Local and global benchmarks should set gas prices

Vol 10, PW 11 (21 Sep 06) Midstream & Downstream

BG believes there is no single formula to test if a particular gas sales transaction is reasonable.

Why Because there is no transparent market for long-term gas supplies! According to BG, the gas market in India is not homogenous. Different sectors face different fuel price economics, so the price of a natural gas deal, whether spot or short-term or long-term, will reflect those economics.

BG believes the Indian natural gas market is evolving. So, prices from a year ago may not be indicative of prices today and similarly, prices from today would not reflect what prices are likely to be six months from now.

Continues BG: With a relatively nascent market, it will be difficult to compare reasonableness of prices in different deals. We learn the sale price may also be affected by customer segment as the ability to pay is likely to vary across customer segments and the price of alternative fuels will also differ.

For example, it is extremely likely that the largest volume segment, the power sector, will also have the greatest limitations from this standpoint whereas a segment using a costly alternative fuel could pay a much better price. Therefore, says BG, Reasonableness of price arrived at through bilateral arrangements would need to take account of these various factors.

BG stresses that, the appropriate long-term price for natural gas upon which to evaluate reasonableness of pricing under PSCs should generally be determined through market mechanisms. Still, BG suggests some fundamental benchmarks to provide useful insight into appropriate long-term prices.

These could include: the break even (domestic or global) price for the main competing fuels, the ability of specific customer segments to pay and the price required to earn adequate returns on upstream production. Short-term prices should be evaluated against a range of factors, including the price for comparable recent transactions, R-LNG prices and the short-term pricing of competing fuels.

However, said BG, we observe that in most markets, short-term prices are more volatile and therefore a relatively wide range in what is regarded as reasonable prices is likely to be required.