natural gas – some regulatory issues oil & gas industry practice

Natural Gas – Some Regulatory Issues

Oil & Gas Industry Practice

Agenda

Natural Gas and India

Global Regulatory trends

Natural Gas policy framework in India

Natural Gas policy framework in India - Implications

India’s rapidly growing economy – needs to be fuelled by additional energy

Natural Gas share of total energy basket set to increasefrom 9% in 2003-04 to 23% in 2031-32.

Demand far outstrips supply. Natural Gas & allied infrastructure needs strengthening.

•Gas grid connecting producing and consuming locations

•LNG receiving terminals

•Gas Distribution networks


Agenda





The gas industry in every country goes through four stages of development linked to production and consumption growth

Stage

Description

Market Characteris-

tics

Stage 4:Unbundling and retail competition

Stage 3: Open access and

wholesale competition

Stage 2: Competition in natural

gas production

• Production is separated from the rest of the industry and competition is introduced here

• Open access is permitted to the transmission segment of pipeline transportation

• Industry participants in the wholesale market can now choose their gas supplier

• Natural gas supply is totally unbundled from transmission and distribution

• Participants at the retail level can also choose their gas suppliers

Stage 1: Vertical Integration

• Production, pipeline transportation and distribution are all performed by one company, in which the government typically has a controlling stake

• Value added chain breaking up as trade commences

• Availability of structured trading products

• Competition commences between value added steps

• Increased sales activities • Increasing price

transparency

• Increasing gas trade• First spot markets

develop• Intensive competition

leads to shrinking margins

• Additional services & structured products

• Increasing liquidity enables transparent pricing systems

• 100% market opening• High competitive

pressure• High Market liquidity• Established trade

markets • Defined products • Overall price

transparency• Market Prices

• Tight market structures (monopoly) with regional limitation

• Different gas qualities

• Tight supply chain• Very little

competition in gas• Low trade liquidity• Take or Pay

Contracts

India


Increasing regulation of gas transmission and greater competition in gas supply and trading have had significant implications on the strategies of natural gas companies

CompanyCompany Regulatory changeRegulatory change Impact on strategyImpact on strategy

British Gas Plc

Duke Energy

El Paso

Gas Natural SDA

Since 1995, UK evolved to Stage 4 of the regulatory framework, where gas transmission had to be unbundled from gas supply and trading

Latin America, Europe and Australia are expected go through a reforms towards an open, competitive market

The EU Gas Directive adopted in 1998, was to be implemented by Aug. 2000, which aimed at creating a competitive market

EU directive was implemented in Spain in 2000 resulting in open access and wholesale competition in natural gas

Demerged Centrica - the marketing arm of the group in 1997

Plans to grow aggressively in Europe, Latin America and Australia

Entered the European natural gas trading market in 2000

Forward integrated into power as a result of increasing competition


Agenda





Objective of PNGRB Act is to regulate the sector so as to protect the

interests of consumers and entities and ensure uninterrupted and

adequate supply of P&NG in all parts of country and to promote

competitive markets

Natural Gas Policy Framework in India

• To protect consumers and ensure level playing field

• To promote efficiency in natural monopoly industries

• To provide consumers with more choice (not less choice)

• To set benchmark performance standards

• To promote competition

Regulatory framework imperative for Natural Gas infrastructure development in India

Supreme Court : Natural Gas

a Central subject

State Governments are keen

to develop the local gas

transmission and distribution

business

Promote private sector

players

Promote access to

infrastructure

PNGRB Act provides thatEntities to be registered or

authorisedTransportation of Natural Gas on

Common carrier or Contract carrier basis with non-discriminatory open access basis – also for Distribution

Regulator empowered to require Marketing of Natural Gas to be separated from transportation including ownership of pipelines

Right of first useLay down transportation tariffs

Natural Gas Policy Framework in India

Agenda





The restructuring of mature natural gas markets globally provides some insight into what can be expected in India (Contd.)

Key Implications of Gas Market Restructuring:

• Deregulation and restructuring activities have taken place in industrialised as well as

developing countries across the world with the UK and USA leading the way

• These countries have deregulated prices and lowered entry barriers in the industry

• As a result, many new participants have emerged, promoting competition in the

newly created markets

• With increasing decentralization, regulation focuses on pipeline transportation and

distribution, the industry segments which have natural monopoly characteristics

Natural Gas Policy Framework in India - Implications

The restructuring of mature natural gas markets globally provides some insight into what can be expected in India

Key Implications of Gas Market Restructuring:

• The objective of regulation is to protect both the end users and the participants in

the deregulated segments from the market power of companies operating in the

monopolistic segments

• Two major markets emerge as a result of deregulation:

— The natural gas market, which facilitates the trading of natural gas as a

commodity, and

— The transportation market, which enables market participants to trade the

transportation services necessary to ship natural gas through the pipeline

system


Such market restructuring has driven companies to enter and exit specific businesses and markets

Regulatory changes have had a significant impact on the strategies of natural gas companies. Increasing regulation of transmission typically causes:

— Forward integration into natural gas utilization (like power) to increase margins

— Moving closer to the consumer through services like energy management and financial services

— Split up into separate companies for transmission and marketing

Deregulation in overseas markets has facilitated international expansion


natural gas – some regulatory issues oil & gas industry practice

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