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Keynote Keynote Presentation Transcript

  • Methodology for calculation of tariffs for trunk gas transportation Keynote seminar
  • Russian Gas Transportation System
  • Gas Transport Costs In Russia * For Independent Producers excluding transit gas of Central Asia
  • Typical Gas Value Chain
  • Sensitivity Of Business To The Tariff Trends
    • « Fair Competition » radius - 1600 km .
      • As long as tariff is linear and costs of production are equal.
    • A decrease in the tariff by 1 ruble (4%) increases the radius by 50 km.
      • Faster than linearly
        • 3 RUR – 13% - 400 km .
        • 5 RUR – 20% - 600 km .
        • 7 RUR – 30% - 1100 km .
        • 10 RUR – 40% - 2300 km .
    -10 -7 -5 -3
  • Bases For Tariff Regulation
    • List of regulatory documents
        • Federal Law "On Natural Monopolies" (1995)
        • Federal Law "On Gas Supply in the Russian Federation" (1999)
        • Government resolution No. 1021 (2000)
        • Methodology for calculation of tariffs (2005).
    • Current tariff application logic
      • Cross-subsidizing transport costs
        • Tariff = Planned revenue/Planned shipments
        • Cost = Tariff x Route length x Gas volume
    • Special cases
        • Gazprom's internal tariffs
        • Export and Transit tariffs
        • Local gas supply systems
  • Background Of Tariff Setting
    • Actual regulatory procedure
      • « Negotiating » CAP
    • Trend in tariff increase
      • Due to the wholesale prices increase
    • Interrelationship between the tariff and the regulated wholesale prices
      • The market is unbalanced up to date
  • Estimated prices of the independents and regulated wholesale prices Price Zone
  • Trends of Tariff and Wholesale Price Tariff ( left axis ) Wholesale price ( right axis )
  • Problems Of Setting Tariffs In Russia
    • The huge role of Gazprom in the economy of Russia
      • 8% tax revenue of consolidated Russia’s budget
    • Forms of influence of the Monopoly on the Regulator
      • From President Opinion to steamroller tactics
    • Lack of adequate information
      • Security as technique of evasion ex parte
    • Lack of Regulator's authority
      • Lack effective coercive leverages
        • Draft of Law “On public utilities”
  • Gas Price Regulation System in Russia 1: Associated gas price set at entry level to gas processing facility . 2: Transportation tariff for independent producers accessing Gazprom's pipeline. 3: Wholesale gas price (based on geographic zone and consumer type). 4: Distribution tariff (based on size and state of distribution pipeline). 5: Supply and sales service fee (based on size of consumer). 6: Residential Tariff (per person or per 1,000 m 3 )
  • Systematic problems
    • Arbitrariness in the reference data
      • Security as technique of cost manipulating
    • Linear cost of the transportation is inadequate economic situation
        • Transportation costs
        • Actual wholesale prices
    • Procedural arbitrariness in setting the tariffs
      • Lack of coordination in the tariff and wholesale price regulation schedules
    • Route variability
      • Cost variation - up to 20%
  • Route variability
  • Once More About « Old » Practice
    • Unpredictability of the transportation cost
      • Significant cost variations
    • Discrimination when entering into transport agreements
      • Unreal routes
    • Limited geographic range for gas sales
      • Economical reservation for gas of independent producers
    • "Access problem" because the "bottlenecks" have not been resolved economically
      • Invitation to “investment tribute”
  • Sources Of New Methodology
    • Background for gas sector key documents
      • ERTA experts took part in all progressive shifts in sector key documents
        • Gas supply law
        • Resolution 1021
        • Gas shipment rules
    • ERTA’s initiative to "change the situation"
      • Purpose: a stable gas market based on unified principles.
