Volatility in Primary Fuel Prices

Date – 24th August 2012

Presented by : Proshanto Banerjee

Outline

• Crude Oil /Coal /LNG/Gas – Historical Global Price Trend and Future Outlook

– Current Domestic Prices and Future Outlook

– Reasons for Price Volatility

• Conclusion

Historical Brent Crude Oil Prices & Refinery Gate Diesel Prices

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Diesel (Rs/Litre) Crude Oil ($/bbl.) Diesel ($/bbl.)

Source : PPAC

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IEA Crude Oil Price Forecast ($/bbl) * Actual Crude Oil Price ($/BBL)

Diesel (Import Parity Price) (Rs/Litre) * Actual Diesel (Import Parity Price) (Rs/Litre)

Future Outlook – Crude Oil and Diesel Prices

* Actual extrapolated considering today's Prices

Note : All prices are in real terms in 2011 $

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

Thermal Coal Prices

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Northwest Europe marker price US Central Appalachian coal spot price index Japan steam coal import cif price

Historical Global Thermal Coal Prices

Coal Prices are turning more volatile on account of increasing Chinese and Indian demand

High Volatility in Prices

Source : BP Statistical Review 2012

Future Outlook - Global Thermal Coal Prices

In the medium term Coal prices are expected to be highly volatile and demand responsive

• Europe/North American coal demand is stagnant and mostly substituted by gas and renewable energy

• Indian and Chinese import dependency for thermal coal is expected to increase further, as domestic production growth is constrained by logistic, quality and environmental issues

• Long term supply growth is mostly from Australia once infrastructure expansions come through

• Short term - Indonesia will supply most of the incremental demand

• Higher cost of inflation and US dollar-based imports increasingly expensive

Lower/Upper bound Price

Annual Avg. Price

Source: Anglo American Thermal Coal

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Northwest Europe marker price

US Central Appalachian coal spot price index

Japan steam coal import cif price

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Coal Basic Prices

Current Domestic Coal Prices in India

Coal Grades are based on Calorific value

Source: Coal India Limited

Future Outlook - Domestic Coal Prices

• Over last 10 years , the average notified coal price has increased by 4.9% annually

• The price increase in the near-term expected to be in the range of 6-7% annually and about 9-10 % beyond 2015

• In order to meet the increasing demand, in the long term, domestic coal prices are expected to move closer to import parity – with some discount (very similar to ONGC’s crude oil pricing approach)

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Coal Basic Prices

2012 2015 2020

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

Gas/ LNG Prices

Huge arbitrage opportunity exists between Atlantic and Pacific basin gas markets 13

Source : BP Statistical Review 2012

Historical Global Gas Market / LNG Index Prices

~ $ 11/MMBtu

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LNG Japan CIF European Union CIF UK NBP IndexUS Henry Hub Canada (Alberta)

Long term LNG prices are expected to depend largely on Oil Indexation and Henry Hub Prices

Source: WEO 2011 and other Public Sources

Future Outlook – Gas Index/LNG Prices

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

$/ M

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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Crude Oil Parity Price (JCC)

PLL Qatar (12.7 % JCC)

PLL Gorgon(14.5 % JCC )

Sellers Willingness (14.85% JCC)

Cheniere LNG Deal (Henry Hub Plus)

NBP Index (UK)

Henry Hub Index

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

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MMSCMD

• Domestic gas pricing are not completely market based and price determination remains uncertain

• Significant upward revision seen in domestic gas price over last 10 years

• Government role in domestic gas price determination continues

• Pooled price approach being explored, would be beneficial for more LNG use if adopted

• Going forward, arms length derived pricing approach is expected to prevail for any domestic gas supply

Current Domestic Gas Prices in India

Source: MoPNG

Future Domestic Gas Price Scenarios

Domestic gas prices are expected to increase significantly to accommodate deep water supply, marginal fields and challenging E & P activities

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CBM Producer Demand - 100% Crude Oil Parity (JCC)

KG D6 Gas - Post 2014 (Inflation Adjustment)

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)

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 You

For further Information please contact

Proshanto Banerjee at

proshanto.banerjee@gmail.com