By V Shunmugam
& Ruchi Shukla
The International Energy estimates that India’s energy demand outpaced growth in global demand in 2018 (2.3%); the country’s primary energy demand rose by 4%. While a healthy growth rate is essential, it important that it is sustainable—today’s growth should not be at the cost of tomorrow’s potential. Major economies have been looking at cleaner sources of energy such as natural gas. But growth in India had been primarily led by coal-based power generation and fossil fuel-based mobility solutions. As per Energy Statistics 2018 published by the ministry of statistics and programme implementation, coal accounts for about 70% of total power generation, and natural gas accounts for 9%.
To balance growth in energy demand with sustainability, we need to reduce the environmental cost of energy use. India must enhance the share of natural gas in the energy basket to 15% in the next decade compared with the current 6% (‘Vision 2030-Natural Gas Infrastructure in India’, PNGRB). We are also at an inflection point where our domestic production benchmarked to administered prices witnessed unhealthy exploration interests; at the same time, increasing dependence on gas imports has the potential to add to the overall burden of energy imports, besides putting our economic planning and forex management processes out of gear.
The success of a market place depends on demand and supply parameters. On one hand, there are increasing sources of gas supplies, and on the other hand a strong and expanding consumer base, with competing buying interests from power, fertiliser, city gas distribution (CGD), auto gas and industrial consumers, and it requires that there is transparent price discovery on a trading hub. This will increase trust levels of market participants, besides making way for market-based pricing for infrastructure providers such as transportation and regasification.
Demand and supply dynamics of our natural gas market have set the stage for a structural change in market design. Power, fertiliser and CGD collectively account for 70% of natural gas demand in India. With power sector alone accounting for 28%, the ‘Vision 2030’ report projects that gas-based power generation would contribute 36-47% of the increased demand of natural gas till 2029-30. Reforms in power sector moving electricity prices to market-based efficient pricing will further enhance the demand of natural gas. The revival of urea plants to augment domestic urea supplies will also drive gas demand from the fertiliser sector, and policy push for CGD and priority allocation of domestic gas to PNG and CNG sectors will provide impetus to overall demand.
On supply side, the Indian market has been receiving gas from varied sources. The total natural gas supply in 2017-18 was 52.26 BCM, of which only 25.93 BCM was domestically produced. The rest 26.33 BCM was met through LNG imports. Of the total supply, domestic gross production of natural gas in the last five years accounted for 63.86% on an average, with its share declining to about 50% in 2017-18.
India is the fourth-largest LNG importer (2018), behind Japan, South Korea and China. Imported gas is also witnessing a shift in pricing from long-term to spot contracts, thus highlighting the need for a transparent spot market.
The government has undertaken policy reforms to increase the share of natural gas in the overall energy consumption basket, besides laying out a roadmap to augment domestic production. A high-level committee appointed by ministry of petroleum and natural gas has recommended a higher natural gas price for both existing and new discoveries, and also a shift of gas markets to follow global trends. With 16,770 km of gas trunk pipelines in operation, and 11,377 km more approved, it will enhance the gas user base that will need the support of a well-functioning market place with robust price discovery.
India benchmark price
While relevance of crude oil is fading away for gas markets, the markers and hub-discovered prices are also not so relevant to a country like India, insofar as both reflect fundamentals of the underlying international markets, and India is neither included in the assessment done by price reporting agencies or a buyer from any of the major hubs. In such a condition, existence of an India benchmark price would not only guide domestic transactions, but also the pricing of gas purchase contracts with their global exporters. With India as the fourth-largest LNG importer, it is essential that there is a hub-based marker to guide buyers and sellers in pricing gas in line with Indian fundamentals.
India has a dual gas pricing mechanism comprising of domestic gas sales guided by the Administered Pricing Mechanism (APM) and imported LNG-based gas prices determined by global market forces. There is a wide disparity between APM prices and LNG import prices (see graphic). For example, for the period April-September 2019, APM price was $3.63/MmBtu against the Henry Hub linked price of $7.98/MmBtu. The APM has been adopted to promote the use of gas, and also for the purpose of reduced subsidies to users such as power, fertiliser, CGD autogas distributors. With lower price realisation under APM for the sale of domestically-produced gas, private investments in E&P activities and hence domestic production tended lower in the market with increasing demand and policy push for greater green fuel usage. In the absence of benchmarks, gas prices in Asia are set by crude-linked LNG, and reported to be the highest in the world, compared to markets with active hubs that discover prices based on their own fundamentals.
For successful functioning of a spot market, there needs to be freedom of access to transportation of gas from sellers to buyers, which needs a mechanism of open and non-discriminatory access to pipelines. Global examples with successful spot trading hubs indicate that gas transportation business should be unbundled from other gas value chain functions of the same entity. A welcome move had been made by the regulators, but its success will lie in transparent operation of capacity release programmes and establishment of an independent transmission system operator that will work towards clearing and settlement of hub-based gas transactions and publication of capacity-related information. Developing infrastructure such as pipeline and regasification capacities will help Indian consumers leverage market-discovered prices and arbitrage the temporal and geographical differences, besides promoting spot trades. A well-developed gas hub supported by infrastructure will help India emerge as a price-setter in global markets through Indian benchmark prices.
Authors are head and AVP Research, respectively, at MCX. Views are personal