  • Principles Of Tariff System Structure ( recommended by the Madrid Forum decisions )
    • The tariffs should :
        • show the transportation costs
        • promote a higher effective gas trade
        • ensure a high level of transparency
        • stimulate effective long-term investments to the transportation infrastructure
        • provide a satisfactory investment profit level for the transport company
        • have the appropriate control level
        • prevent discrimination
  • Fundamentals Of The Proposed Concept
    • Specifics of the Russian gas transportation system
        • Long distance
        • A few entry – many exits
        • Administrative fragmentation
    • Cases of applicability of the worldwide experience
      • The worldwide experience is not applicable directly
        • History of regulation in North America
        • Advantage of European Principles
  • Current Tariffication Systems
    • «Рostage stamp»
      • Significant cross-subsidizing
    • «Entry - Exit»
      • Tedious calculations
    • D istance-related
      • Dependency on variable route
      • Absence of investment motives
  • Zoning Principle
    • Inlet zones :
      • The recommended distance is no more than 100 km
        • The set of gas supply points
          • from the fields
          • gas producing plants
          • underground gas storages
          • points where trunk gas pipelines cross the Russian Federation border
    • The outlet zones :
      • Should the region extend for more than 400 km, several outlet zones may be assigned .
        • The set of points where gas is taken from
          • the gas trunk pipelines
          • underground gas storages
          • where main gas pipelines cross the Russian Federation border
  • Consideration Of Nonlinear Costs
    • "Costs plus" principle
      • Economic grounds for « negotiating fairness »
    • Two rates for the same tariff :
        • The rate for gas transportation implemented
          • Based on the "distance" principle .
          • Covers 20 to 30% of all expenses .
        • Trunk gas pipeline use rate
          • Nonlinear relationship to the weighted average distance between the "inlet" and "outlet" zones .
  • Payment “For Transport”
    • Is set for transporting 1,000 m 3 for 100 km
      • Is depend on actual route
    • Is calculated as the ratio of the total expenses
        • for electricity
        • gas for in-house needs
        • net profit distributions
      • Is 20% to 30% of the total tariff
  • “ User Fee”
        • Confirmation of the "normal gas transportation flow system"
        • Minimizing the tariff route
        • "Averaging" the tariff route length and cargo transporting
    L 1 = 100 км; V 1 = 4500 м 3 L 2 = 2 00 км; V 2 = 500 м 3 L 0 = 110 км
  • “ User Fee”
    • Is set for transporting 1,000 m 3
      • Based on the gas average weighted transportation distances between the inlet and outlet zones
    • There is a constant part that does not depend on the transportation distance
      • Is based on the averaged gas-distribution stations maintenance costs
    • Nonlinear relationship to the transportation distance
      • Based on the differentiation factors
    • Based on the total costs that were not considered in the payment “For Transport”
  • Estimation Of Required Sales
    • Required Sales =
        • + transportation expenses , recognizes as cost
        • Balance of operational incomes/expenses
        • Balance of extraordinary incomes/expenses
        • + profit tax
        • + net profit
        • + calculation discrepancy for previous period
  • Tariffs And Wholesales Prices
  • Achievements Of Methodology
    • Procedure formalization
      • The Methodology did not exist for 10 years
    • Increase predictability of transport cost
      • Except for 20-30% payment « For Transport »
    • Tariff calculation method for new pipes
      • Based on guarantee of reasonable rate of return on invested capital for investors
  • Methodology Weakness
    • The rate depended on a route
      • Discrimination is limited , but not liquidated.
    • Arbitrariness in zone formation and interzonal distance calculation
      • Calculated distance of interzonal transportation depends on details of procedure
    • Poor validity of the "correction factors"
      • Correlation between prices and tariffs is introduced from price to tariff.
    • Tariffication of services for short distances demands for detailed approaches
      • Actual length of transportation is used within one zone.
  • Causes Of Imperfection
    • Key participants in the process
      • Adoption of the Methodology is a complicated administrative process
        • FTS RF
        • Gazprom
        • MEDT
        • Independent Gas Producers
    • Methods of working out and adopting compromises
      • Signification of key interests demands for specific efforts.
