Landed price of gas

I always wondered going through the cost of gas that various gas users pay how is it possible that we hear the gas price to be $4.2 per mmbtu (million british thermal units) while the cost reflected in the raw material expenses of fertilizer plants and power plants is above $5.5 onwards. The reason is simple the $4.2 is the well head price of gas i.e. the price of gas at the generation center, but to reach to the end consumer it has to be transported via pipelines, so the company using the gas pays for the transportation cost and also for a marketing cost that is charged by the transporter. Now as the gas passes through various states there are state taxes that come into effect making the landed cost of gas much higher than $4.2/mmbtu.

In india the pipeline transportation companies are reimbursed the transportation charges on a cost plus basis with 12% RoE and the marketing charges are levied on account on large risk like non-payment of bills, billing cost, inventory management and marketing effort that the transportation company undertakes. GAIL for example charges different marketing margins from different players like it charges $0.18/mmbtu on re-gassified LNG, 0.12/mmbtu from PMT fields operated by BG and $0.11/mmbtu for selling gas from Raava fields operated by Cairn India and doesnot levy any margin on the APM gas. Reliance has proposed to levy margins of $0.135/mmbtu.

The transportation cost also vary depending upon the pipeline being used to transport the gas. Reliance gas transportation is estimated to be charging Rs. 16.32/mmbtu for gas delieverd in a zone of 300km from the site of production and Rs. 60/mmbtu for gas delivered beyond 300km for its 1385km kakinada to Baurach pipeline. Gail however charges Rs.28.48/mmbtu. Moreover the producer and consumer prices are applicable for a calorific value of 10000kcal/scm while the transportation charge are for 8500kcal/scm and hence a corresponding adjustment needs to be made in order to make the two comparable

So the price build up is as follows

landfall price in AndraPradesh: $4.2/mmbtu

Transportation cost: $1.33/mmbtu

Marketing margin: $0.135/mmbut

Taxes extra depending on state charges

Landed cost > $5.7/mmbtu

Note: There is a difference between producer price of gas and landfall price of gas, the landfall price of the gas is the sales price of the gas and the cost incurred on bringing the gas onshore from offshore exploration point.

We can take the example of torrent power to understand the same

The landfall price of KG D6 gas at kakinda: 4.2

Marketing margin: 0.135/mmbtu

Transmission cost:0.93