The gas pricing mechanism adopted in 2014 linking domestic prices to a combination of international benchmarks was perhaps the least imperfect of solutions for an evolving yet unconsolidated market quite far from maturity.

Establishment of Gas exchange in India was a long overdue beginner’s step. The other big ticket reforms now must also be pushed which include providing level playing field, direct incentives for market development and demand side conversion, ease of regulations and permissions at State and Center level, free pricing, uniform taxation, open sourcing and demand side correction of value chain economics.

The trading platform which the Exchange will provide would also push and encourage liberalization of the India`s gas market by transparent matching of demand and supply resulting in free market pricing of natural gas.

It takes time for a hub to build volume and credibility; and often, it takes concerted government push and follow through to facilitate buyers and sellers to use the hub; and it all hinges on broader and wide-ranging market reforms.

"The gas trading platform will play a vital role to discover our own price benchmark for gas, address demand supply gaps, accelerate investments in the value chain. The transparency, reliability, flexibility, and competitiveness of our gas markets will contribute in reviving India`s industrial and economic growth," Pradhan said.

For perspective, it took more than 10 years for TTF in the Netherlands to establish itself as a benchmark. Even in markets where hubs could formalize existing relationships, e.g. Japan-Korea Marker (JKM), it took years to build liquidity—10+ years after its launch, the marker is still barely included in long-term contracts.

Perhaps, over time, Indian Gas exchange could be a basis for pricing LNG—the way Henry Hub in the USA, NBP in the UK and TTF in the Netherlands have become. But that is a long, long way out; even China has not reached that stage yet.

Several regulatory and structural changes, such as, pipeline tariff mechanism, standardized network access code, gas utilization policy, developing standard contracts, unbundling of marketing & transportation companies, simplification of tax regime, GST reforms, etc. are required for the hub to flourish.

Inadequate gas pipeline infrastructure and connectivity of LNG Regasification terminals to the demand centers remains a challenge; ramping up terminal usage and pipeline connectivity, as well as, rationalization of pipeline tariffs is critical to boost gas demand.

One of the much-needed reform is the unbundling of gas trading and transmission business and setting up of independent system operator (TSO) as well as online booking of capacity to ensure transparent allocation of capacity.
Availability of unbundled entity which solely relies on transmission trade & tariff would attract an entire gamut of institutional investors, infrastructure funds and multibillion-dollar pipeline Cos., e.g Penspen and Enbridge, to form Special Purpose Vehicles (SPVs) and Joint Ventures (JVs) to create complementary and supplementary transmission network. This may include both greenfield and brownfield infrastructure development of the natural gas infrastructure connecting R-LNG terminals to the demand centers.

India’s current daily consumption of gas is about 165 mmscmd, of which 47% is met through imported liquefied natural gas (LNG). Gas accounts for around 6.2% of India’s primary energy mix against the global average of 24%. The government plans to increase this to 15% by 2030. The country’s LNG capacity is also expected to increase from 37.5 million mtpa to 62.5 mtpa by 2021-22. India’s gas demand is expected to be driven by fertilizer, power, city gas distribution and steel sectors.

The next challenge for the government will be revival of gas-based power plants – 14305 MW of generation capacity remains stranded for want of fuel. The challenge is inadequate domestic gas production and costlier imports. The exchange will help in the revival of stranded Gas fueled power projects and reducing fertilizer prices and subsidy. The exchange may also facilitate power and fertilizer sector to be direct importers of LNG.

Like the rest of Asia, the bulk of India`s LNG term import deals are oil-linked, resulting in an average import price of over $8/MMBtu in 2019 - about 50% higher as it could have been if linked to spot (such as JKM). Falling spot LNG prices amid bulging global supply have resulted in a pushback from Indian buyers, who are seeking to either re-negotiate those deals or diversify procurement to spot markets.

Gas exchange will play a key role in discovering gas prices in a transparent and competitive manner for a price sensitive market like India. The current global gas oversupply is likely to support hub as well as gas price index developments in Asian markets.

The exchange is initially expected to facilitate trading in LNG, while the price of domestic gas is notified by the government. Domestically produced gas should also be traded on hubs; it will be a huge boost for the E&P companies. It will also definitely help the small producers (e.g. Coal Bed Methane, Marginal Fields, etc.) and marginal buyers.

It is important to note that, at a time when the price of domestically produced natural gas is at $2.39 per mmBtu, which most E&P companies have cited as unviable, the newly established exchange has got a market-discovered price of $4.07 per mmBtu within the first two days of operation.

Initially, the exchange will offer spot and forward contracts at three physical hubs - Dahej, Hazira, and Kakinada. Spot contract for the day-ahead market means gas will be delivered the following day. Additionally, there will be forward contracts for daily, weekly, monthly, and fortnightly markets.

A Gas hub eventually is as important and influential in developing a transparent market as the volume of gas which gets traded on it. Hence all efforts should be now to bring wide ranging reforms both on demand and supply side and attract major investment and facilitate, fast track, ease development of gas processing, storage transmission infrastructure. Only then any serious volumes will appear on the trading screens.

On the demand-side complete and successful development of 200 + CGD projects, reforms and revitalization of Power and fertilizer sector are going to be the key drivers. On the supply-side major investment in gas transmission network, unbundling and allowing large scale monetization, increasing regasification infrastructure and capacity are some of the volume drivers.

A major supply side volume driver could be successful commissioning of a transnational pipeline if all stakeholders could manage the geopolitics and accompanying security threats.

In conclusion, establishment of a Gas exchange is a first step in the right direction. Let us not burden the exchange with high expectations. Creating a competitive well traded gas hub takes time and its success will depend concerted effort of all stakeholders. There is still a long way to go for it to become a benchmark. Celebrate it for what it is - a small yet significant and hard-won step in the right direction.

For more interaction and opportunities contact you@sanjaykaul.com

Sanjay Kaul, FEI

Founder Univ of Petroleum Energy UPES, Univ of Tech & Mgmt, ISPe, IESD, Sanmarg, BGCL, PwC O&G, Deloitte Energy Resources