GMS Pricing Report 15 July 2014

Galway Energy Advisors LLC
Delivering Global Energy Transactions
Global and Regional Gas Market Study

(PRICING)
Submitted
to
PETROVIETNAM GAS J. S. CORPORATION (PV GAS)
FINAL REPORT
12th June 2014
#1300, 3050 Post Oak Blvd, Houston, TX, USA 77056 www.galwaygroup.com #22-04, Suntec Tower 3, Singapore,
038988
TABLE OF CONTENTS
Table of Figures.............................................................................................................................................................4
1. Executive Summary ..............................................................................................................................................5
2. Study Introduction ................................................................................................................................................7
Background to the Study ...........................................................................................................................................7
Approach and Methodology......................................................................................................................................7
3. Gas Markets Analysis ...........................................................................................................................................9
Atlantic Basin Markets ...........................................................................................................................................9
United Kingdom........................................................................................................................................................9
Belgium...................................................................................................................................................................11
Italy .........................................................................................................................................................................12
France......................................................................................................................................................................14
Spain........................................................................................................................................................................16
Russia ......................................................................................................................................................................18
United States ...........................................................................................................................................................20
Canada.....................................................................................................................................................................22
Chile ........................................................................................................................................................................24
Argentina.................................................................................................................................................................26
Pacific Basin Markets ...........................................................................................................................................28
Japan........................................................................................................................................................................28
South Korea.............................................................................................................................................................30
Taiwan.....................................................................................................................................................................32
China .......................................................................................................................................................................34
India ........................................................................................................................................................................37
Singapore ................................................................................................................................................................39
Thailand ..................................................................................................................................................................41
Indonesia .................................................................................................................................................................46
Global and Regional Gas Market Study – Table of Contents Page 2

Malaysia ..................................................................................................................................................................48
4. Summary of Lessons Learned from 19 Gas Markets ..........................................................................................50
Key “Lessons Learned” on Pricing Mechanisms ....................................................................................................50
5. Recommendations for Vietnam Gas Pricing Mechanism ...................................................................................61
Summary of Current Gas Pricing Mechanism in Vietnam ......................................................................................61
Pricing Policy: Consideration for Vietnam .............................................................................................................62
Recommendations on future gas pricing mechanisms ............................................................................................63
6. Abbreviations......................................................................................................................................................65
Global and Regional Gas Market Study – Summary of “Lessons Learned” From Various Gas Markets Page 3
TABLE OF FIGURES
Figure 33 End User Prices in Selected Cities in China................................................................................................34
Figure 41 Gas Price Pooling Mechanism ....................................................................................................................43
Figure 42 Gas Pooling and Resultant End User Gas Prices.........................................................................................43
Figure 48 Gas Prices in Malaysia - Spot Vs. Subsidized.............................................................................................48
Global and Regional Gas Market Study – Table of Figures Page 4

1. EXECUTIVE SUMMARY
The Global and Regional Gas Market Study (Study) has been performed at the request of PV
Gas. The purpose of the Study is to derive useful lessons and examples from the analysis of 19
gas markets, notably in respect of gas market structure and gas pricing mechanisms. The bulk of
the Study comprises the individual analysis of each of the 19 gas markets, using a standard
template in each case. Based on the findings from those analyses, the Study concludes by making
recommendations for the future evolution of the gas market structure and gas pricing
mechanisms in Vietnam.
The Study focuses on the different methods by which other governments maintain control over
their respective gas markets – whether by full government ownership, partial ownership, or
solely through regulatory oversight in the case of fully liberalized markets.
In its recommendations on the gas market structure in Vietnam, the Study supports Vietnam’s
well-functioning present structure. Looking ahead, and based on experience from around the
world, the Study recommends that further liberalization be considered carefully and be measured
in decades rather than years. International examples show that further equitization of PV Gas, if
felt desirable, would certainly be possible without impairing government control of the gas
market. On the other hand, the Study strongly recommends against any move to renationalize PV
Gas (a joint-stock company), as international experience shows that this would be perceived
negatively by international markets and investors. The Study also offers some recommendations
on approaches and methods of regulatory oversight.
In respect of pricing, the analysis of the 19 gas markets shows a wide spectrum of variance, from
full government control of gas prices, to open markets where prices are set by market forces.
Most gas markets (including Vietnam) are positioned somewhere between the two extremes.
However, even in the open markets, regulatory oversight in the gas midstream is commonplace.
To prevent abuse of market power, regulations might include transmission tariffs and open
access requirements for third party infrastructure users.
The Study provides insight into the pricing issues which arise when expensive imports (mainly
LNG, but also pipeline gas) are introduced into markets hitherto supplied only with cheaper
domestic gas – a situation which Vietnam will face within a few years. The Study analyses the
different ways in which this issue is being handled in Thailand, India, Malaysia and China.
In its recommendations on gas pricing mechanisms for Vietnam, the Study endorses the existing
gas pricing structure as effective and workable, and recommends maintaining the status quo for
the time being. In respect of planned imports of more expensive LNG, the Study considers gas
price pooling. The Study concludes by advising against a pooling solution based on international
experiences with price pooling mechanisms. Furthermore, the Study strongly endorses the
Global and Regional Gas Market Study – Executive Summary Page 5

government’s preference to avoid gas price subsidies, which are expensive and once introduced
are hard to remove. Therefore, the Study concludes by recommending that the full costs of LNG
must be passed through to the buyers. The buyers will be mainly power sector participants, but
also some oil-fuelled industries which can afford to pay for the higher price of LNG. In light of
the profile of gas market customers in Vietnam, the Study proposes that EVN could adopt price
pooling of LNG-derived power within its general power tariffs.
2. STUDY INTRODUCTION
This section provides the background to this Global and Regional Gas Market Study and
describes the approach and methodology applied to perform the Study.
BACKGROUND TO THE STUDY

PV Gas expressed to Galway an interest in gaining a better understanding of global and regional
gas markets from the perspectives of: a) gas market structure and b) pricing mechanism.
The organization therefore commissioned Galway to perform a study covering 19 specified gas
markets - located in both the Atlantic and Pacific basins - in order to derive “lessons learned,”
which can be relevant for the gas market in Vietnam.
Based on those “lessons learned,” PV Gas asked Galway to offer recommendations on an

optimal gas market structure and pricing structure for Vietnam.
APPROACH AND METHODOLOGY

In line with the agreed Scope of Work for the Study, Galway analyzed each of the specified 19
gas markets. For each individual gas market the Study followed a standard template:
Gas Market Structure
• Introduction
• Historic Gas Market Development
• Current Regulatory Structure and Energy Policy
• The Government’s Methods of Control
• Pros and Cons
• Any proposed changes
• Lessons learned
Gas Pricing Mechanism
• Historic Pricing Development

• Current Gas Pricing Mechanism
• Pricing policies and mechanisms when imports introduced
• Pros and Cons
• Any proposed changes
• Lessons learned
Global and Regional Gas Market Study – Study Introduction Page 7

After completing the analysis of each of the 19 different gas markets, the Study then focused
mainly on gas markets with government ownership structures most relevant for Vietnam.
The Study analyzes how various governments "control" their gas markets through having
majority shareholdings in the companies which purchase, transport, import and/or market gas in
their respective countries. The Study also analyses the Regulatory Structure for each gas market.
The Study analyses gas pricing in the different gas markets, focusing mainly on “lessons
learned” in those gas markets which not only have domestic gas, but which also import gas
(pipeline gas or LNG). From this analysis, the Study found various examples of how
governments control gas pricing, including when LNG imports were introduced. On the specific
question of gas price pooling, the Study identifies markets where pooling has either been
implemented, or has been discussed.
Finally, based on the findings highlighted herein, in Section 5 the Study sets out a set of
recommendations for Vietnam in respect of both gas market structure and pricing mechanisms.
3. GAS MARKETS ANALYSIS

In this section, the Study details findings on each of the 19 different gas markets listed in the
Scope of Work, with individual analysis of each market.
ATLANTIC BASIN MARKETS

UNITED KINGDOM
GAS PRICING MECHANISM
HISTORIC PRICING DEVELOPMENT

The UK gas market has experienced significant changes in gas pricing dynamics over the last
two decades in three discrete phases:
Until 1994: Before competition, British Gas purchased gas from individual gas fields under fixed
contracts with a price indexation based linked to inflation, oil/oil products and electricity.
1994-98: With competition, strong push for new gas supply sources led to oversupply situation,
and with that increased spot trading leading to decoupling from oil prices.
1998-08: In 1998, with the opening of the Interconnector pipeline between UK and Zeebrugge in
Belgium, UK was connected to larger European gas market and then prices traded around
existing European long-term oil indexed contracted prices from Russia, Norway, Netherlands
and LNG imports. Thus in some years when LNG was imported into UK at prices below
European levels, the LNG was regasified and exported to Europe via the Interconnector pipeline.
CURRENT GAS PRICING MECHANISM

Since liberalization, UK gas market trading has developed at NBP – a notional point in the UK’s
transmission system against which the majority of trades are indexed. Gas prices in UK are
generally linked directly to the NBP or oil prices, or a combination of the two. The NBP price is
set by gas market dynamics, such as gas demand/supply fundamentals and market sentiment.
However, with the Interconnector, spot gas prices in the UK have been influenced by the pricing
dynamics in Europe, and to some extent are therefore indirectly linked to oil prices.
Natural gas in the UK trades at the National Balancing Point (NBP), a virtual hub which sets the
market price for domestically consumed natural gas. The system is balanced by trades made on
the daily commodity market. Gas trades at marginal cost, at prices set in pence per therm.
Shippers nominate quantities entering and/or exiting the system. The network operator is
responsible for establishing the transportation route to end customers.
Global and Regional Gas Market Study – Lessons Learned From Various Gas Markets Page 9
WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

INTRODUCED?
UK’s is a liberalized gas market and, hence, no specific pricing policy for LNG import has been
put in place. When LNG prices rise above NBP prices, LNG import volumes to UK reduce
significantly.
ANY PROPOSED CHANGES

There are no proposed changes to the gas market pricing in the UK.
LESSONS LEARNED
Liberalized market and transparent gas price discovery helps to create an efficient market.
However, seasonal pricing dynamics and market factors can cause very significant fluctuations
in gas prices that might not be acceptable to customers in a growing economy.
BELGIUM

EU market directives have resulted in price liberalization. In 2005, the tariff system was changed
from yearly “cost-plus” to four-year tariffs based on secured revenue. Gas transmission tariffs for
the domestic and international markets are equal and non-discriminatory.

