India’s plans to set up a gas trading hub are likely to come to fruition by the first quarter of 2020-21. The draft rules for the operation of the proposed hub have already been finalised by the Petroleum and Natural Gas Regulatory Board (PNGRB). The establishment of the hub, under way since 2017, will facilitate the trading of natural gas at market-determined prices. The move forms a part of the government’s goal to boost gas consumption and increase its share in the energy basket to 15 per cent by 2030. The hub will involve an electronic exchange on which pooled domestic natural gas and imported liquefied natural gas (LNG) will be traded.
The Indian Energy Exchange (IEX), the country’s largest power trading platform, will set up the gas exchange. It will be based on similar lines as the power exchange and will feature day ahead, daily, weekly, fortnightly and monthly products. The setting up of the hub will facilitate both short- and long-term gas pricing based on a transparent price discovery mechanism at the trading exchange. At present, the government fixes the price of domestically produced natural gas using a formula derived from the prices prevalent in gas-surplus nations such as the US, Canada, the UK and Russia.
The price discovered at a hub is taken as a reference price for all transactions across the gas grid. The Henry Hub in the state of Louisiana in the US is the world’s largest gas trading hub. Gas delivered at this point is the basis of most US natural gas futures. Other leading hubs include the National Balancing Point (NBP) in the UK and the Title Transfer Facility (TTF) in the Netherlands. While the Henry Hub is a physical hub, the NBP and TTF are virtual hubs. A virtual hub could represent the entire country or a transregional zone. Trading for multiple hubs can be conducted on an exchange.
In India, there are plans to set up a delivery-based spot exchange. The physical gas trading hubs will be set up in Dahej, Hazira and Kakinada where more advanced infrastructure is located. The hub can evolve into a virtual hub once pipeline tariff reforms are brought into effect.
Advantages of the hub
A gas trading hub will offer a plethora of benefits. It can help in generating price signals that participants can respond to by making changes in demand and supply. This could lead to increased investments in the upstream sector. Further, it could improve liquidity and lower transaction costs in the gas market. It will also facilitate spot and future trading of gas.
A gas trading hub can also facilitate the optimal utilisation of infrastructure including LNG import terminals and pipelines due to an increase in transaction volumes. Various small industries can also use the exchange to procure gas at competitive prices, thus promoting industrial growth. It can help in increasing the demand for gas by power plants and fertiliser industries which can take advantage of competitive spot prices. City gas distribution companies can also serve their customers better by using the hub to meet peak domestic and industrial demand. Thus, the development of a gas hub is expected to result in a more mature gas market in the country.
The way forward
Various issues need to be resolved to make the proposed gas trading hub a success. First, it is important to bring natural gas within the ambit of the goods and services tax. At present, the tax rates on natural gas vary across states. This would make it hard for buyers and sellers to enter into contracts on the exchange as they would have to juggle between multiple rates. There is also a significant gap in the price of domestic gas and imported LNG which makes it difficult to arrive at a single price. Moreover, the government is yet to approve a plan to allocate a certain volume of gas for trading at the exchange.
The unbundling of GAIL (India) Limited is also a precondition for setting up of a trading hub. GAIL is involved in both marketing and transmission of gas, and this could create a conflict of interest and affect the discovery of competitive gas pricing. The government is considering a plan to bifurcate the company’s gas transmission and marketing business.
Reforming the pipeline tariff structure is equally important. The PNGRB is considering a switch from the current distance-based pricing to zonal or entry-exit tariff models. The development of a uniform access code with standardised terms for connectivity, capacity booking, scheduling and imbalance settlements also needs to be worked out.
Based on a presentation by Rajesh K. Mediratta, Director (Strategy), Indian Energy Exchange, at a recent India Infrastructure conference