Liquefied natural gas (LNG) sourcing is key for India to ensure long-term energy security and affordability. This requires collaboration with international suppliers in medium (3-4 years) to long term (5-25 years) contracts through innovative trading mechanisms. Long-term gas purchase agreements should permit adequate flexibility from the supply side and provide for periodic review in terms of contract period, formulation of prices, delivery ports and diversion of supply as per changing market requirements.
Transparent and competitive market structures can help India ensure optimal allocation of natural gas to consumers and facilitate transparent price delivery. A credible liquid hub must be created for customers to rely on the prices discovered here. After all, hubs give true price signals, in both normal and crisis times.
India’s first gas exchange, established in December 2020, is playing an important role in transparent price discovery. Although it has six regional gas hubs and a few delivery points, the ideal scenario would have one virtual point for trades, as in Europe.
The Petroleum and Natural Gas Regulatory Board/Ministry of Petroleum and Natural Gas can mandate the unbundling of all contracts to improve the flexibility of long- and short-term contracts.
The exchange market provides many flexible options for sourcing — ranging from day-ahead to six months — that can be optimally utilised by customers, suppliers and marketers. Additionally, during periods of high prices, regulators can mandate transactions through the exchange and opt to temporarily cap prices.
Removing barriers
Barriers to gas trade can be reduced by improving access to transport network and other infrastructure. Harmonised procedures are important for giving access to a network that is independent of ownership, endowing flexibility in access and sale of unutilised capacity. Applying ‘use-it-or-lose-it’ principles in capacity booking, and storage and re-gasification terminals, may also be explored.
System operators should be expeditiously put in place through a government mandate. A statutory body like the system operator can oversee the gas system for maintaining safety, and bring a common platform for transport capacity access, scheduling, nomination and allocation. The system operator may also be mandated to carry out annual assessments of gas supply security, beginning with the next season, similar to European Network of Transmission System Operators-Gas.
On the taxation front, it is expedient to implement GST to let gas flow across the country purely on economic basis, without limitations of State boundaries.
The government may enable creation of gas storage using underground mines or salt caverns. These storages can be strategic in nature — merchant/commercial — and can be used prudently to protect important gas users like fertiliser units and CGDs (city gas distributors) from gas price volatility.
India may create a system akin to Europe’s EU Energy Purchase Platform, that will consist of big players for gaining negotiating power to secure long-term contracts. The government may also consider monitoring the price formulation and tenure of long-term supply contracts to ensure energy security.
The writer is Managing Director and CEO of Indian Gas Exchange