India’s Plan To Set Up A Gas Trading Hub Is Years Away

India plans to set up a gas trading hub to sell the fuel at market-determined prices as it looks to move away from dirtier alternatives. That still may take years.

The government, which announced its plan in 2017, itself admitted as much. A precise timeline couldn't be indicated for the project—which involves advanced infrastructure such as pipeline networks, regasification and storage capacities—due to administrative, operational and legal issues, Union minister for Petroleum and Natural Gas Dharmendra Pradhan said in a reply to Parliament in December.

The industry isn't ready as there's lack of pipeline connectivity, according to K Ravichandran, senior vice president at ICRA Ltd. “Although west and north India have pipeline infrastructure, it's inadequate in east and south India. An improvement in pipeline network to cover all regions is still three to four years away.”

Demand for the fuel is growing and Asia's third-largest economy plans to raise the share of natural gas in its primary energy basket to 15 percent from the current 6 percent in the next few years. With 14 of the world's 15 most polluted cities in India, according to a WHO study, natural gas is an alternative to dirtier kitchen and auto fuels that can curb pollution. Also, gas is cheaper than crude oil—the nation's primary import—and can help lower India's import bill.

India's use of natural gas, Bloomberg reported citing International Energy Agency estimates, would grow 4.9 percent annually through 2040 to 171 billion cubic meters, just behind China.

The Petroleum and Natural Gas Regulatory Board, Bloomberg reported in April last year, will hire a consultant to prepare a regulatory framework to develop and start gas trading hub or exchange in the country, according to a bid document on the regulator's website.

Petroleum Minister Pradhan, and Dinesh K Sarraf, chairman of Petroleum and Natural Gas Regulatory Board, declined to comment on BloombergQuint's queries.

Henry Hub, a network of pipelines in Louisiana, U.S., is the world's largest gas trading hub. Gas delivered here is the basis of some of the world's natural gas futures. Other leading hubs include the National Balancing Point in the U.K. and Title Transfer Facility in the Netherlands.

China, the world's third-largest importer of liquefied natural gas, plans to set up a trading platform in Chongqing. It has a similar exchange in Shanghai. But that works because these countries have a well-developed grid of gas pipelines.

“There should be pipeline connectivity; without it, a gas trading exchange isn't possible,” said ES Ranganathan, managing director, Indraprastha Gas Ltd. “Not all sources are connected to all consumption points. For example, suppose somebody wants to sell gas from Andhra Pradesh and somebody wants to buy from Uttar Pradesh, he can't do that as there's no connectivity.”

Ranganathan, however, expects the process to mature after launch. “As we've seen in the power sector, connectivity improves once customers start using an exchange.”

A gas exchange, according to Ranganathan, can result in efficient transactions. At present, if we need to buy gas from pipelines by companies such as GAIL(India) Ltd., we buy it via tenders, he said. “If an exchange is formed, those tenders won't be required.”

Pricing Hurdle

Pricing poses another challenge. While a gas trading hub offers advantages, establishing a single price is difficult considering significant gap in domestic and imported gas prices, Ravichandran said. The current landed domestic gas is priced at $5-5.5/mmBtu (including transmission tariffs and taxes), while imported gas (regasified liquefied natural gas) costs around $13-14/mmBtu.

Ravichandran also underscored a potential conflict of interest for free trade as a couple of large companies or groups are involved in both marketing and transmission of natural gas.

Prabhat Singh, managing director and chief executive officer of Petronet LNG, said the hub will make sense only if there are many suppliers and consumers. “If you create a hub, it will give you a regional segment of pricing discovery and some competition and a bit of demand enhancement.”