Natural gas prices are mainly indexed to oil and committed in long-term contracts (with time
lag); with some volumes traded on the spot market. Neither the government nor CREG control
energy prices for final users, but CREG has the ability to influence the cost of supply in order to
protect consumers. CREG, after consultation with the system operators, develops the
methodology to determine transmission, storage and LNG terminal tariffs.

INTRODUCED?
The country is not a natural gas producer; it currently imports all gas volumes needed for the
domestic market. Thus, the introduction of LNG did not result in major changes to the pricing
structure and mechanisms.

Currently there are no proposed changes to LNG and natural gas pricing in Belgium.
LESSONS LEARNED
A diversified portfolio approach of using long-term contracts and spot market transactions to
meet domestic gas demand needs has provided system flexibility and has helped mitigate price
volatility.
ITALY

Before 2000, end user prices were regulated. In 2000, as part of the Letta decree issued to
comply with EU directives, two types of prices emerged in the market: regulated and unregulated
prices. The regulated prices were set by AEEG using a formula linked to oil prices, largely based
on the cost of long-term imports. To date, regulated prices remain markedly higher relative to
unregulated prices. As a result, larger customers have progressively moved to purchasing gas on
the open market at unregulated prices.
Over the years, gas pricing in Italy been burdened by rising taxation resulting from a number of
taxes imposed at the federal as well as regional levels. Although gas prices at the pre-tax stage
are comparable to prices in the rest of Europe, the post-tax prices are substantially higher.

Until 2007, AEEG was responsible for establishing (maximum) gas prices for residential and
commercial customers, and for supervising negotiated prices for all other consumers. Today,
AEEG is responsible for setting a “reference price,” which the retail supplier must take into
consideration when determining the prices or pricing formulae offered to end customers.
For industrial customers, the price is usually based on a volume charge and maximum demand
charge. The customer indicates to the supplier the maximum daily volume and the total expected
volume for the year. The price is thus determined taking maximum volumes into consideration.
The volume charge is indexed to gas-oil, crude oil and heavy fuel-oil prices (mirroring the type
of indexation and elasticity to energy price changes which is incorporated into the long-term
import contracts). There are various volume discounts that can be applied to the price. The
demand element of the tariff also has a base charge that is indexed. The indexation is annual, and
is based on the movement in wages and in PPI.

INTRODUCED?
With the increase in gas import volumes, AEEG has started to benchmark the upstream
component of regulated prices to the prices of long-term import contracts, which in turn were
primarily indexed to a basket of oil products.
PROS AND CONS
Pros Cons
Gas trading has introduced liquidity in the High levels of taxation pose a high burden for
market, and more favorable unregulated gas gas end users in the industrial, commercial
prices available to market participants and residential sectors
Government efforts to decouple gas prices Oil and oil products indexation has resulted in
from oil indexation will result in more regulated prices that are higher than the
competitive gas prices unregulated prices set by the market

In 2013, the AEEG commenced the implementation of a process which will gradually phase out
oil indexation in regulated prices. Initially, gas prices will be linked to liquid spot indices in
Europe such as the Dutch TTF. Eventually, the goal is to be able to use Italian exchange prices as
a benchmark.
Over the last couple of years, import contracts with major pipeline suppliers such as Russia,
Algeria and Norway have been renegotiated to reduce the oil indexation, with varying degrees of
success. Overall, there will be a significant reduction in oil price linkage, which should make it
easier to implement the same in the reference prices.
Finally, a tax reform decree was signed in 2013 that would reduce the tax rates applicable to gas
prices, especially for energy intensive industries.
LESSONS LEARNED
Imposing high levels of taxation on commodities that are critical to sustained economic growth
and that are already exposed to the volatility of international import prices is counter-productive
over the long run, and has negatively impacted the Italian economy.
FRANCE

Over 98% of the natural gas consumed in France is imported. The majority of gas imports, 92%,
are committed through long-term supply contracts. Historically, the price of gas has been
indexed to the price of crude oil and petroleum products. From 2001 to 2005, term contracts
prices were indexed to the price of Heavy Oil, and later amended to include indexation to the
price of domestic fuel oil. In 2008, CRE published a new gas price formula, which included
indexation to the price of heavy and domestic light fuel oil, and the price of Brent.
The vast majority of transactions on the French wholesale market are bilateral contracts. GDF’s
control over the majority of gas supplies and the state’s moratorium on the exploration of shale
plays prevents the French market from achieving higher levels of liquidity.

France has three gas trading hubs, two servicing GDF’s transportation subsidiary GRTgaz and
one servicing TIG, the transportation subsidiary for Total. The volumes exchanged at the trading
hubs remain marginal compared to the size of the physical market.
Two pricing structures are available on the French market: regulated retail prices and market
prices. Regulated retail prices are the prices charged by the incumbent gas suppliers (GDF et al).
These prices are regulated by the CRE based on a predetermined gas price formula. Alternative
suppliers charge market-based prices. Market-based contract prices reflect the type of indexation
and price elasticity incorporated in long-term contracts.

INTRODUCED?
Gas imports on the French market are priced according to bilateral negotiations between
international gas suppliers (Algeria, Russia, etc.) and distribution companies (GDF, Total etc.).
LNG thus competes for market share with pipeline imports. As a result, with demand for gas
decreasing and then stagnating in the aftermath of the 2009 financial crisis, a share of LNG
imports is being re-exported to higher price consumption centers in Asia primarily.
There are no proposed changes to natural gas pricing structures at this time.
LESSONS LEARNED
The liberalization of commodity markets in the upstream and downstream will likely benefit the
French gas consumer over the long haul, and afford more competitive wholesale and retail fuel
prices. In the period immediately following market liberalization though, distribution companies
and their shareholders have suffered significant losses due to their take or pay commitments to
international gas suppliers. The first key lesson is that a regulated, government-controlled
midstream enables the development and functioning of a liberalized market. Finally, the core
lesson from the French experience is that, although market liberalization is a positive, the rate at
which the market is deregulated is critical to its success. Introduced too quickly, liberalization of
gas monopolies can significantly hinder the survival and well-functioning of core distribution
companies.
SPAIN

In 1998, at the start of market liberalization, end user tariffs liberalization was introduced. By the
mid-2008, all tariffs were successfully deregulated. To protect the interests of smaller customers,
a ‘last resort’ tariff was created, which was based on futures prices of traded indices such as
National Balancing Point and Henry Hub.

Trades on the MS-ATR are bilateral and lack price transparency. Most trades happen at LNG
regasification terminals, where only a few companies have market share. The absence of a liquid
spot market makes it more difficult for smaller gas players to compete. Since prices traded in the
MS-ATR are not public, CNE publishes an index for natural gas border prices based on gas
import pricing data.

INTRODUCED?
LNG forms a majority of the gas supply into Spain, plus significant volumes of pipeline gas. As
a result, most Spanish prices are implicitly linked to long-term LNG and pipeline gas contracts
that are indexed to oil.
The six LNG regasification terminals are key balancing points for the MS-ATR trading system.
Most of the trades in the exchange are around swaps of storage capacity in the regasification
terminals.

CNE has approved a proposal to create an organized wholesale gas trading hub in Spain, which
will facilitate price discovery in the market. The reforms will include real market-based
balancing, replacing the current system that is based on nominations submitted by shippers to the
TSO via MS-ATR.
LESSONS LEARNED
Although prices were deregulated and a gas trading platform was put into place, the development
of an organized hub with transparent gas prices reflecting supply and demand balances was
essential to the proper functioning of the gas market.
RUSSIA

In 1991, when the price of basic domestic commodities was liberalized, the Russian government
decided to continue to subsidize the cost of gas for residential customers. Meanwhile, industrial
customers were charged significantly higher rates for the commodity. Although industrial gas
prices were regulated, their linkage to inflation meant that the industrial gas price grew by orders
of magnitude, and was almost on a par with export netback prices by 1995. Not surprisingly,
industry was overburdened with high energy costs, contributing to the financial crisis of 1998, to
debt default, and currency devaluation.
In 2000, prices were decoupled from inflation and were completely brought under the control of
the Federal Tariff Service (FTS). The Russian Government defines the variation parameters for
regulated wholesale gas prices. The FTS of Russia approves specific regulated wholesale prices
for various price zones with due regard to consumer remoteness from gas production areas and
to consumer categories. This led to significant declines in domestic prices, but resulted in
challenges with WTO membership. Adding further pressure was the emergence of non-Gazprom
gas producers during the 2000s such as Novatek, who, despite paying higher transmission tariffs,
were allowed to sell at higher, unregulated prices, and thus making the economics of gas
production work. Increasingly higher gas volumes were thus purchased by customers in the
unregulated market, while Gazprom started restricting the volumes sold at regulated prices
(based upon an annual quota system).
In 2007, the Russian government announced upward price adjustments over a five year period
with the aim of achieving ‘export netback parity’ by 2011. However, since lower oil prices were
assumed in determining netbacks from European sales, and since the ruble started depreciating,
prices by the end of 2010 were still significantly lower than export netback parity. In December
2010, the government adopted regulation towards a step-by-step liberalization of the gas market
with a transitional period from 2011 to 2014.
Gazprom production was priced based on equal yield of gas supplies to the domestic and foreign
markets. The FTS established decreasing coefficients during the transitional period to bring the
prices to the export netback parity level. These coefficients were an integral part of the pricing
formula, taking into account specific features of pricing in the domestic market. Additionally, the
government set variance limits for the period of 2013-2014, ranging from -3 to +3 percentage
points. These pricing principles were to be applied to all consumers other than households.
Starting in 2015, Russian Ministries were instructed to develop a coordinated transport tariffs
regulatory system to replace gas price regulation.
The Russian government introduced netback price parity in the domestic natural gas market with
the aim of achieving equal revenue for gas supplies on the domestic and export markets. To this
end, the strategy was to cap annual export gas price growth until the domestic market was fully
liberalized. By applying a decreasing coefficient to the price of export gas, gas sellers were able
to increase export gas prices, but by a lesser amount each year, and until export prices equal
domestic gas prices.

