Gas Trading in India: A storyline with twists and turns

India's initiative for setting up of Gas Trading Platform and developing a vibrant gas market is good news for Indian gas industry. At what stage of growth we are in and in what direction it is moving, will determine the speed with which the country will achieve the dream of enhancing the gas share in the energy basket and creating a vibrant gas market hub. A look in to the current scenario is in order at this juncture. India still has a very low usage of natural gas in terms of its volume and its share in the total energy basket. It must also be noted that the proportion of gas in the energy mix has fallen from above 10% in 2011-12 to the current level of 6.2%. This has been due to the fall in natural gas production in the country since 2012 and non-affordability of the high price of LNG and volatility of LNG during this period, in some anchor sectors like power. India should look at the following strategic options to enhance the usage of natural gas in the energy mix:

• Sustained investments in India’s upstream and step up domestic exploration. The efforts already underway should be sustained in order to maintain the share of domestic gas in the total gas supply.
• Enact policies and action plans to enhance usage of gas in those industries and commercial segments where polluting fuels like diesel and coal are being used as a primary or back up generation fuel.
• While sustaining the policy of expanding renewable energy usage, promote gas-based power to meet peak and intermittent demand to serve the overall objective of clean power.
• Promote gas usage beyond the traditional base load power and fertilizer and expand markets to include the newer areas of gas application and usage, with active support from government

These are fundamental requirements to drive India towards a gas-based economy, which will lay a good foundation for gas trading. Leveraging on its experience in implementing a successful model of creating a vibrant electricity trading market, IEX has taken the first important step through its subsidiary Indian Gas Exchange (IGX) to launch gas trading with a no. of products, which will enable physical trading of gas from designated hubs and enable competitive price discovery. But the ultimate objective is to move towards a vibrant national gas market which will need a no. of steps. A few key pillars which will enable fulfilment of this objective:

• Gas and LNG Supply: Moving towards a gas economy without the "constraint" mindset which has been set over the years. That is already happening with all the market players focusing on developing and expanding the usage of LNG / Gas in other sectors which includes CGD, Refinery and Petrochemicals, other key Industries and  LNG / LCNG as transport fuel and alternate modes of delivery like LNG by road.
• Gas Reach: Gas Pipeline Transmission and Distribution Grid will be an absolute necessity to create a trading base across the country rather than confining to certain regions. This will need investment, implementation and optimal utilization of gas infrastructure across the chain like re-gasification infrastructure, gas transmission pipeline network and distribution infrastructure by expanding consumption in industrial, commercial and residential sectors.
• Gas in Energy Mix: Government Policy to support increase in gas usage in the total energy mix would give the necessary thrust for gas sector growth. For example, as India prepares for 450 GW of Renewable Energy (RE) capacity by 2030 (close on the heels of the 175000 MW target by 2022), it is important to address the issue of intermittency / variability in the electricity supply associated with RE.  Therefore, it is also important to plan back-up, dispatchable alternate generation sources as part of India’s National Electricity Plan. Natural gas can

be playing an important role as a balancing fuel / support fuel in power generation in the years to come. It is important to put in place a strategy for gas-based power generation which needs a special attention. A strategy for natural gas to complement RE would give a great fillip to natural gas usage. Some of the other major recommendations for consideration to expand usage of natural gas is listed below:

• This is the stage when natural gas must be brought under GST and more importantly, gas should be treated at par with coal with 5% GST. This policy can be one significant step which will bring to the fore, government’s decisive step to move towards cleaner fuels and away from coal in the longer run, thereby giving a fillip to gas sector growth.
• Customs Duty waiver on LNG
• Mandated use of gas in industries instead of fuel oil / furnace oil / petcoke to address environment issues and consequential health effects on population and loss of productivity.
• Closure of all old coal-based power plants

• Gas Market Breadth and Depth: A vibrant traded market will not be confined to a few large players. It should aim to include multiple players - buyers, sellers, traders, marketers, pipeline operators working in unison and enabling a competitive market and price discovery. Supporting regulatory reforms to move away from the natural monopolistic situation in pipeline infrastructure and create a competitive market is also a key enabler to achieve market depth and breadth.
• Gas Market Liquidity: This would call for policies and actions to enable gas availability for trading on a continuous basis which will facilitate competition and price discovery. A liquid market is at the core of a well traded, mature gas market. There is a need for stepping up the focus on domestic gas production which will definitely aid in growth of the gas markets in a more sustainable way. At the

same time, it is forecasted that the gas consumption in India is likely to double from the current 153 MMSCMD to close to more than 310 MMSCMD by 2030 driven by LNG, the share of which is likely to jump from the current 50% + to closer to 65 -  70%. With LNG usage increasing and its expanding usage in sectors other than the traditional power and fertilizer sectors, the gas trading market will depend on LNG to be a key driver. This is also a pointer that India has to step up its efforts to increase domestic production to around 150 MMSCMD to maintain its share in the gas basket. Moving forward, access to LNG storage can be a strategy which can check price volatility, balancing and security of supply. In addition to liquidity, it is important ensure market transparency with real-time data of traded volumes, prices, gas flows and capacity availability will be critical.

• Gas Market Regulatory Actions and Reforms: Regulatory framework is a key requirement for an active gas market in order to aid in safeguarding the interests of market players, pipeline operators and enabling price discovery, delivery and smooth transactions. Unbundling, Non-Discriminatory access and a credible system operator to monitor and manage pipeline access and ensure dissemination of reliable information about pipeline capacity availability, utilisation and gas flows on fair and non- discriminatory basis, will be the pre-requisites for setting up a vibrant gas trading hub in India.
• Gas Pricing: As the country moves towards a more active gas market, it is also important to introduce a market reflective pricing mechanism. Gas in India is priced through a linkage with international trading hubs and markets. Two major steps are needed in this context: Stepping up domestic gas production and implementing a realistic price discovery mechanism. The international markets and hubs are far more matured gas markets with active trading and price discovery mechanisms. Rather than subjecting domestic gas prices to the

price movements and volatility of international markets, it would be more prudent to have a pricediscovery mechanism which is reflective of the Indian oil and gas market dynamics so that India’s gas pricing mechanism reflects India’s oil and gas portfolio, targets and government plans.

• Gas Taxation Policy: Removing Tax Distortions is an important strategy to create a national trading market. One of the key recommendations by various bodies and the industry is the inclusion of gas in GST and bring in a uniformity across the country.  That will remove the distortions caused by multiple state level tax regimes and avoid trading distortions as well.

• Gas Training and Capacity Building: Expanding gas markets and infrastructure would require well trained people in the system, which has always been a challenge. Training initiatives in the sector need to be encouraged which focus on development of professionals in the areas of Pipeline and Gas Distribution across various technical functions, Gas / LNG business, Gas Trading and other related areas. India is in need of a large no. of industry ready engineers and executives at entry level as well as competent experienced professionals across technical and business functions. Capacity and Competence building is a key necessity.