Widodo W. Purwanto , *Hanan Nugroho Departemen Teknik Kimia Universitas Indonesia *Bappenas

1. Natural Gas Price & Tariff Lecture-3 • Widodo W. Purwanto, *Hanan Nugroho • Departemen Teknik Kimia • Universitas Indonesia • *Bappenas

2. There is no “World Prices” for gas … yet • Oil and gas are DIFFERENT commodities • Market maturity • Regional differences • Different outlets • Risks Mature International Captive markets Exploration risks In development Regional No captive market Market risk

4. Price theory

5. Gas pricing: Basic principles • Fixed Prices • Cost-Plus • Pt = Po[a(Gt/Go) + b(Ft/Fo)]

6. Price Components • The basic price, which splits the risks between the two parties: sellers and buyers • Indexation provision, which assures gas competitiveness and helps to integrate the changes occurring in the energy market, without having to renegotiate the contract

7. Example: Ruhrgas’ NWCE Additive Formula P = Po + 0.6 x f1 x k1 (KEL–KELo) + 0.4 x f2 x k2 (HSL–HSLo) Where Po = base price for German pfennings per kWh (pf/kWh) KEL= price of gasoil in Deutsche Mark per metre tonne (DM/Tonne), net of all taxes and duties in German inland market HSL = Price of Heavy fuel oil with maximum 1% sulphur in DM/Tonne net of all taxes and duties in German inland market f = “delivery point” adjustment factors, k = energy conversion factors, Methodology: calculation on price averages over a period of 3 to 12 months

8. Pricing formulae: Other parameters • Long term pricing: partial indexation to coal used in some power generators’ purchase contracts (Italy’s Enel) • Spot and short term sales (one day to one year): Fixed prices for gas, determine by market conditions at the moment the deal is signed • Price Review Clause: provided for renegotiating the price formulae if market conditions are substantially modified (for instance, the NWCE formulae was transformed into a modified “S-Curve” formula).

9. Recent trends in Gas Pricing Formulae in Europe: Spot Price Indexing • IPE prices have started to be used as the basis for price indexing in mid-term pipeline contracts. • Statoil sold 5 Bcm/year of gas to British Gas Trading (Centrica), over a 10 year period (2005-2015), indexed to the spot gas price at the NBP. • Gasunie Trading & Supply sold 8 Bcm/year of gas to British Gas Trading (Centrica) over a 10-year period (2005-2015) indexed to the spot gas price at NBP. This contract is tailored to match Centrica’s high seasonal demand profile.

11. Cost component of pipeline gas

15. Price of crude oil vs. gas

17. Oil/Gas Price ratio

18. Comparison of coal/crude oil prices

20. Perbandingannilai gas bumi

21. LNG Prices to Japan

22. LNG Prices to Japan and JCC

23. LNG Prices to Japan, Korea and Taiwan

24. LNG Pricing by Region

25. LNG Pricing Formulae in Asia (1) • 1988 – 2004 • Prices linked 85% to crude oil • 10-15% premium over crude at around $18/bbl • Lower premium declines at higher oil prices and no premium above $28-$30/bbl • “S” shaped curve in some contracts • 2004+ • New indices and price mechanisms to reflect changing markets?

26. LNG Pricing Formulae in Asia (2) • Reference Oil Price: JCC Japanese Custom Cleared average price1988 – 2004 • Price applies over an agreed range ($11 to $30/bbl), outside that range there is an agreement to “meet and discuss” • Such a pricing basis initially developed with Japanese buyers but has been adopted by S. Korea and Taiwan • In Japan the basic formula has been modified by adopting an “S” shaped curve • No “S” curves in S. Korea and Taiwan contracts

27. LNG Pricing Formulae in Asia (3) • Most contracts for LNG sold on an ex-ship basis use the following pricing formula: P(LNG) = A x P (Crude Oil) + B where P(LNG) = price of LNG in cents$/MMBtu P (Crude Oil) =price of crude oil in $/bbl B = a constant in cents/MMBtu • In many contracts: A = 14.85 B = 70 to 90 cents

28. Basic LNG Pricing Formulae in Asia

29. Asian “S” Curve Price Formula

30. LNG Pricing Formulae in Asia • Linkage to crude oil is about 85% • In most contracts the average of Japanese Custom Cleared (JCC) crude prices are used, but Indonesia uses the average price of Indonesian crude exports • Inclusion of constant results in premium over crude oil parity of about 10-15% at $18/bbl • Premium erodes as oil price increase and disappears at around $28-30/bbl • Most price negotiations focus on the constant • The 14.85 factor is used in many contract is not exclusive (especially in FOB contracts)

31. Level of price formula varies along fluctuating oil price

32. Tipikal formula harga LNG

33. Harga Gas Internasional dan Domestik • Harga gas PGN berkisar 1/3 sampai 1/2 dariharga gas internasional • Harga gas domestik untuk pupukberkisar1/6 sampai 1/4dari harga gas internasional

34. Perbandingan Harga Gas Bumi dengan Harga Minyak Bumi Pola harga gas di luar negeri mengikuti pola harga minyak bumi, tetapi tidak demikian halnya dengan pola harga gas domestik.

35. Rasio harga minyak bumi terhadap harga gas bumi Rata-rata rasio harga minyakbumiterhadap gas di: - US sebesar 8,7 - Uni Eropa sebesar 7,6 - Jepang sebesar6,2 - PGN berkisar8-18

36. Korelasi Harga Gas Internasional dengan Harga Minyak Bumi Berdasarkan regresi linear tersebut diperoleh persamaan untuk gas bumi di: - Uni Eropa (3.25) - US (3.26) - Jepang (3.27)

40. Different Tariffication Methods for Gas Transportation • Tariffication according to the «distance»: booking capacity along each section of the «tariff route» • Tariffication according to «pondered distance» (average distance) • Tariffication «Entry-Exit»: booking capacity at entry and exit, without taking into account physical flows between these two points • Tariffication «post-stamp»: a unique tariff applied for injection and withdrawal on the overall territory