The government has abandoned its attempts at achieving export netback parity in favor of
lowering price subsidies. Gazprom has implemented measures to establish a futures market for
natural gas. A financial market for natural gas is expected to provide Gazprom the right to sell
natural gas on electronic trading floors and on commodity exchanges at prices that are not
regulated by the government.

INTRODUCED?
Not applicable. Russia is the world’s largest gas exporter.

Russian gas pricing mechanisms have undergone a number of developments and framework
changes. The Russian energy market continues to be plagued by a high level of price uncertainty.
Most recently, the government’s emphasis seems to have firmly shifted towards lowering gas
prices to support the economy.
LESSONS LEARNED
The Russian government’s unrealistic target to set domestic prices based on export netback
parity has continued to have a destabilizing effect on the Russian economy. A more prudent
approach would be to gradually deregulate, provide a level playing field for gas market players,
and let the market find the right price. To that end, further development of the electronic trading
system would be a step in the right direction.
UNITED STATES

The pricing of natural gas in the US has evolved over time, from a system of price regulation
across the natural gas value chain, to today’s market in which only midstream and distribution
pipeline tariffs are regulated by federal and state governments as an anti-monopolistic measure.
The Natural Gas Act of 1938 was the first instance of direct federal regulations and price-setting
in the gas industry. The Act provided the Federal Power Commission (FPC) with jurisdiction
over interstate pipelines and wholesale gas sales. In 1954, this jurisdiction was expanded to
wellhead sales of natural gas in interstate commerce. The federal government set the maximum
price that producers could receive based on the date the well was started, the depth of the well,
proximity to other wells, geology and geography of the deposit plus a monthly inflation and
escalation factor. Eventually, the price of gas reached levels at which the gas became
unmarketable.
It became apparent that the price ceilings established by FPC provided inadequate incentives for
natural gas producers to explore for or develop new fields. As a result, in 1989 the government
removed all price controls and FERC authority over wholesale natural gas prices. To date,
midstream pipeline tariffs remain regulated by FERC. In the US downstream market, PDCs set
gas distribution tariffs for the LDCs.
Today, the US has two distinct markets for natural gas: a physical market, in which gas is
physically sold, purchased and delivered; and a financial market, where derivatives are traded.
Gas can be sold and purchased on the physical and financial markets on the basis of spot trades
(daily market), monthly indexed, or futures (1-36 months in advance) trades.

The North American gas market is deep, liquid, but far from homogeneous. Wholesale natural
gas prices are set by the market at the point of production (wellhead), or at a physical trading
hub. Pricing points have emerged where gas supplies and/or pipeline capacity are actively traded
(e.g. Henry Hub, the designated delivery point for all NYMEX gas futures contracts). Prices vary
at each of the over 80 pricing points.
Gas is sold and purchased both on the physical and financial markets. Thousands of transactions
take place daily on the physical gas markets between gas producers and buyers. Financial
markets see an exponentially larger number of daily transactions. Only 20% of transactions are
fixed price deals; the rest of gas contracts are priced based on a daily or monthly index, or based
on other financial instruments.

INTRODUCED?
LNG imports were introduced into the US in the 1970’s at the Everett and Lake Charles
regasification terminals. Imported LNG was sold into the distribution and power markets. In the
early 2000’s, when US natural gas production was deemed insufficient to meet domestic
demand, additional LNG import facilities were built in the US Gulf of Mexico. LNG import
prices were indexed to domestic gas prices at Henry Hub, and import gas was sold into the
domestic gas distribution network at market prices. The market turned in the late 2000’s, on the
advent of the US shale gas renaissance. As US domestic gas production in shale plays increased,
LNG imports became unnecessary. LNG import terminals having largely lost their purpose, they
are now in the process of being converted to export facilities, with a few exceptions in the US
Northeast. LNG exports from the US will be priced at indexed to HH – though of course that
does not guarantee that they will be on sold to Asian buyers at cost-plus. Also, if HH prices rise
significantly, US LNG exports will not necessarily prove cheaper in Asia than traditional JCC-
indexed supplies, taking account also of the longer shipping distance.

The price of natural gas in the US will continue to be set by market dynamics. No changes in gas
pricing mechanisms are anticipated.
LESSONS LEARNED
The US natural gas market is made up of thousands of buyers and sellers, and gas prices are set
by the market. It is the most dynamic and arguably the most efficient gas market globally.
However, the process of getting to where the market is today took over a century of trial and
error. Moreover, the US Federal and State governments still exercise considerable regulatory
oversight over this highly liberalized gas market – the largest gas market in the world.
CANADA

For the period of 1975-1984, natural gas prices were determined through a series of agreements
reached by the producing provinces and the federal government. In 1985, prices were
deregulated through the Agreement on Natural Gas Prices and Markets between Alberta, British
Columbia and Saskatchewan. The Canadian market liberalization efforts coincided with similar
developments on the US natural gas market.

The Canadian upstream sector is deregulated, while the midstream and downstream sectors
remain regulated, with tariffs and prices set by the federal and provincial governments. Pipelines
are typically regulated by the NEB, and distribution by provincial authorities.
The commodity cost is set by the market, where the New York Mercantile Exchange is used as a
benchmark. Futures contracts trade in units of 10,000 million BTU’s and the price is based on
delivery at Henry Hub (“HH”). The AECO price hub in Alberta is the main Canadian pricing
point. It has become a price-setting benchmark in Canada, similar to HH in the US.
There are two types of retail structures available to end consumers of natural gas in Canada: the
option to purchase gas from a distributor the prices of which are regulated by the provincial
authority (no mark-up is allowed), or the option to buy from a broker/marketer at a fixed price,
which is not regulated.
At 2013 prices of approximately $3.00/ million British Thermal Units (MMBtu) in Western
Canada, Canadian natural gas producers are earning insufficient returns to be able to attract
additional investment and to increase, or even sustain production. Hence, natural gas production
in Canada has followed a downward trend in recent years.
Nevertheless, natural gas priced below $4.00/MMBtu has displaced significant amounts of coal-
fired power generation. It is unclear whether domestic gas demand will be sufficient to push
wholesale gas prices above the $5.00/MMBtu level needed to encourage a significant resumption
in dry natural gas drilling activity. If domestic demand is unable to make up for and exceed lost
US import demand, natural gas prices may remain in the $3.00 - $4.00/MMBtu range in the
foreseeable future, and until LNG export terminals are developed.
INTRODUCED?
Canada is a net exporter of pipeline gas. Since 2009, it has imported limited amounts of LNG at
its Canaport LNG import terminal. These imports have been stored for resale into the North
American gas market during high-demand winter seasons when a margin on the price of
regasified LNG can be gained. The price of gas and LNG is fully deregulated and entirely set by
the market.

No proposed changes in the price of natural gas are likely to be instituted.
LESSONS LEARNED
Overall, a deregulated upstream market model, with regulated midstream pipeline tariffs, has
worked in Canada. However, despite the abundance of natural gas resource and of gas
production capacity, Canadian gas production is now decreasing, and Canada has been unable to
reach its full production potential and become an exporter of LNG. Geographic limitations and
imminent domain pipeline infrastructure development challenges have posed the greatest
obstacles in the face of development. Nevertheless, the federal and provincial governments’
support of gas production and exports, via the expedient approvals of LNG exports, has
incentivized many international players to invest in the development of gas export infrastructure
in both Western and Eastern Canada. It is clear in the case of Canada that the government, by
streamlining and expediting project approvals, has incentivized the development of resources and
of new energy projects.
CHILE

Since the 1970’s, when the Chilean economy was liberalized, the energy sector has been
characterized by competitive pricing structures. In the last two decades, the retail gas price has
increased fivefold, to $377.67 US$/Mm3.
The two existing LNG terminals are controlled by Enagas, GDF Suez and end users, all of which
have equity ownership in the projects. The Quintero terminal has a long term sales and purchase
agreement (“SPA”) with BG, and the Mejillones terminal has one with GDF Suez. LNG imports
have helped mitigate the seasonality of hydro power generation, as well as reduce diesel imports
volumes. Additionally, LNG imports have replaced lost Argentinian pipeline import volumes.
For these reasons, the country is planning to expand its LNG infrastructure.

Natural gas prices are determined by the market, except in the Magallanes region where gas
prices are set by the Ministry of Economy. Pipeline operators are free to negotiate transportation
fees with users. Concession holders directly negotiate private gas transportation agreements
(“GTAs”) with downstream customers. Downstream companies are mandated to publish the
prices charged to individual consumers. Natural gas retail prices vary by region. For LNG,
prices are negotiated privately among interested parties.

INTRODUCED?
Given the fully liberalized gas market, the introduction of LNG did not trigger new pricing
regimes or regulations. LNG is purchased at a market price by industrial and distribution
customers who entered into long-term SPAs with BG and GDFSuez, respectively.