    • Chronology of methodology approval
      • Key administrative compromise of 2005 is an adoption of a new tariff for approval of methodology
  • Why is it necessary ?
    • Methodic is necessary because :
        • It simplifies investment decisions for the full fields development
        • Sidestep a linear tariff makes Company market widely
          • Long-distance transportation cost cutting opens access to new customers
        • It resolves long-term gas transportation cost planning.
  • Key Objective Risks And Threats
    • « Expenses plus »
      • Costs are an actual charge of money and expenses can be as money payment as creation of financial guaranties
        • Expenditure of gas for own needs and losses
        • Expenditure of electric power
        • Labor compensation
        • Expenses for basic repairs
    • “ Basic Approach” to costs classification of holding company
      • Proportional to the costs of the transportation subsidiaries to the total costs of subsidiaries.
    • Gazprom cost structure
      • Principles of regulation of wholesale prices links tariff and prices closely .
        • An average leasing of permanent assets is 34% of costs ( to 48% for « Tumentransgas ») .
        • Capital investments are more than 50% to transport infrastructure.
  • Key Objective Risks And Threats
    • Vague algorithm for calculating transportation cargo
      • “ … on the basis of volume forecast for period of regulation and taking into account contracted volumes, statistical data of transported volumes and transportation cargo for previous 3 years.”
    • “ Common Pot” way to account gas for Gazprom technological needs
      • Scale of problem - 70 bln m 3 per year
        • consumption for transport 1000 m 3 per 1000 km is 25-40 m 3
        • normative standard - from 14 to 101 m 3
    • Loss of the initiative can lead to financial losses
        • Gazprom opinion
        • Other interests
  • What Is The Future?
    • Zones formation and costs calculation
      • Will be adopted by FTS , but who will be a vendor ?
        • Administrative and organizational issues
        • Objective issues
    Entry Exit V 1 , L 1 V 2 , L 2 Entry Exit V 1 , L 1 V 2 , L 2 V 3 V 4 V 5 V 6 V,L 1 V,L 2 0 ,L 3 I I I I II V I
  • Methodology Development
    • Development of a gas pipeline loading information disclosure mechanism
    • "Localization" of specific tariff rates and calculation of tariffs via calculation of weighted average transportation costs
    • Elimination of the tariff component related to a specific route
    • Elimination of the tariff rate linkage to cost items
    • Inclusion of payment for balancing and storage
  • Risks And Threats - II
    • New owners of the gas transport infrastructure
      • Different versions of setting and calculating tariffs are possible
        • Cost+
        • Project economics
    • FTS set up zones
      • Calculated consumer’s prices can be different from Company commercial strategy
    • Non-comparability of the cost calculation forms and methods
      • The Methodology is based on separate functional cost accounting , according actual Russian accounting rules . Shortcomings of the accounting rules automatically became shortcomings of the Methodology .
    • The change of the tariff procedure should lead the changes in market strategy of Independents
      • Existing balance of interests will be inevitably broken
  • What Can And Should Be Done Further
    • Improvement in the regulation principles
      • The situation should be moved
        • Improvement in the actual methodology
        • Correction of the Access Resolution and Shipping Rules
    • Participation in calculation/methodology work
      • The situation should be driven
        • Zone formation
        • Calculation of the route bank
        • Calculation of the inter-zonal cargo transportation
    • Take into account the difference of Independent Producers interests
  • Preliminary Recommendations
    • A passive position is extremely dangerous
      • The process has reached the level of specific calculations: if you don't take of it yourself, no one will take care of it.
      • Because the Regulator does not have a justified position the Methodology will be discredited: a valid methodological logic needs to be developed
    • It is important to start the process BEFORE the methodology is introduced
      • Discrimination during the "zone rating" may prove to be very significant