Gas pricing up in the air: 2023 to see new trading products from exchanges

New trading products could be the start of India's attempt to create a domestic price benchmark and derivatives contract market, and the tapering of the administered price regime

The year 2023 could prove to be a watershed for India’s gas industry in one of two ways. It could be the year when Prime Minister Narendra Modi’s government prompts the country’s gas consumers to move towards market-based trading platforms or it could be a period when price caps dictate the country’s gas future. Either decision will have an impact on the energy security of the world’s third-largest energy consumer.

The year will see new products from exchanges like the National Stock Exchange (NSE), the Indian Energy Exchange (IEX) and the Indian Gas Exchange (IGX) offering consumers and investors a glimpse of market prices. At the same time, upcoming price caps on a majority of India’s gas supplies erode the very benefits offered by exchanges.

NSE will launch India’s first futures contract for natural gas this year after securing approval from the Securities and Exchange Board of India. 2023 will also witness the progress of India’s attempt to create a domestic gas price benchmark in line with global gas pricing benchmarks, as a precursor to the derivatives contract.

GIXI, a gas index launched by IGX last month, was announced amid turmoil in global gas markets. Recurring bouts of Covid-19 and a war in Ukraine had sent liquefied natural gas (LNG) prices over $60 per million Btu (mBtu), destroying South Asian gas demand last year.

The proposed gas futures contract and GIXI are intricately linked. GIXI will offer price signals for companies and speculators to place bets in the derivatives market. Companies will be able to hedge their positions for deliveries of gas on IGX via a futures contract on NSE, opening up the country’s gas business to derivative trades and enabling consumers to manage pricing risks better.

“A futures market needs a price signal from the spot market,” said Rajesh Kumar Mediratta, managing director and CEO, IGX. “GIXI will send that signal.” GIXI was developed to derive a single price for gas in the country, and aspires to duplicate the success of international gas benchmarks such as Henry Hub and TTF, which represent prices of the fuel in the US and Europe respectively, and spot LNG benchmark assessments Japan Korea Marker and West India Marker. IGX will calculate the day’s GIXI from the volume weighted price of all gas trades on a particular day — a cumulative GIXI will be available for the entire month.

Setting up an Indian gas benchmark is critical because HH and TTF reflect the dynamics in western markets, and are divorced from the realities and peculiarities inherent in the Indian gas economy. For instance, the GIXI for December was Rs 1,294/$15.7 per mBtu. That compares to $5.7 per mBtu for HH, $36 per mBtu for Dutch TTF, and $30 per mBtu for WIM, according to IGX data. That makes Indian gas prices thrice that of HH, and half of the other benchmarks. So, extrapolating foreign gas benchmarks into the Indian environment sends the wrong price signals to domestic gas consumers and fuel sellers.

“The competitive prices discovered at IGX have been a true reflection of India’s gas demand and supply, including the LNG long-term, spot, and domestic gas prices,” Mediratta said.

That said, GIXI is still imperfect because it captures average rates from low trading volumes. An index has a value when there is significant liquidity behind that index. But liquidity on IGX is currently low because the majority of 95 million cubic metres (mcm) a day of India’s gas output is allotted by the government to end users. Over 80 per cent of India’s 80 mcm a day of LNG supplies are tied up under long-term take-or-pay agreements, leaving little to be traded on the marketplace.

IGX, whose fortunes are partly pegged to the growth rate of India’s gas economy, traded around 7.1 mcm of gas a day in December, growing 382 per cent on the year — that is still only around 4.5 per cent of India’s gas consumption. But the country’s gas use is shrinking, despite GDP growth. India’s gas demand dropped 6 per cent in the April-November period to 40.9 billion cubic metres from a year earlier, according to the oil ministry. LNG imports during the period slumped 14 per cent to 18.6 billion cubic metres from a year earlier because of high prices. That means IGX needs to increase its share of the existing market to grow.

“More volume trading on the exchanges, especially by the city gas distribution sector, fertiliser and power sector companies, will further open up the gas market in India,” said Tarun Kapoor, former petroleum secretary and adviser to the Prime Minister.

Efforts are underway to boost such trades. The government, which plans to more than double gas share in the overall energy mix to 15 per cent by 2030, has asked fertiliser makers, which in November accounted for 36 per cent of India’s 4.7 billion cubic metres in gas consumption, to use IGX as an option to source around a fifth of its needs. IGX also plans to launch a contract for trading in pipeline capacity, and will soon secure approval from the Petroleum and Natural Gas Regulatory Board (PNGRB) for a contract to trade small-scale LNG by trucks.

“Over the next few years, as the volumes increase, this index will see its popularity grow,” said Satyanarayan Goel, chairman and managing director of IEX, India’s biggest power exchange, and parent of IGX. “The government has also issued a policy framework that is very supportive of the market.” IEX is also working on a power index.

New Delhi is also considering bringing gas into the goods and services tax system, and if that happens, then the opportunity for IGX will multiply. Today, each state has its own taxes, which vary from 4 to 26 per cent, preventing standard contracts in the gas market, Goel said.

GIXI may also capture prices from regional trades when it evolves into a South Asian Gas Exchange in the future, according to A K Tiwari, member, PNGRB, because gas forms a key part of the energy mix of India’s neighbours.

IGX will reflect market-based competitive prices benefiting all stakeholders to trade gas in the country, said Kirit Parekh, former member, Planning Commission, who ironically headed a committee to recommend the capping of prices of domestic gas extracted from older areas. But Parikh has also recommended total pricing freedom for gas by January 2026.

Vapours of change

• 2023 will see new products from exchanges like NSE and the Indian Gas Exchange (IGX), offering consumers a glimpse of market prices
• Upcoming price caps on a majority of India’s gas supplies threaten to erode the very benefits offered by exchanges
• A domestic gas price benchmark in line with global gas pricing benchmarks is a precursor to the derivatives contract, and sends price signals to market participants
• Setting up an Indian gas benchmark is critical because HH and TTF reflect the dynamics in western markets, and are divorced from the realities and peculiarities inherent in the Indian gas economy
• Recurring bouts of Covid-19 and a war in Ukraine had sent LNG prices over $60 per million Btu, destroying South Asian gas demand last year
• The government, which plans to more than double gas share in the overall energy mix to 15% by 2030, has asked fertiliser makers to use IGX as an option to source around a fifth of its needs