While LNG import prices are not regulated by the Chilean government, there has been pressure
from power generators to have more regulatory oversight on the sale of LNG. The government is
studying potential changes to the regulatory norms with regard to pricing and access to LNG
facilities.
LESSONS LEARNED
A liberalized downstream natural gas market and transparent gas pricing have been conducive to
the development of an efficient gas market in Chile. The Chilean natural gas market has proven
stable over time, and the introduction of competitively priced LNG imports has further enhanced
the market’s stability.
ARGENTINA

Until 2002, end user prices for natural gas were based on the wellhead market price plus a
transportation and distribution fee. The distribution fee was set by ENARGAS for five year
periods, in US dollars, and adjusted for inflation every six months. Any increases in federal,
provincial or municipal taxes were passed on to the consumer. Increases in the market price of
natural gas could only be passed through to the consumer with the approval of ENERGAS.
In January 2002, the government changed downstream gas prices from US dollars to Argentinian
pesos on a one-to-one basis, and froze these prices at 2001 levels. The freeze did not extend to
the wellhead, with producers being able to sell natural gas at market rates (although in
Argentinian pesos). However, ENERGAS did not approve any upstream price increases to be
passed through to the end-consumer. This meant that the price for domestic sales of natural gas
was frozen. Because domestic prices were effectively frozen, there was an incentive to export
the majority of gas produced, leaving domestic markets short of adequate gas supplies.

To mitigate the unwanted effect of price freezes on gas export trends, during 2004 the federal
government negotiated a schedule of wellhead price increases in the industrial and commercial
wholesale markets. As a result, since 2005, large industrial and commercial customers have paid
the full market price for gas supplies. The federal government is in the process of negotiating an
increase in the rates charged for wholesale gas transportation and distribution. The last
modification in midstream prices took place in 2008.

INTRODUCED?
Given the high cost of LNG short-term/spot cargo imports into Argentina and the existing price
caps on the domestic market, the government has had to subsidize the cost of LNG imports. So
far, the government’s sourcing strategy has been to issue biannual tenders to secure short-term
LNG imports for its two LNG import projects. Given the lackluster international interest in the
development of its upstream resource base, Argentina is expected to be seeking term LNG
supplies for the foreseeable future.

In 2012, the government introduced the Gas Plus program. The program aims to incentivize
production in unconventional shale plays by allowing producers to increase wellhead prices from
US $5.00/MMBtu to US $7.50/MMBtu. The program has had marginal success to date.
As of April 2014, the government is formalizing a new tariff scheme for residential and
commercial consumers. Consumers that are able to decrease their demand by 20% will qualify to
retain the government subsidy on gas prices. Consumers who lower their demand by 5-20% will
continue to benefit from 50% subsidy, and those who show no decrease in consumption will lose
between 50% and 80% of the subsidy. As a result of this policy, the wellhead price of natural gas
is expected to rise manifold. Similarly, ENERGAS published new distribution tariffs increasing
distribution service fees by a factor of five (5).
LESSONS LEARNED
The domestic gas price freezes instituted by the Argentinian government in the 2000’s created an
unforeseen incentive to export a disproportionate share of natural gas production. Exports to
Chile, in turn, led to severe natural gas shortages on the domestic market. The continuation of
the domestic freeze in natural gas prices and the nationalization of YPF have made new
exploration and production activities less attractive, and have led to a loss in international
interest for upstream investment in Argentina.
One key lesson is that subsidizing expensive LNG imports can be ruinously expensive for the
government but is politically difficult to stop once it has been started.
Another key lesson derived from the Argentinian case study is that renationalization of a
domestic oil and gas company leads to significant international backlash, higher import prices on
gas and LNG, and a decrease or stagnation in international FDI.
PACIFIC BASIN MARKETS

JAPAN

Since 1955, the Japanese government has pursued the liberalization of wholesale gas prices. The
government introduced extensive legislation in support of power and gas industries’ ability to
select gas suppliers on the open market. However, these pricing reforms remain limited to the
wholesale market. These changes have had virtually no effect on the rates charged on the
residential market which are regulated by METI and account for 40% of the gas companies’
market.

The gas market is fully reliant on LNG imports. Historically, Japan has been viewed as the
premium LNG buyer. Hence, its contracts have been traditionally indexed to average crude
import prices (or “JCC-indexed”). Domestic gas prices are set based on the suppliers’ weighted
average cost of LNG imports, using the following formulae:
• Large users (>100,000 cm/year demand) - Direct negotiation with suppliers
• Residential/Commercial customers – Cost set by METI (Imported LNG price + regasification

cost + transmission cost + other associated costs)

INTRODUCED?
Japan’s gas prices were always linked to the cost of imported LNG, and the LNG price was
negotiated based on the displaced oil prices.
PROS AND CONS
Pros Cons
No subsidy and hence all costs are passed Gas market reform has no impact on the rates
through to the end user charged for residential use. The current price
for residential user is around 30$/MMbtu
Not an efficient market and the end user does

not benefit from liberalization

Increased natural gas market competition is expected to bring down the average imported cost of
LNG, and hence the price of retail gas. The government is pushing LNG importing companies to
diversify LNG prices from oil indexation to a mix of new indices such as Henry Hub.
LESSONS LEARNED
Liberalization has no direct correlation to price reform and efficient market. Hence, market
evolution through controlled regulatory environment to increase competition is the key to any
developed market.
SOUTH KOREA

The government controls the price of gas in South Korea. It sets gas prices charged to KOGAS’
wholesale customers, whereas the central and municipal governments regulate the end user
prices charged by distribution companies. Historically, gas price increases were moderated to
encourage economic development and to enhance South Korea’s industrial
competitiveness. Low gas prices for the residential and commercial sectors were also seen as
socially and environmentally desirable to incentivize the use of gas over oil and coal products
(coal briquettes used to be a major domestic heating fuel and a prime source of pollution).
Industrial gas prices have been kept consistently lower than residential and commercial prices
because of the government’s desire to promote the development of the industrial sector.

Gas prices are set on a cost-plus basis. Costs are then passed through to KEPCO and the regional
distribution companies. KOGAS earns a fixed rate of return. In turn, the regional distribution
companies recover their costs and earn a rate of return when calculating prices to end users.
Prices vary between sectors to reflect the prices of competing fuels and to follow government
policy directives, cross subsidizing different end user groups.

INTRODUCED?
The LNG import price is calculated on a cost-plus basis and is then passed through to end users.
The entities involved achieve a fixed rate of return.
PROS AND CONS
Pros Cons
Government control through differential Subsidy could only be a short term solution
pricing to end user sectors
Cost plus system helps to control the price Cost plus system may also permit inefficiency

There are discussions with regard to opening up the market to allow for the direct negotiation of
prices. However, the existing cost-based system is expected to remain in place over the medium
term.
LESSONS LEARNED
The cost-plus pricing can be attractive for some markets where the demand sectors’ affordability
varies, and where the government seeks to incentivize the development of specific targeted
sectors.
TAIWAN

Historically, the government of Taiwan controlled gas prices for the small volumes of
domestically produced gas, keeping them relatively low in order to encourage economic
development. However, with the introduction of LNG imports in 1990 and in line with the
changing pricing dynamics, Taiwan reformed its policy on energy pricing to a market based
approach. The 1990, the government’s energy policy stated that energy prices should reflect
energy costs as well as provide for a rate of return (6% for gas companies) that would be
sufficient to finance suppliers’ future investment. Retail gas prices are regulated in line with the
Gas Distribution Regulations. Throughout the period of high global LNG demand (and high
LNG prices) between 2006 and 2008, the Bureau of Energy was unwilling to allow CPC to pass
through its full costs quickly and delayed price increases to end users. However, in principle
there is full pass through of its costs by CPC to its customers – of which by far the largest is
Taipower.

Because CPC’s LNG purchases are JCC-indexed, Taiwan’s gas prices are currently indexed to
oil prices and are expected to remain so for the foreseeable future. Prices charged by CPC to
industrial users and to distribution companies are regulated by the Bureau of Energy in the
Ministry of Economic Affairs. The wholesale price of natural gas is determined by CPC based on
a cost-plus formula that takes into account fixed and variable costs. This allows CPC to adjust
the gas price, but only within a limited range.

INTRODUCED?
When LNG was introduced in 1990, the Taiwanese government reformed its approach to gas
pricing. It transitioned from a structure where domestic gas prices were controlled to a market-
based cost plus approach, allowing the full cost of LNG and of the LNG import facilities to be
passed through to end customers – though sometimes with delays.
PROS AND CONS
Pros Cons
Government controls the price set to Lack of competition has resulted in high
industrial users and distribution companies prices for domestic gas

Taiwan’s gas prices are expected to remain indexed to oil prices over the medium and long-term.
Efforts to open up the Taiwanese LNG market to competition have been slow, and thus will
likely limit the potential for price reform.
LESSONS LEARNED
The affordability of gas by end users is ensured by the government through price regulation.
Even though the prices are set based upon cost plus formulae, the full variability of the imported
cost is not allowed to be passed through to the end customer.
CHINA

Historically, Chinese gas prices have been controlled by the government through NDRC. Prices
are set through a cost plus approach. The fundamental rationale behind the pricing mechanism is
defined below:
Different prices are set for different users, with higher natural gas prices set for non-residential
customers. Additionally, different prices are set for different sectors, with lower prices applicable
to the manufacturing and fertilizer sectors.
Figure 1 End User Prices in Selected Cities in China
Source: CNPC Research Institute 2012
End-user gas prices are comprised of wellhead price, pipeline transportation tariff and of the end-
user price. The ex-plant (wellhead) price is typically proposed by the project developer and
adjusted by the central government. This price is based principally on the production cost of
natural gas (wellhead cost plus purification fee, financing cost and tax) plus the appropriate
margin for the producer. The wellhead price is a baseline, and producers and buyers can
negotiate up to 10% above it.
There has been a recent effort by NDRC to reform gas prices in China. The timeline and the
process are listed in the diagram below:
CURRENT GAS PRICING MECHANISM `

The current system of gas prices was implemented nationwide in 2013 is order to bolster
investment in the natural gas sector; create more transparency in the pricing system and
responsiveness to market fluctuations; and make domestic natural gas competitive with other
fuels and imported gas. As a result, gas prices are now linked more closely to international oil
prices, with city-gate prices linked 60% to fuel oil and 40% to liquefied petroleum gas (LPG).
Price linkages currently do not take into account the cost of coal as a competing fuel. The price
formula takes calorific differences into account, and includes a 10% discount to promote gas use.

