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India seeks consultants to frame regulations for gas trading hub

20th April 2018

By: Ajoy K Das

Creamer Media Correspondent

     

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KOLKATA (miningweekly.com) – With the Indian government aiming to set up a natural gas trading hub in the country, sector regulator the Petroleum and Natural Gas Regulatory Board (PNGRB) is seeking to appoint a consultant to help determine a regulatory mechanism for such a trading exchange.

“In  order to further boost the consumption of natural gas in the country, government is considering the establishment of a gas trading hub or a gas trading exchange where natural gas can be traded, and supplied through a market-based mechanism instead of multiple formula driven prices,” PNGRB said in a notice inviting consultants.

“The government has envisaged ushering in a gas-based economy by increasing the share of natural gas in the primary energy mix of the country from the current level of about 6% to 15% by 2030,” the PNGRB notice said.

The regulatory framework for a gas trading hub would aim to lay down a domestic price discovery mechanism for natural gas and possibly smoothen some inherent anomalies in the present domestic natural gas pricing, sources familiar with the current process said.

For example, the Indian government currently sets natural gas prices using benchmark prices at hubs in the US, the UK, Canada and Russia, but considering that these benchmarks used were from natural gas surplus countries, any domestic pricing would have inherent aberrations in the case of a natural gas deficit country like India, the sources pointed out.

At the same time, it was not clear yet whether the government would completely abandon the practice of periodically announcing revised natural gas price for the domestic market, the sources added.

Last month, the Indian government revised the natural gas price to its highest level in the last two years, pegging it at $3.06 a million metric British thermal unit (mmBtu) and $6.78/mmBtu in case of production from “difficult fields” and effective for the next six months.

The sources said that consultants along with officials from PNGRB would visit natural gas exchanges in several countries before finalizing the regulatory framework for the Indian version of a gas exchange and whether the existing system of government price fixation would continue, be scrapped or exist parallel to the new price discovery mechanism would depend on rules proposed by the consultants and the regulatory body.

Significantly, China has also proposed setting up a natural gas trading hub this year for discovery of an Asian benchmark price, and government officials here would be keeping a close watch on its direction, the sources added.

However, any proposed regulatory framework for a gas trading exchange would need to ensure that both domestic and foreign market participants could trade and access pipelines and storage facilities, confident that the Indian government would not intervene at times when prices were on an upward trend.

As a precursor to making storage facilities available to natural gas market participants, PNGRB has already proposed a regulatory framework for liquefied natural gas terminal operators in which the latter would have to mandatorily offer 20% of the short term – less-than-five-years contracts – uncommitted regasification capacity or 500 000 t/y, whichever was higher for common carrier capacity or available to third parties.

However, officials acknowledged that the most challenging issue in setting up a trading hub and a natural gas price discovery mechanism, while the government maintained an “arm's length distance from the process”, would be reconciling the scenario in which the price for gas was market determined, but users’ final product, like fertilizer, continued under a government administered price regime.

If fertiliser producers, for example, were to use natural gas at market determined price, they would need to have option to “pass through” any increase in gas price to final consumers. However, with fertilisers, like urea, under a government subsidy scheme, wherein the government reimburses the difference in cost of production and a lower retail price to producers, any rise in feedstock input costs under the this dispensation would result in a surge in government’s subsidy bill, the officials pointed out.

Edited by Mariaan Webb
Creamer Media Senior Deputy Editor Online

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