles to Rs1.28 per KwH when the power station is more than 1,000-km away from the pithead because of environment ministry rules that such power stations should use coal with only 34% ash content.

Gas suppliers, our source says, should keep these figures in mind while pricing gas for the Indian power sector. Despite coal's price advantage over gas, NTPC chose not to link its gas price to coal.

Why "Coal is not yet traded as a commodity unlike crude oil." This is not to say that gas has no advantages over coal. "Gas is certainly a cleaner fuel with a higher calorific value.

An open cycle gas-based power station has a gestation period of only 18 months unlike 39 months for a coal power station." Power sector officials also point out that current global practice is to slash the percentage of gas price linkage to crude oil. "Only about 8% of the Guangdong LNG price is linked to crude oil."