INTRODUCED?
End user gas prices have been under government control before gas imports commenced. Initial
LNG imports to Guangdong and Fujian were low-priced and competitive even with coal.
However, starting in 2012, it became evident that LNG importers were struggling to pass the
higher cost of subsequent LNG purchases and of long-distance pipeline gas imports through to
the end-users. Partly as a result, NDRC stepped in to increase domestic wellhead prices. During
this initial phase, the state-owned entities incurred significant losses from buying oil-indexed
LNG and selling gas to end-users at government regulated prices. The 2013 price reform sought
to address the pricing discrepancies by allowing more of the higher imported pipeline gas and
LNG prices to be passed on to the end consumers. However, the process of price liberalization is
likely to take several years to unfold and to be fully reflected in the domestic market.
PROS AND CONS
Pros Cons
Government controlled end user prices based The government/National Oil Company have
on cost plus formulae to subsidize the price of gas if the full price
cannot be passed through
New pricing mechanism is moving towards a Lengthy process of introducing price

market price allowing LNG prices to be liberalization
passed through to end consumers

The new pricing mechanism introduced in 2013 is being implemented, a process which is likely
to unfold over several years to come.
LESSONS LEARNED
In China, the prices of domestic gas, more expensive imported pipeline gas and of LNG are at
different levels presently. Hence, with the introduction of LNG and pipeline gas imports price
reforms are needed to be introduced to accommodate the discrepancy between LNG imports and
gas received from alternative sources. The transition to a market price for gas is best achieved
through multiple stages of price increases to ease the impact on the domestic economy.
INDIA

Gas pricing in India is controlled and prices require government approval. The ministry approves
the wellhead price to be received by upstream suppliers, and the regulator approves the
transportation tariff for pipelines. The Indian government has increased domestic price levels to
match international benchmarks and to attract upstream players for increased E&P activities.
End-user gas prices vary from U$4.2/MMBtu to US$8.4/MMBtu, depending on the supply
source and respective pipeline tariff.

There are broadly three pricing regimes in India. Under the Administered Gas Pricing (APM) the
price of gas is set by the government and applies to indigenous gas produced by government
owned companies. Under the New Exploration and Licensing Policy (NELP), non-APM gas is
sold at market prices and is generally produced by non-government owned companies. The price
of regasified imported LNG is set on a cost-plus basis. The regasified price must be approved by
the government.

INTRODUCED?
The cost of imported LNG is directly passed on to the end users. Hence, for priority sectors
(power and fertilizer) where affordability is an issue, the government tends to allocate cheaper
(domestic) gas.
PROS AND CONS
Pros Cons
Gas prices are not directly subsidized, but Gas demand from LNG is unlikely to rise due
quantities and prices are controlled and to price affordability issues
regulated by the government
Differential pricing for priority sectors could

help foster growth in focus industries

The government has studied gas price pooling as a mechanism for allowing expensive LNG into
the market. However, there has been strong opposition to gas price pooling from various
agencies. It is the prevalent view of domestic parties that the cheap domestic gas should be
allocated to specific strategic sectors, and not be pooled with the high cost of LNG, which would
result in a blanket price hike for all industrial sectors.
LESSONS LEARNED
Gas pooling has been studied by the Indian government, but determined to be too complex and
unlikely to achieve the development of priority industrial sectors. Hence, in India’s case,
differential pricing through gas allocation has been implemented as the pricing mechanism of
choice for the government.
SINGAPORE

Historically, gas has competed directly with fuel oil, for which there is a ready supply given
Singapore’s 1.3 million barrel/day refining capacity which is almost double the country’s
consumption. However, given the associated emissions problems of fuel oil and high level of
dependence on Middle East crude, the government has actively encouraged a shift to gas-fired
power generation (now >80% of power generation is gas-fired)
Singapore has two sets of piped gas import contracts with Malaysia and Indonesia, described in
more detail in the next section.

Singapore has deregulated wholesale natural gas prices. However, wholesale prices continue to
reflect oil price movements because Singapore’s long-term import contracts with Indonesia and
Malaysia are linked to oil. The initial 3 mtpa of LNG to be supplied by BG is JCC-indexed and
will be at a similar though not identical price level to current pipeline gas imports.
The following table summarizes the various gas pricing contracts Singapore has:
INTRODUCED?
The Singapore gas market is accustomed to paying oil-linked prices for gas supply. The
mechanism for passing on the delivered energy price is well established, and hence the
introduction of LNG did not result in any significant modifications to the price mechanisms on
the domestic gas market.
PROS AND CONS
Pros Cons
Market-based pricing and direct cost pass

through to end users

No changes have been proposed in the pricing of natural gas.
LESSONS LEARNED
Singapore is a developed economy that is accustomed to cost pass through for fuel indexed to
alternative products such as fuel oil. The introduction of LNG imports has not significantly
altered the domestic pricing of energy.
THAILAND

Historically, the price of natural gas in Thailand was dependent on wellhead prices plus various
margins. The wellhead price for domestic gas supply is relatively low in Thailand.

The upstream wellhead price is negotiated based on the cost plus energy parity, and then an
adjustment factor based on various indices.
The Price Adjustment is based on a formula incorporating the following indices;
 Basket of LSFO from Singapore,
 Producer Price Index in Thailand,
 U.S. Index of Export Prices,
 Producer Price of Oilfield Machinery and Tools Index and
 Baht/US$ Exchange Rate.
The weighting of the above element varies between contracts (some prices are adjusted annually,
while others more frequently). Included below is the detailed price formula based on the above
structure:
Included below is the list of gas customers and the sales price structures available to various
industries:
Thailand has aimed to keep prices affordable by implementing an average gas pooling
mechanism. The Gas Pool determines the price of gas by averaging the well-head cost of
domestic gas supplies with more expensive imported supplies including LNG. Pool 1 is sourced
from the Gulf of Thailand (including MT JDA) and is allocated to GSPs, whereas Pool 2 consists
of all remaining gas including gas from the Gulf of Thailand, MTJDA, Myanmar and LNG.
Gas prices in Thailand, based on the pool pricing system, have risen steadily since 2000. The
raise has been moderated by the structure of oil price linkages in legacy supply contracts. This
same mechanism ensures that high-priced LNG is more gradually integrated into the market.
One of the significant consequences of this reform package has been rapid growth in the capacity
of the gas system.
The gas price pooling mechanism is described below:
Figure 2 Gas Price Pooling Mechanism
Source: Galway Internal Analysis
Figure 3 Gas Pooling and Resultant End User Gas Prices
Source: DMF; Galway Internal Analysis

INTRODUCED?
Gas pricing pooling as explained in the section above was implemented in 2000, when pipeline
gas imports from Myanmar were introduced.
PROS AND CONS
Pros Cons
The pool pricing mechanism helped to The pool price may limit the growth in
average out the difference between domestic domestic gas exploration as the market price
and imported gas prices is not set on margin cost
Price pooling could be implemented

successfully in countries where gas contracts
are entered into with one entity and the
government is able to implement the average
price rise for all gas customers

There are no proposed changes to the gas pricing mechanism in Thailand.
LESSONS LEARNED
Thailand’s gas price pooling is one method for averaging out the difference between cheap
domestic gas prices and more expensive gas imports (pipeline or LNG). However, the potential
negative implications of implementing the pricing pool may outweigh its benefits, due to the
following issues Vietnam might face:
• All existing domestic gas contracts need to be restructured so that only one entity buys
from various upstream producers
• There are various and complex tax implications for contracts signed in various regions
• Existing gas buyers need to agree to the rise in their gas price
• New gas supply development may be impacted as the prices are not based on marginal
cost
INDONESIA

Historically, gas prices have remained competitive relative to oil products, which in turn have
been subsidized by the government.

Gas prices in Indonesia are regulated by the government. Gas prices for “general users” are
determined by the market. General users are non-subsidized industries and power plants. The
primary considerations for the pricing are demand-supply dynamics, affordability and margin.
The formulae for the gas selling price is given below, where the cost of gas is approved by the
upstream regulator SKKMIGAS.
The subsidized industry will still negotiate the gas price with the upstream supplier based on
alternative fuel availability. The government will then pay the subsidy to the end user based on
affordability.

INTRODUCED?
The latest pricing mechanism - with end users directly negotiating with suppliers - was
introduced as a way to incentivize upstream players and LNG importers to pass the fuel cost
through to the customers.
PROS AND CONS
Pros Cons
The new mechanism of cost plus with a Priority sectors that cannot afford expensive
margin has incentivized new suppliers to gas face a major problem without subsidy
engage in the market
Even though the negotiations are directly

between the seller and buyer of gas, the price
needs to be approved by the regulator

No changes have been proposed to the gas pricing mechanism.
LESSONS LEARNED
Indonesia has seen an evolution in domestic gas prices from historic lows to current levels of
approximately US$ 8-9/MMBtu. The evolution was achieved through sellers and buyers being
able to negotiate directly, without the involvement of an aggregator or national oil company. The
high price of LNG is also being passed through to end users directly, and subsidies are only
given to specific sectors.
MALAYSIA

Power Generation Sector: The gas price supplied by Petronas Gas into power generation has
been fixed at RM6.40/MMBtu (~US$1.7/ MMBtu) since 1997. This was adjusted to
RM10.7/MMBtu in 2008 to reflect the rising price of oil to which wholesale gas prices are
linked. The price was again adjusted to RM13.7/MMBtu in 2011, and remains unchanged since.
Figure 4 Gas Prices in Malaysia - Spot Vs. Subsidized
Source: CIMB
Non-power Sectors: Prior to the 2008 price increases, gas price for the non-power sector was
fixed at RM9.40/MMBtu (US$2.5/MMBtu) despite being indexed against the price of fuel
oil. The price cap is active only for the power sector. The retail gas sector is regulated by the
government and adjusted according to customers’ ability to pay, as well as according to Petronas
Gas and Gas Malaysia’s rates of return. In March 2009, the government announced a new round
of gas price adjustments. Apart from the price reduction, 100 mmcfd of natural gas from the
power sector was reallocated to the manufacturing sector. This reallocation is only a temporary
reprieve to industrial end users whose gas demand has been increasing by an average of 8% per
annum since 2000, compared to the power sector’s annual gas demand growth of only 2%. The
current average gas price for smaller industrial customers supplied by Gas Malaysia is around
RM16.07/MMBtu.
Because of the power sector’s reliance on gas, the government considers gas to be of strategic
importance to the Malaysian economy. Hence, gas prices are regulated and set by EPU.
Currently, there is no formal policy in terms of end user price adjustment as the cost of supply
(linked to fuel oil) fluctuates. Gas pricing policy remains controversial, and will continue to be
politically driven until an independent price-setting mechanism is introduced.

