IGX answer to inflation: Trade gas on exchange to counter rising prices

Gas exchange's proposal also dovetails with plans by New Delhi to appoint a panel under Kirit Parikh to review India's gas pricing formulae

The Indian Gas Exchange (IGX) — the country’s premier natural gas trading platform — has a solution to surging prices of fuel. It has proposed to the government to trade a chunk of domestic gas on the exchange to counter rising gas prices that threaten to unravel India’s emerging gas economy.

IGX wants the government to permit gas consumed by India’s city gas distributors to be sold via auctions on the exchange in a way that benefits producers such as Oil and Natural Gas Corporation (ONGC) and city gas distribution (CGD) companies, says Rajesh Kumar Mediratta, chief executive officer, IGX.

IGX’s proposal also dovetails with plans by New Delhi to appoint a committee under former Planning Commission chairman Kirit Parikh to review India’s gas pricing formulae.

Mediratta will seek to allot around 25 per cent of domestic gas output to be traded on IGX. “We have devised a special mechanism where CGD supplies can be auctioned,” says Mediratta, adding, “ONGC and Oil India (OIL) can put their gas on the exchange.” 

ONGC and Oil India can offer administered pricing mechanism (APM) gas under a separate contract on IGX having some kind of a floor where it takes into account the cost and margins to start bidding.

The CGD sector was the biggest consumer of gas in the April-July period at 21 million cubic metres (mcm) a day after the government gave priority to city gas companies.

“We are very confident this mechanism will give out a price that is not too low or too high,” adds Mediratta. He expects gas to be available in the range of $4-$7 per million British thermal units (mBtu).

The average gas price discovered on IGX in August was $30 per mBtu. The average international spot gas price averaged around $50; the US Henry Hub traded at around $9, according to IGX data.

“The competitive prices discovered on IGX have been a true reflection of India’s gas demand and supply, including liquefied natural gas (LNG) long-term, spot, and domestic gas prices,” says Mediratta. 

India produced 93 mcm a day of gas in July, while consumption averaged 165 mcm a day — the shortfall met by imported LNG.

Earlier this year, IGX was allowed to trade gas from high-pressure, high-temperature areas such as deepwater deposits. The exchange traded as much as 600,000 cubic metres a day of gas supplied by ONGC in July and August, but the government diverted the fuel in September to CGD companies.

IGX is now looking to see if a part of Reliance-bp’s new production of 12 mcm per day is offered on IGX.

India’s existing formula to price APM gas — pegged to gas benchmarks US Henry Hub, National Balancing Point, Canada’s Alberta hub, and Russian gas — didn’t work initially for producers; now, it’s not working for CGD consumers, says an industry executive. 

At $1.79 per mBtu — the price in the October 2020-March 2021 period — ONGC was losing money on gas sales as production costs were nearly double the sale price, says an ONGC executive.

CGD players were sitting pretty. Now, at $6.1 per mBtu, ONGC is making profit, but CGD players are facing declining margins. Retail prices have surged 70 per cent, hurting consumers. APM gas prices may rise to $9-$10 per mBtu in October 2022-March 2023, say industry executives.

Most of the APM gas is allotted to city gas facilities because they are the cheapest. Prices of APM gas for the April-September period more than doubled to a record $6.1 per mBtu, compared with October-March 2021. But it was still at a discount to the ceiling price of gas from high-temperature and high-pressure areas at $9.92 per mBtu and cheaper than gas produced from coal seams or coal bed methane gas at over $20 per mBtu. LNG secured under term contracts cost around $12-13 per mBtu, and spot LNG trades at over $40 per mBtu.

Separately, IGX will apply to the Petroleum and Natural Gas Regulatory Board this month for permission to launch a new contract to trade LNG at four import terminals — Dahej (Gujarat), Ennore (Chennai), Mundra (Kutch), and Hazira (Surat). It currently trades LNG in regassified form on a delivered basis.

Under the new contract, LNG will be shipped in trucks to consumers from special bays at import facilities that lack pipeline connectivity. Transporters, industries, and consumers in southern states that lack access to pipelines are expected to use this contract, observes Mediratta.