Future Outlook – Crude Oil and Diesel Prices 140 40 120 30 100 80 Rs/Litre$/bbl 20 60 * Actual extrapolated considering 40 todays Prices 10 20 Note : All prices are in real terms in 2011 $ 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 IEA Crude Oil Price Forecast ($/bbl) * Actual Crude Oil Price ($/BBL) Diesel (Import Parity Price) (Rs/Litre) * Actual Diesel (Import Parity Price) (Rs/Litre) Since Diesel and other refinery products are derived from Crude oil, a high degree of Correlation exists between their Prices (> 95%)
Volatility in Crude Oil Prices• Global Commodity – fully market based pricing• Changes in demand and supply• Weather conditions – seasonal demand• Inventory level (particularly US)• Supply chain disruptions• Environmental disasters• Speculative Trading activity• Geopolitical situations• Economic conditions
Historical Global Thermal Coal Prices 150 120 90 $/Tonne 60 30 High Volatility in Prices 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Northwest Europe marker price US Central Appalachian coal spot price index Japan steam coal import cif priceSource : BP Statistical Review 2012 Coal Prices are turning more volatile on account of increasing Chinese and Indian demand
Future Outlook - Global Thermal Coal Prices 150 Northwest Europe marker price US Central Appalachian coal spot price index 120 Japan steam coal import cif price • Europe/North American coal demand 90 is stagnant and mostly substituted by gas and renewable energy$/Tonne 60 • Indian and Chinese import dependency for thermal coal is 30 expected to increase further, as domestic production growth is 0 constrained by logistic, quality and 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 environmental issues • Long term supply growth is mostly from Australia once infrastructure Lower/Upper bound Price expansions come through Annual Avg. Price • Short term - Indonesia will supply most of the incremental demand Source: Anglo American Thermal Coal • Higher cost of inflation and US dollar- based imports increasingly expensive In the medium term Coal prices are expected to be highly volatile and demand responsive
Current Domestic Coal Prices in India 4000 80 Coal Basic Prices 3500 70 3000 60 2500 50 Rs/Tonne $/Tonne 2000 40 1500 30 1000 20 500 10 0 0 A B C D E F G Coal Grades are based on Calorific valueSource: Coal India Limited
Future Outlook - Domestic Coal Prices 140 Coal Basic Prices 7,000 • Over last 10 years , the average notified coal price has increased by 120 6,000 4.9% annually • The price increase in the near-term 100 5,000 expected to be in the range of 6-7% annually and about 9-10 % beyond Rs/Tonne 2015$/Tonne 80 4,000 • In order to meet the increasing 60 2012 2015 2020 3,000 demand, in the long term, domestic coal prices are expected to move 40 2,000 closer to import parity – with some discount (very similar to ONGC’s crude oil pricing approach) 20 1,000 0 0 A B C D E F G CIL notified prices are expected to increase at a faster rate than before
Volatility in Coal Prices in India• Higher share of imported coal in domestic coal basket• Coal exporting countries are changing rules/regulations which will further lead to higher prices with significant volatility• Land acquisition bill to impact overall cost of production where developers will have to share profit/revenues with land owners throughout the operational life• Environmental cost/tax likely to go up in this decade• Higher investment for mining activity since more land would be required to compensate for forest land• Increased obligation for washed coal use• Most of the incremental production to come from new mines
Historical Global Gas Market / LNG Index Prices 15 LNG Japan CIF European Union CIF UK NBP Index US Henry Hub Canada (Alberta) 12 ~ $ 11/MMBtu 9$/MMBtu 6 3 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source : BP Statistical Review 2012 Huge arbitrage opportunity exists between Atlantic and Pacific basin gas markets 13
Emerging long term LNG Pricing Behavior• Most of the recent long-term LNG contracts have slope of about 14.5% and 15.4% JCC• Long-term contracts in the Asia Pacific region are converging to a slope of 14.85% JCC• LNG from shale gas from North America tends to be much cheaper and offers significant arbitrage opportunity• Oil indexed pricing set to continue for LNG from the Middle East , the Asia Pacific region and Africa at least for the mid term
Current Domestic Gas Prices in India • Domestic gas pricing are not 6 completely market based and price determination remains uncertain • Significant upward revision seen 5 in domestic gas price over last$ / MMBtu 10 years • Government role in domestic gas price determination continues 4 • Pooled price approach being explored, would be beneficial for more LNG use if adopted • Going forward, arms length 3 derived pricing approach is 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 expected to prevail for any MMSCMD domestic gas supply Source: MoPNG
Future Domestic Gas Price Scenarios 20 CBM Producer Demand - 100% Crude Oil Parity (JCC) KG D6 Gas - Post 2014 (Inflation Adjustment) 18 KG D6 Gas - Post 2014 (50% Parity to Crude Oil(JCC)) KG D6 Gas - Post 2014 (50% Parity to Crude Oil(JCC)+ 50% YoY Inflation Adjustment) 16 14$/ MMBtu 12 10 8 6 4 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Domestic gas prices are expected to increase significantly to accommodate deep water supply, marginal fields and challenging E & P activities
Volatility in LNG/Gas Prices• Significant increase in Global LNG demand – Higher gas demand in post Fukushima Japan – German closure of nuclear power plants (~ 8GW) – Entry of new countries on the supply side• Spare LNG Liquefaction capacity (Australia)• $ Exchange rate movement• Economic recession• Weather condition (severe winter – US/Europe)• Significant LNG supply is expected to come from Greenfield projects in East Africa, Russia, Iran, P&NG• Higher share of LNG in the primary energy mix
Conclusion• With a multitude of factors impacting oil, coal and gas, their prices are bound to fluctuate• All fuel prices are tending to get globally linked• Therefore to deal with volatility : – Have a portfolio of contracts at different price levels linked to different indices – Invest in the entire value chain as far as possible – Use financial instruments efficiently
Thank YouFor further Information please contact Proshanto Banerjee at firstname.lastname@example.org
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