INTRODUCED?
LNG imports into Malaysia are priced at approximately RM40-50/MMBtu. However, due to
high subsidy levels, the gas is sold to TNB (state power company) at around RM14.05/MMBtu.
There has been no change to the gas pricing mechanism following the introduction of expensive
LNG into the market. Petronas is currently absorbing the losses on LNG imports.

An important element of Tenth Malaysia plan (2011-2015) is the removal of gas price subsidies.
As gas supply from LNG imports increases in Malaysia, domestic average selling prices for
natural gas will rise to support the planned phase out of government subsidies. The government
planned to introduce systematic RM3/MMBtu price adjustments every six months starting in
mid-2011. As more LNG imports will continue to flow into the country, domestic gas prices
were scheduled to reach international rates by 2016. However, the scheduled price increases
have yet to be implemented due to elections and political pressure. It is likely that Malaysia will
experience a significant delay in the implementation of market rates.
LESSONS LEARNED
Malaysia does not provide a good model for gas pricing mechanisms to be emulated by Vietnam.
In Malaysia, gas price subsidies are only made possible by Petronas’ very strong balance sheet.
Given the changing upstream gas market dynamics and the precipitously decreasing reserve
availability, price hikes are inevitable in Malaysia, possibly as early as 2014. The key lesson
derived from Malaysia is that, once introduced, price subsidies are very difficult to remove, both
from a political and from an end-customer perspective.
4. SUMMARY OF LESSONS LEARNED FROM 19 GAS MARKETS

KEY “LESSONS LEARNED” ON PRICING MECHANISMS
The study of 19 different gas markets unsurprisingly revealed a wide variety of gas price levels
and gas price mechanisms.
Gas Price Levels: Whereas the market price of a barrel of crude oil is roughly the same
worldwide (assuming a similar quality of oil), the wholesale market prices of natural gas can
vary greatly by country and region. To take three examples, the current wholesale market prices
of natural gas in three different large gas markets – namely the US, UK and Japan – are
approximately:
Gas Price
Market Comment
($/MMBtu)
US 5 World’s largest gas producer (680 bcm in 2012) and also largest gas
market (720 bcm in 2012). Because of surplus shale gas, the US will
become a major LNG exporter)
UK 8 Large gas market (~80bcm/year), supplied 50/50 by domestic and

imported gas. Imports both by pipeline and LNG.
Japan 14 Largest LNG market (116 bcm/year), fully dependent on LNG imports.
The reason for the much higher wholesale gas price in Japan – as also in Korea, Taiwan – is full
dependence on LNG imports. It is nevertheless remarkable to have a single commodity (natural
gas) with such major price variations between the US, Europe and Asia.
Gas price mechanisms: The analysis of the 19 different gas markets revealed a wide range of gas
price mechanisms.
At one end of the spectrum, gas prices are set by the free market, for example in the US and UK.
However, even in such open markets, the government establishes regulatory authorities with
oversight powers, for example to prevent natural monopolies (such as trunklines) from abusing
market power. This role is fulfilled by the FERC in the US and by Ofgem in the UK – each
regulating both gas and electricity.
At the other end of the spectrum are countries where the government fully controls gas prices.
Some Middle East oil & gas producing countries have gas markets of this character (though
these were not specifically analyzed in the Study).
Most gas markets have gas pricing mechanisms within these two extremes. In Vietnam, PVN/PV
Gas negotiate individual gas prices with domestic gas producers, and the government (through
MOIT) approves transport tariffs, distribution tariffs, sales prices, and volume allocations by
market sector.
“Import Only” Countries: Japan, Korea, and Taiwan are three regional examples of large gas
markets supplied fully by LNG imports. Based on 2012 figures, the percentage of LNG imports
consumed by the power sector is high in each case - in Taiwan 80%, in Japan 59%, and in South
Korea 47%. In Singapore, the power sector consumes an even higher 87% of gas imports
(mainly pipeline gas). In all of these four gas markets the high costs of LNG imports - or in
Singapore of both pipeline gas and LNG imports - are fully passed on to end-customers through
the power or gas companies’ tariffs. In Japan, the power companies that directly import LNG
(also the major gas companies) are “private monopolies” in their respective areas. In South
Korea, the dominant power company (93% market share) is KEPCO, which is 51% state-owned.
KEPCO is itself 24.5% equity owner in KOGAS, the near-monopoly government-controlled
LNG importer and trunkline system owner, and also the largest single LNG buyer in the world
(~40 mtpa). It should be of interest to Vietnam that the full cost of LNG imports (including
regasification costs) is passed on to customers through power and gas tariffs in all of the above
countries. There are no government subsidies.
Gas Markets Supplied by both Domestic Gas and LNG Imports: For Vietnam, where the gas
market is currently supplied 100% by domestic pipeline gas, but which will commence importing
LNG within a few years, some useful lessons can be learned from countries whose gas markets
are supplied by both domestic gas and LNG. Countries in this category include:
Market Gas Portfolio
Thailand Mainly domestic gas, but growing LNG imports
India Mainly domestic gas but growing LNG imports
Malaysia Major LNG exporter from East Malaysia (24 mtpa), but recently
started LNG imports to Peninsula Malaysia which has a pipeline gas
supply deficit
China While gas currently supplies only 5% of its primary energy, China is
already the 3rd largest gas market in the world, and growing rapidly.
Domestic gas is being increasingly supplemented by LNG and
pipeline gas imports.
Addressing these four countries in turn provides some relevant lessons for Vietnam:
Thailand: Perhaps the most interesting feature for Vietnam to note is that Thailand is arguably
the only gas market in the world to have mathematically implemented “price pooling.” The
decision to “pool” gas prices can be attributed to the commencement of pipeline gas imports
from Myanmar in 2000. Pooling now also includes LNG imports, which commenced in 2011 and
which will grow steadily. Under price pooling, the different prices paid for various offshore
domestic supply streams, for imports from Myanmar, and for LNG are averaged by PTT. The
company then decides on the wholesale and retail prices to be paid by the various market sectors
(power, industry, NG vehicles etc). The “price pooling” of different gas supply costs can only be
achieved because PTT controls all natural gas purchases and all natural gas sales in Thailand.
While price pooling has enabled PTT to mitigate/blend in the higher cost of gas imports, as the
percentage of LNG imports increases and that of domestic gas declines, the pool price is likely to
increase towards the LNG price. Arguably, the cross-subsidization of the full cost of LNG can
distort economic assessments of new gas-consuming investments, because such investments may
be based on today’s pool price which will steadily increase in the future. For any other country
(e.g. Vietnam), introducing a price pool would necessitate changing current selling prices to
customers under existing long-term gas sales contracts. Changes in existing contracts may cause
significant confusion and perhaps resistance. Thus, the benefits of price pooling would be
outweighed by the disadvantages that change in the current system would entail.
A second lesson from Thailand is that the level of control PTT still exercises over all aspects of
the gas market in Thailand is very high, despite the fact that the company is only 51% state-
owned.
India: India is a good example for Vietnam, as both countries share similar economic growth and
development. India’s gas pricing is controlled through regulation, where the government’s
approval is required for the negotiated wellhead price and the transportation tariff. With
declining gas production and increasing gas demand, India started to import LNG in 2004.
Historically, domestic gas prices in India were approximately US$2.5-4/MMBtu, and hence the
introduction of LNG imports has been met with constraints on the domestic market due to a lack
of price elasticity at the US$14-15/MMBtu import price levels.
The Indian government studied various solutions for managing the price differential between the
domestic gas and imported LNG. One of the initial steps was to increase the domestic gas price
to US$4.2/MMBtu. However, this price increase has not helped significantly to bridge the price
gap. Hence, the Indian gas customers sought to avoid signing long-term LNG contracts linked to
oil index. This phenomenon resulted in acute gas shortages in the country, and the power sector
was severely hit. To address the problem, the Indian government introduced a gas allocation
policy where the priority sectors (i.e. Power and Fertilizer) are to benefit from the cheap
domestic gas, and the rest of the gas customers are to pay the market price for LNG. This
approach has resulted in a decrease in gas usage in the industrial sector. Furthermore, the gas
allocation policy sparked dialogue around gas price pooling in India.
The concept of gas price pooling in India was primarily considered to cross subsidize the
expensive LNG imports through cheap domestic gas. However, following a long consultation
and review process, the government ultimately rejected the implementation of gas price
pooling for the following reasons:
• Variations in taxation among different states – Through gas price pooling, supplies are
provided to all customers at the same price. However, with different taxation levels in
different states, the pooled price may be higher than the contracted price for some states
and lower for others. It will be difficult to account for the variations in taxes through the
pooling mechanism.
• No physical pooling – Given that the supply and demand locations are not ideally
matched, there is no physical pooling of gas, and hence the actual delivery of gas might
be different from the pooled gas. This results in complexity around gas swapping, and
hence taxation again can be a major issue.
• No direct seller-to-buyer interactions – Currently, the sellers and buyers negotiate and
enter into GSPAs, whereas in gas pooling there may be no direct relationship between the
seller and the buyer. The disconnect may result in issues around the structuring and
implementation of GSPA/GTAs.
• Price Discovery – Upstream companies oppose gas price pooling, as the price discovery
and the marginal cost of price setting for new upstream development will be at risk. Also,
the pool does not have control over the international LNG price, and hence, to keep the
average gas price affordable, the domestic gas price might not be reflective of the actual
cost of production, but instead be artificially maintained at lower price levels.
• Pooling of transportation tariffs and legal challenges from existing gas contracts are
going be more complex.
Malaysia: The gas market in Malaysia is controlled by the national oil & gas company, Petronas,
which earns very large profits from both oil and LNG exports. Petronas is a particularly rich
NOC, because it is permitted to retain a percentage of rent from the hydrocarbon resources that is
higher than is received by most other NOCs. In contrast with its market priced LNG exports,
Petronas’ domestic sales of gas in Peninsula Malaysia have been kept artificially low-priced (i.e.
“subsidized”), with the power sector (mainly state-owned TNB) being by far the largest gas
purchaser. As a result, gas sales have increased steadily, while domestic gas reserves offshore
Peninsula Malaysia have been depleted. This growing gas market imbalance has led to the recent
building of an LNG import terminal offshore Malacca (Melaka), and the commencement of
expensive LNG imports.
While the Malaysian government has well-defined plans to increase the price of domestic gas
progressively each quarter towards international (LNG) prices, so far it has postponed
implementing those plans. Meanwhile, Petronas is having to absorb large losses on its LNG
imports through Malacca, because it is the company with the greatest financial strength to do so.
The core lesson for PVN and PV Gas is that it is important that the full cost of LNG imports be
passed through to customers - mainly the power sector – and that those higher costs can be
“pooled,” if necessary, in EVN’s electricity tariffs.
China: Traditionally, China’s domestic pipeline gas has been sold at relatively low prices.
Today, rapidly growing imports of both pipeline gas from Central Asia and LNG imports are
proving much more expensive than domestic gas. China’s three large National Oil Companies –
CNPC (PetroChina), SINOPEC and CNOOC - are wrestling with the problem of importing
expensive gas and selling at a loss. For example, in 2013 CNPC’s losses on LNG imports alone
were reported at $7 billion. In China, gas prices are largely controlled by the central
government’s National Development & Reform Commission (NDRC). NDRC is gradually
moving city-gate gas prices upwards, towards full market prices. Price floating will allow the
NOCs gradually to reduce losses on gas imports, and to make higher profits on “new” domestic
gas production. The permitted city-gate gas price increases are also aimed at encouraging
increased production by the NOCs of conventional domestic gas (both offshore and onshore) and
of unconventional gas (shale gas, tight gas and coal bed methane).
Should Vietnam apply Gas Pooling?: Galway is not in favor of Vietnam applying the gas
pooling mechanism for reasons exemplified in both Thailand’s and India’s situations. This is
further detailed below:
THAILAND
As seen from the table above, gas price pooling is unique to the Thai gas market. It is not a
commonly used pricing mechanism.
The rationale behind Thailand having an average pool mechanism was to keep prices affordable.
The gas pool would determine the price of gas by averaging the well-head cost of domestic gas
supplies with more expensive imported supplies including LNG.
Gas that goes into Pool 1 would be sourced from the Gulf of Thailand (including MT JDA) and
is allocated to GSPs. Gas that goes into Pool 2 would consist of all remaining gas including gas
from the Gulf of Thailand, MT JDA, Myanmar and LNG. A price pooling mechanisms has its
short-term and long-term effects on the price of gas. In the short term, gas pooling did help
average out the upstream gas price variations in Thailand, as shown in the diagrams below.

