IGX awaits regulatory reforms to meet mandate of expanding fuel access

The Indian Gas Exchange, which opened for business last year, is waiting for regulatory reforms to achieve its mandate of expanding access to the fuel

Indian Gas Exchange (IGX), a conduit to expanding the country’s access to gas, is hobbling along, waiting for policy and regulatory reforms from New Delhi to move into a fast lane. An exchange is typically a place where commodities or shares are traded freely enabling price discovery. But that’s still not the case with IGX, a key component of India’s strategy to vault natural gas use to 15 per cent of our energy mix by 2030 from 6 per cent now.

Traded volumes on IGX totalled 785 billion British Thermal Units (Btu) last month at an average price of $24.8 per mBtu compared with 3 billion Btu traded in September 2020 at an average price of $5.5 per mBtu two months after the exchange opened for business last year, according to IGX data. Trading may expand from January next year once the exchange adds a new contract, the first for domestic gas supplies, said Rajesh K Mediratta, CEO, IGX.

But record spot LNG prices make the fuel unviable for a price-sensitive Indian market. “It is not good for the sector to have such high prices over a sustained period,” Mediratta said. “It will lead to demand des­truction and consumers will not shift to cleaner fuels like gas,” he added. India’s gas use dropped by 2.4 per cent last month from a year earlier. Record spot LNG rates have put off Indian consumers, a Petronet LNG official said, which means lower interest for regassified LNG on IGX.

Gas trades on IGX are a fraction of what India consumes. India consumed 175 million cubic metres a day (m³/d) of gas on an average in FY2020 before the Covid-19 pandemic, according to the oil and gas ministry. That equates to 184 trillion Btu for a month. So IGX delivered around 0.4 per cent of the volumes that India consumed in November. Let’s compare that to how much the India Energy Exchange (IEX), IGX’s parent, traded in the electricity market. IEX realised 6.79 billion units (BU) cleared volume in November. Power consumption during the period was 100.4 BU, according to the National Load Despatch Centre. That means IEX, which started operations in 2008, accounted for around 7 per cent of India’s power consumption.

The IGX was supported by former oil minister Dharmendra Pradhan, who was instrumental in expanding coverage of natural gas and cooking gas by building infrastructure and enabling intermediaries for trade. IGX started operations in June 2020, amid the pandemic, as a gas trading platform. The IGX traded contracts offered buyers options to evaluate exchange-traded rates versus imported LNG and prices of fuel offered via tenders.

But you cannot aspire for price discovery when less than 0.5 per cent of volumes are traded. Gas trading platforms typically come about where domestic deposits are abundant or if the place acts as a hub for trade, which is not the case for IGX or India. Domestic production is still insufficient to meet growing demand, keeping India reliant on imported LNG to meet over half its needs. That leaves IGX dependent on the government for market-friendly measures.

IGX was hobbled from the start for lack of adequate physical pipeline infrastructure, multiple pipeline operators and systems, and price controls on the fuel. Dom­estic gas was unavailable for trades leaving it dependent on some regassified LNG as most of the imported LNG is tied up in term supply contracts.

New Delhi, meanwhile, is delaying gas price reforms. The government controls both fuel prices and allocations of natural gas. Rates are set biannually and are one of the lowest in the world. The ceiling price of gas from deep-water, ultra-deep-water, high-temperature and high-pressure areas is $6.13/mBtu on a gross calorific basis for the October-March period, while the price of conventional gas is $2.90/mBtu, well below the traded rates on IGX, $35/mBtu spot LNG levels in Asia and less than the $10/mBtu India pays for Qatari term LNG supplies. Domestic prices are based on weighted average prices at the US Henry Hub, the UK’s National Balancing Point and Canadian and Russian prices, with a lag of one quarter.

The lack of an extensive gas distribution network also hurts volumes because IGX is a delivery platform and is barred from offering paper contracts or derivative trades, leaving it reliant on pipelines for physical deliveries of gas.

India’s pipeline infrastructure at around 16,000 km is inadequate and concentrated in the western region. Trunk lines are now being built in the east and north-east of India and southern region, which should more than double the existing network, along with distribution networks to send the gas to consumers.

There have been delays in approvals as well, crimping IGX’s ability to increase volumes. Producers are permitted to sell as much as 500 million m³ or 10 per cent of annual output from their areas, whichever is higher, through IGX or other exchanges approved by sector regulator the Petroleum and Natural Gas Regulatory Board (PNGRB), the government said in August. Staffing issues at PNGRB have delayed approvals.

Once IGX secures permission from PNGRB, it plans to offer a separate contract for domestic supplies because gas supplied from unconventional areas has a price cap. Bidders must make offers equal to or below the cap. IGX is launching a separate contract for unconventional area gas because its existing contracts based on imported LNG allow pricing freedom and settlement of trades based on exchange prices (the government does not control LNG prices).

Gas found in unconventional areas include methane trapped within tight pore spaces like shale and coal seam beds or fuel trapped in ice on the sea floor such as gas hydrates. Natural gas is referred to as “conventional” when it can be extracted from the earth either through naturally occurring pressure, or pumping mechanisms.

India also needs to appoint an independent system operator to enable efficient delivery of the fuel. IGX staff currently approach different operators to facilitate deliveries of the fuel instead of a single agency — something that is in place in the electricity sector. Fuel transport charges are calculated based on a few zones and need to be optimised.

Differing state taxes on gas and Delhi’s inability to have a single goods and services tax charge is also hurting trades. The lack of a state mandate to allot gas to the IGX is also slowing trades, unlike in the power sector where power plants offer 15 per cent of their output to be traded on the electricity exchange.