Gas trading hub in India: From vision to reality

BP India Head, Sashi Mukundan, shares his views on the transition map for gas trading.

Date: 27 April 2018

In a recent workshop organized by Confederation of India Industry (CII) in partnership with Petroleum & Natural Gas Regulatory Board (PNGRB) on ‘Gas trading hub in India - A Transition Roadmap’, I got an opportunity to interact with the stalwarts of the industry and share my views. Here is a summation.

The Indian gas scene is a mix of positives and concerns.

If we assume a 7-8% GDP growth in the near-term India’s energy consumption is expected to grow on an average by over 4% p.a.; the fastest growth projected among all countries. It is forecasted that India will overtake China as the largest growth market for energy by the end of 2020.

Most of these long-term projections on India including the BP Energy Outlook 2018 edition, indicate that gas is going to grow faster than oil or coal with consumption trebling by 2040. However, it’s share in the energy mix will remain below 10% [including projections by National Institution for Transforming India (NITI Aayog)].

In my ‘gas’ vision for India, the following steps would enable a surge:

First and foremost, given that India has taken a stance to play a responsible role in the climate conversation, our aspiration should be to increase gas penetration in the energy mix from the current 6% to a healthy 15%. While doing so, the twin concerns of accessibility and affordability for all strata of society should be kept in mind. Hence, the pitch for a robust gas trading hub.

The presence of multiple buyers, sellers, traders, marketers, and infrastructure providers will enable the above. Institutionalizing gas release programs to allow large volumes traded on the hub (removal of allocation of gas by amending the Gas Utilization Policy) and enabling an environment that allows trading of all forms of natural gas and participation by all parties will create liquidity.

Another factor to enable a robust gas presence will be price deregulation. This would mean no cross subsidies or price caps - let the hub determine the price on which any gas is sold. With optionality in their hands, the customer would be driving the bargain. But a free market doesn’t mean higher prices! It means providing the commodity in the most efficient and hassle-free manner, than one can ever imagine! Take the case of the airline industry, taxi cab services, and telecom services – all great examples of the benefit of true competition. This to me is full market integration!

And herein, comes in the role of the regulator. On the lines of a popular adage: “With great power comes great responsibility” - the regulator should be empowered with clear policy guidelines, stringent market rules and with that, the power to enforce punitive damages for market abuse.

Tax distortions are another factor that impinges on the use of natural gas. If this is removed, gas is not disadvantaged vis-à-vis other competing fuels like naphtha, fuel oil or LPG.

Further, access to LNG storage would aid in reducing price volatility, balancing and security of supply. In this scenario, market transparency with real-time data of traded volumes, prices, pipeline flows and capacity availability will be critical.

With a gas hub in place, non-discriminatory access to infrastructure through an independent Transmission System Operator(s) (TSO) will create a clear separation between Content (gas) and Carriage (infrastructure).

Last but not the least, it will be worthwhile to encourage secondary capacity training, i.e., an institute regime with clear rules for periodic capacity auctions for various time durations (yearly, quarterly, monthly, daily and within-day) and a use-it-or-lose-it principle (UIOLI) to ensure capacity availability.

However, it is important we don’t do this in a halfhearted manner. A halfhearted attempt normally ends up with a few players who have a higher risk appetite and hence, a higher price to compensate for the risk and as a result less supply and limited flexibility.

Going forward, the areas of thrust will be to increase the availability of natural gas by enhancing domestic production, encourage the import of LNG, completion of national pipeline grid and a speedier roll out of the City Gas Distribution network in the country. US Henry Hub and National Balancing Point (NBP) in UK are great case studies in this realm.

In summary, with the right program we can avoid early adopter mistakes and use best practices to speed up successful liberalization. Only then can we ensure that we have a sturdy and sustainable transition roadmap with clear steps to building a Gas trading hub in India – from vision to reality.

Views expressed here are personal.