The individual upstream gas prices where in the range of US$ 1.3 to 12/mmbtu. However, using
gas pool pricing the differences in the gas prices are averaged out to around US$ 8.8/mmbtu.
However, in the long term, pool pricing causes the price of gas to increase. This can be
exemplified by Thailand’s situation where the pool pricing has risen steadily since 2000.

The Uncontracted gas demand in Thailand will be met by LNG imports and that would in turn,
impact the Pool 2 gas price. The Pool 2 Gas Price Forecast shown below does not take into
account this additional LNG imports. Hence, there would be at least an average increase of $4-
5/mmbtu in average gas price in Thailand, compared to the following chart.
As a result, the price pooling mechanism has been losing its attractiveness in Thailand. Calls
have been made by the Thailand Development Research Institute to the National Council for
Peace and Order (NCPO) and concerned agencies to raise the price of natural gas to reflect
market conditions.
In addition, pooling can distort investment decisions by gas consumers because they do not
reflect the full marginal cost of extra gas (LNG cost). In the long run, the average price of the gas
pool will increase in Thailand due to declining domestic gas reserves.
INDIA
India also faced a challenge pricing LNG. India and Vietnam have similar growth and
development characteristics. LNG imports commenced in 2004 and it was a big challenge to
reconcile high LNG import costs with low domestic prices. There was much serious discussion
of implementing an “economic/marginal cost of gas price mechanism”, however, this was
eventually rejected in favor of an allocation policy. The gas allocation policy meant cheaper
domestic gas was reserved for priority sectors while other customers had to pay full market price
for LNG.
There were various reasons why price pooling was rejected in India:
 Taxation issues between different states in India resulting in complex tax related pricing
concerns
 No physical pooling of gas – It is a contract pooling rather than physical pooling of gas
 Increases artificiality and more tax issues
 Pooling means loss of seller-to-buyer interactions
 Loss of “price discovery”
 The price of gas is not set by the marginal cost of gas, rather based on a arbitrary
average number
 Several issues including opposition of upstream companies
 Related complexities on transportation tariffs, legal challenges from existing contract

parties
Furthermore, India is an existing example of a country which can manage power prices with
different gas contracts without a gas price pooling mechanism.
In 2004, due to the increase in electricity demand in India, the Government renewed its focus on
a partial power sector privatisation. This involved putting out a large number of electricity power
purchase agreements (PPA) to private market tender, most priced in the range of Rs2-3/kWh.
Some elements of the PPAs include:
 Competitive fixed charge for about 30 years, including the construction period,
with an option to extend for a further period of 10 years.
 Fuel charge is a pass through.
 Fuel Supply Agreement guarantees the Distribution a stated amount of supply of

fuel sufficient to generate a pre-determined amount of electricity.
 Dedicated capacity for the Distribution
 Open capacity for market sales
 Availability of Power Station
 Fixed charge to be paid for availability of power station
The difference in power price based on various fuel is managed by the power distribution
companies through pooling (pooling of power from various fuel source) and cross subsidy
(capacity based charge).
SUMMARY
Gas pooling is complex and not desirable for Vietnam due to reasons below:
 Taxation issues between different supply regions in Vietnam
 No physical pooling of gas
 Increases unreal and more tax issues
 Pooling means loss of seller-to-buyer interactions
 Loss of “economic/marginal cost of gas price mechanism”
 Several issues including opposition of upstream companies
 Market distortion (price below market value creates artificial demand; price above
market value destroys demand)
 Related complexities on transportation tariffs, legal challenges from existing contract

parties
 Pooling is a short term solution for new end user to pay lower prices, however in the long
run Pooling disrupts market forces as its not reflective of actual marginal cost of supply
5. RECOMMENDATIONS FOR VIETNAM GAS PRICING

MECHANISM
SUMMARY OF CURRENT GAS PRICING MECHANISM IN VIETNAM

Each of the existing offshore gas projects in Vietnam has negotiated its own upstream gas price
formula with PVN, based on that project’s costs and economics. The individual upstream prices
are then reflected in the individual downstream sales prices charged by PVN and PV Gas. While
prices differ by supply source, they are all at levels acceptable to both producers and end-
customers. Importantly, full cost recovery is achieved, and no natural gas price subsidies by
government are required.
The larger part of domestic gas sales are of Nam Con Son gas to the power sector. These are
priced at ~$5/MMBtu (or ~$30/bbl oil equivalent), while the smaller volumes of gas from other
offshore areas are sold at somewhat higher prices. Prices to industry (excluding fertilizer) are
sold at the price of alternative fuels.
In international terms, Vietnam’s domestic gas prices today are all commercially competitive.
Future imports of LNG are forecast to be significantly more expensive.
Pros Cons
Commercial pricing structure exists in Future challenge of importing more expensive

relation to each upstream project, between LNG. Important to avoid introduction of any
upstream, midstream, downstream price subsidies by maintaining full cost pass
through
Government price subsidies have been Gas price pooling is not the answer, as it
successfully avoided would have disadvantages which outweigh
any benefits
Global and Regional Gas Market Study – Recommendation for Vietnam Page 61
PRICING POLICY: CONSIDERATION FOR VIETNAM
STATUS QUO
Galway advises that Vietnam keeps the status quo. The existing gas pricing structure in Vietnam
is stable and well-functioning. The Government is still in a strong position through both
regulation and ownership compared to other countries. Prices have been agreed between gas
producers and PV Gas (for a specific buyer). All costs are recovered and government subsidies
are not required. By international standards, Vietnam’s domestic gas prices are reasonable.
Hence, there is no need to modify the existing project-by-project (and market sector-by-sector)
pricing mechanisms. The gas contracts - with their respective pricing formulae - can continue to
work well. If changes such as gas pooling are implemented, the negative effects from the
disruption caused would outweigh any benefits.
GAS ALLOCATION POLICY
A gas allocation policy could serve as a measure of last resort should the government seek to
promote certain strategic industries. For example, the Indian government, in an effort to promote
certain industrial sectors, has implemented a policy to allocate more affordable gas supplies to
those key industries. Priority sectors (i.e. Power and Fertilizer) benefit from the cheap domestic
gas. The rest of the gas customers pay the market price for LNG. This approach has resulted in a
decrease in gas usage in the industrial sector. A similar policy in Vietnam would ensure that the
government has sufficient flexibility to allocate the most affordable gas supplies to the industries
it seeks to promote.
WHEN LNG IS IMPORTED
Looking ahead, the challenge of introducing more expensive LNG into the Vietnamese gas
market must be considered. The higher costs of LNG imports must be fully passed through to
customers and governments subsidies be avoided (even through gas pooling). The largest
customer sector for LNG will likely be power. Therefore, one option to address the pass-through
of higher LNG costs to end-customers would be to allow price pooling in EVN’s electricity
tariffs. For any potential industrial customers, who are currently using costly LPGs and fuel oils,
the cost of LNG would be affordable. The learning's from other markets such as India and China
is clear that any interference on pricing LNG will only result in either high subsidy related
losses, or negative impact on the LNG demand.
RECOMMENDATIONS ON FUTURE GAS PRICING MECHANISMS

