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The News

Published Date: Nov 14, 2013

South Asia needs new gas pricing mechanism

Old mechanisms of gas pricing, particularly those linked to oil prices will be unsustainable in the long run, experts of the Sustainable Development
Policy Institute (SDPI) say.

Arshad H Abbasi, senior adviser to SDPI, suggested a new gas hub as one of the solutions to this problem.

“The
old gas pricing regime will no longer be a viable solution for Pakistan
and other growing economies of the region,” he said.

“Looking
at the global shale gas revolution, technological advancement and other
indicators of an increased global gas supply in comparison to oil, gas spot prices in the market are significantly lower than oil,” he said.

“There is a need for a new gas hub for Asia that includes South Asian countries and the Far East.”

This
came to light as a follow-up to SDPI’s recent report on the Iran-Pakistan gas pipeline. The report urged the government of Pakistan to renegotiate gas prices and delink them from oil and link gas prices to a gas hub such as the Henry Hub.

A statement last week by Hamid Raza, managing director of the National Iranian Gas Company (NIGC), suggested that the gas price has not yet been fixed and can be reviewed if Pakistan formally requests Iran.

Pakistan has shale gas reserves of around 105tcf and shale oil reserves of around 9.1
billion barrels, and countries such as China and India also have a high
potential in unconventional energy.

Citing the possible forecast of increased gas in the future, with diminished conventional oil reserves, gas prices will be lower than oil prices, Abbasi said.

Currently,
there are three main pricing mechanisms for gas contracts, oil-indexation, gas-gas competition and netback from final product (eg, prices linked to Ammonia, etc). Across the world, there is a trend of gas prices being delinked from oil, as seen in recent pressure on the Russian gas company Gazprom to delink its gas pipeline and LNG contracts.

In 2011, Russia’s Gazprom and Germany’s E.On were involved in arbitration on lower contract prices by seven percent to nine percent and pay a fine of one billion euros for charging high prices, because of the link to oil prices.

Similarly, because of this pressure on the oil-gas price link, Gazprom also faced antitrust case from the European Commission. The IP project may even be costlier than LNG for Pakistan, the report added.

“In 2012, the Henry hub prices of gas dropped to USD 2.76/MMBtu and USD 9.46/MMBtu in case of UK NBP,” SDPI’s report on the Iran-Pakistan gas pipeline said. It is to be noted that Pakistan’s gas pipeline contracts,
TAPI and IP are both currently linked to oil indices.