(i) Maintain current status. The existing gas pricing structure in Vietnam is stable and well-
functioning. Prices have been agreed between sellers and buyers. All costs are recovered
and government subsidies are not required. By international standards, Vietnam’s
domestic gas prices are reasonable. Hence, there is no need to modify the existing
project-by-project (and market sector-by-sector) pricing mechanisms. The gas contracts -
with their respective pricing formulae - can continue to work well. If changes were to be
imposed now, the negative effects from the disruption caused would outweigh any
benefits.
(ii) Impact on gas pricing of the commencement of LNG imports. LNG imports are planned
to commence within a few years. Such LNG will almost certainly be significantly more
expensive than current domestic gas resources. It is therefore necessary to consider the
best method of passing those higher costs through to the market.
(iii) Government gas price subsidies should be avoided. International experience shows that
fuel subsidies by governments usually become ruinously expensive – and that once such
subsidies are introduced they then become very difficult politically to remove. In respect
of oil product price subsidies, this important lesson can be seen in countries such as Iran,
Venezuela, Indonesia, Nigeria – and several others. Specifically on LNG, both China and
Malaysia provide examples of where the “rich” NOCs who are importing LNG are
currently absorbing losses on expensive LNG imports - though both countries have plans
to phase out such hidden subsidies. Argentina provides another example of subsidizing
LNG imports and this is contributing to the increasing economic meltdown in that
country. It is therefore strongly recommended that the Vietnamese government
should be firm in passing the full costs of LNG (including regasification costs)
through to the market.
(iv) Price pooling. One possible mechanism for passing through the costs of an expensive gas
stream is by “price pooling” (or averaging) with other gas streams. While some degree of
informal price pooling probably exists in several countries – for example Japanese power
and gas companies will average the costs of their various LNG purchase contracts when
calculating their tariffs – the only country revealed by the study of 19 gas markets which
has systematically and mathematically implemented price pooling of domestic gas and
imported gas streams is Thailand. It is the considered recommendation of this Study
that Vietnam should reject price pooling as a method of passing through higher
LNG import costs to the market. The reasons for this recommendation against price
pooling are explained more fully in section 4.2 above, in the discussion on both Thailand
and more particularly on India. In summary, the complexities involved (including
disruption of existing contracts, tax issues, loss of seller/buyer relationship, distortion of
investment analysis for new projects) outweigh any advantages.
LNG costs pass through recommendations. This Study concludes that the higher costs of
LNG should be passed through to the customers physically receiving the regasified LNG
stream. The major customer will be EVN. EVN will then have “expensive” power from
its LNG-fuelled power station(s). However, such power will be mixed with the power
from its other power stations in the grid and become indistinguishable. This Study
therefore recommends that EVN “pool” its power costs from the various power plants
supplying its grid, when calculating and seeking approval for power tariffs. The pooling
process would thus be similar to a Tokyo Electric or Kansai Electric or Chubu Electric in
Japan “pooling” their generation costs from the whole mix of respective power plants
(coal, oil, gas –and nuclear) to calculate power tariffs. As for other industrial or
commercial gas customers currently using oil or LPG, supply of regasified LNG should
be affordable with full cost pass through.
(v) Gas allocation policy. Finally, a gas allocation policy could serve as a measure of last
resort should the government seek to promote certain strategic industries. For example,
the Indian government, in an effort to promote certain industrial sectors, has implemented
a policy to allocate more affordable gas supplies to those key industries. A similar policy
in Vietnam would ensure that the government has sufficient flexibility to allocate the
most affordable gas supplies to the industries it seeks to promote.
6. ABBREVIATIONS
APM Administered Price Mechanism (India)
BBL One stock tank barrel, of 42 US gallons liquid volume
BCF One billion cubic feet of natural gas
BP British Petroleum
BPCL Bharat Petroleum Corporation Limited
BPH Regulatory Agency for Upstream Oil and Gas (Indonesia)
MIGAS
BTU British thermal unit
CBM Coalbed Methane
CNOOC China National Offshore Oil Corporation
CNPC China National Petroleum Corporation
CPC Chinese Petroleum Corporation (Taiwan)
CRE Energy Regulatory Commission (France)
CREG Commission de Régulation de l’Électricité et du Gaz (Belgium)
DGO Distribution Grid Operator
DMF Department of Mineral Fuels (Thailand)
DMO Domestic Market Obligation
DOE Department of Energy (US)
E&P Exploration & Production
EC European Community
EDF Électricité de France
EMA Energy Market Authority (Singapore)
ENAGAS Ente Nacional Regulador del Gas (Spain)
ENAP Empresa Nacional del Petróleo (Chile)
ENI Ente Nazionale Idrocarburi (Italy)
EPC Engineering, Procurement and Construction
EPPO Energy Policy & Planning Office (Thailand)
EPU Economic Planning Unit (Malaysia)
ERC Energy Regulatory Commission (Thailand)
EU European Union
FDI Foreign Direct Investment
FERC US Federal Energy Regulatory Commission
FPC Federal Power Commission (US)
GDF Gaz de France
GDF SUEZ Gaz de France and Suez (merged)
GDP Gross Domestic Product
GEMA Gas and Electricity Markets Authority (UK)
GSP Government Selling Price
Global and Regional Gas Market Study – Abbreviations Page 65

GTA Gas Transportation Agreement
HH Henry Hub
HPCL Hindustan Petroleum Corporation Limited
IOC International Oil Company
IOCL Indian Oil Corporation Limited
JAPEX Japan Petroleum Exploration Company
JNOC Japan National Oil Corporation
JOGMEC Japan Oil, Gas and Metals National Corporation
JV Joint Venture
KEPCO Korean Electric Power Company
KOGAS Korea Gas Corporation
LDC Local Distribution Company
LNG Liquefied Natural Gas
LPG Liquefied Petroleum Gas
LSFO Low Sulphur Fuel Oil
METI Ministry of Economy, Trade and Industry (Japan)
MIGAS Directorate General of Oil and Gas (Indonesia)
MMBtu One million British thermal units
MMcf One million standard cubic feet of natural gas
MOPNG Ministry of Petroleum and Natural Gas (India)
MTPA Millions of tonnes per annum
NBP National Balancing Point (UK)
NDRC National Development and Reform Commission (China)
NEPC National Energy Policy Council (Thailand)
NGO Non-governmental Organisation
NOC National Oil Company
NYMEX New York Mercantile Exchange
Ofgem Office of Gas and Electricity Markets (UK)
ONGC Oil & Natural Gas Corporation Ltd.
OPEC Organization of the Petroleum Exporting Countries
PGN Perusahaan Gas Negara (Indonesiam listed midstream gas company)
PGU Peninsular Gas Utilization (Malaysia)
PLN Perusahaan Listrik Negara (Indonesian listed power company)
PNGRB Petroleum and Natural Gas Regulatory Board (India)
POSCO Pohang Iron and Steel Company
PPI Producer Price Index
PSV Punto di Scambio Virtuale
PDC Public Utlity Company

SEC Securities Exchange Commission (US)
SKK Special Task Force for Upstream Oil and Gas Business Activities
MIGAS (Indonesia)
SLNG Singapore LNG
SPA Sales and Purchase Agreement
T&D Transmission and Distribution
TCF One trillion cubic feet of natural gas
TEPCO Tokyo Electric Power Company
TPA Third Party Access
TPC Taiwan Power Company or “Taipower”
TSO Transmission Systems Operator
WEP1 West-East 1 Pipeline (China)
WWII World War II
YPF Yacimientos Petrolíferos Fiscales, Argentina's NOC

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Galway Energy Advisors LLC

Delivering Global Energy Transactions

Global and Regional Gas Market Study

12th June 2014

1. Executive Summary ..............................................................................................................................................5

2. Study Introduction ................................................................................................................................................7

Background to the Study ...........................................................................................................................................7

Approach and Methodology......................................................................................................................................7

3. Gas Markets Analysis ...........................................................................................................................................9

Atlantic Basin Markets ...........................................................................................................................................9

United States ...........................................................................................................................................................20

Pacific Basin Markets ...........................................................................................................................................28

Global and Regional Gas Market Study – Table of Contents Page 2

4. Summary of Lessons Learned from 19 Gas Markets ..........................................................................................50

Key “Lessons Learned” on Pricing Mechanisms ....................................................................................................50

5. Recommendations for Vietnam Gas Pricing Mechanism ...................................................................................61

Summary of Current Gas Pricing Mechanism in Vietnam ......................................................................................61

Pricing Policy: Consideration for Vietnam .............................................................................................................62

Recommendations on future gas pricing mechanisms ............................................................................................63

Global and Regional Gas Market Study – Table of Figures Page 4

Global and Regional Gas Market Study – Executive Summary Page 5

BACKGROUND TO THE STUDY

Based on those “lessons learned,” PV Gas asked Galway to offer recommendations on an

APPROACH AND METHODOLOGY

Gas Market Structure

Gas Pricing Mechanism

• Historic Pricing Development

Global and Regional Gas Market Study – Study Introduction Page 7

3. GAS MARKETS ANALYSIS

ATLANTIC BASIN MARKETS

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

ANY PROPOSED CHANGES

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

ANY PROPOSED CHANGES

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

PROS AND CONS

ANY PROPOSED CHANGES

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

ANY PROPOSED CHANGES

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS

ANY PROPOSED CHANGES

GAS PRICING MECHANISM

HISTORIC PRICING DEVELOPMENT

CURRENT GAS PRICING MECHANISM

WHAT PRICING POLICIES AND MECHANISMS WHEN IMPORTS