The energy policymakers have been struggling to achieve the desired goal to help country transition to gas-based economy. Several initiatives have been discussed in this regard. However, it requires a comprehensive review to identify the issues and address them in a transparent way in a given time frame. The objective looks achievable but may require strong will to take some tough decisions.
Historically viewed as a by-product of crude oil extraction, natural gas has only recently gained recognition as a critical energy source. While crude has long-standing global benchmarks like Brent, Boney M and West Texas Intermediate (WTI), larger gas volumes are traded with gas pricing linked to crude oil prices. This legacy persists in India too, where gas prices remain tethered to crude.
However increasing trades are happening linked to global gas price benchmarks such as Henry Hub, Japan Korea Marker (JKM), and West India Marker (WIM) or a combination of crude and gas price benchmarks. With the global energy markets evolving rapidly, and the Indian gas market maturing with its own distinct supply and demand dynamics, the need for our own indigenous transparent and efficient gas benchmark has never been more pressing for both producers and consumers.
The Indian gas market has unique characteristics and complexity with multiple pricing and where the growing demand for natural gas is met by inconsistent and unclear pricing mechanisms. Inadequate infrastructure, such as inter-country pipelines like those in Europe, and increasing reliance on imported gas have complicated the establishment of a uniform benchmark. Implementing a unified and transparent gas benchmark would not only improve market clarity but also attract investment, enhance supply chain efficiency, and foster the growth and development of a more resilient and competitive market.
India’s gas pricing landscape
India’s current gas pricing system is divided into domestic and imported liquefied natural gas (LNG). Domestic gas, produced by companies like ONGC and Oil India, is governed by an Administered Pricing Mechanism (APM), where prices are set by the government without a true market-based discovery process. The current system allocates APM gas without true market-based price discovery, limiting the ability to reflect domestic demand and supply dynamics.
There is a need to develop an indigenous gas price benchmark by establishing a market-driven pricing model with all the filters like ceiling, floor, etc., reducing the need to link to international benchmarks that don’t align with our specific demand and supply conditions. This approach would help the market grow and ensure that gas prices are more attuned to our local market while increasing acceptance from both buyers and sellers.
On the other hand, imported LNG is primarily priced based on contracts linked to global oil/gas benchmarks, which introduces volatility, and delayed price adjustments and has no relation to our market conditions of demand and supply. This external benchmarks-linked pricing has hindered the development of a transparent, demand-driven gas market in India, unlike more mature gas markets in countries like Europe, the US or the UK, where pricing reflects actual market conditions.
Apart from this, the pipeline operators can also use the indigenous benchmark for pricing the imbalances of their shippers which currently is either in-kind or priced at highest-price of gas in the system — both of which in my opinion are unfair and unscientific.
Another case is where government has used Brent-linked dollar denominated formula for setting ceiling price of domestic HPHT (high-pressure, high-temperature) gas. The government could use the indigenous benchmark to set the ceiling price for HPHT. This would be better than relying on the outdated method of using alternative fuel prices, which isn’t friendly to the market.
Lessons from established markets
In markets like the US and UK, transparent gas benchmarks such as Henry Hub in US, TTF (Title Transfer Facility) in the Netherlands and National Balancing Point (NBP) in the UK have been instrumental in creating efficient and liquid gas markets. These benchmarks are based on actual gas trading activity and reflect real-time supply and demand conditions, offering a clear pricing signal for both producers and consumers. The transparency provided by these benchmarks has enhanced investor confidence, improved liquidity, and stabilised prices, particularly during periods of high volatility, such as in the winter months in Europe.
Adopting a similar market-based approach could significantly enhance price transparency and market efficiency for India. However, this would require addressing several structural changes, including market-based domestic gas pricing mechanisms, tariff and tax rationalisation, and incorporation of a hub/system operator. All leading to pooled liquidity at a unified trading hub.
Pathway to a unified gas benchmark
The setting up of Gas Exchange in India has been a significant and a welcome move towards creating a more transparent gas marketplace in India. The prices discovered on IGX, setting the gas price index GIXI (Gas Index of India), reflects the inland price of gas — that is, the gas in the pipeline network which serves as a more accurate and reliable indicator of market-based gas price in the country. However, for GIXI to evolve into a more widely used benchmark, its liquidity must be enhanced to encourage broader acceptance and usage. This can be achieved through increased market participation, the inclusion of foreign players, and ensuring the index accurately reflects supply and demand conditions.
Different State level taxes (VAT) and distance-based transmission tariff have been fragmenting the gas market/benchmarks. Though, Dahej has emerged on IGX as major hub, however a virtual hub linked to electricity sector for example may be best for creating a virtual unified price hub. For a unified gas benchmark, we will need a single postage stamp across the country or an entry-exit tariff. The latter takes into account distance sensitivity within tariff calculations and its application is very simple — every zone pays its entry or exit tariff independent of its counterpart. On the taxation front, the cry of the industry for GST is much more to develop a robust price benchmark. This transition will be crucial for growth, building liquidity and thus driving competitiveness.
A key element in establishing a gas benchmark is the development of a robust gas trading hub. In markets like Europe, gas trading hubs allow multiple parties to buy and sell gas, creating a liquid and competitive market. For India, the creation of such a hub would increase transparency, improve price discovery, and reduce reliance on foreign price benchmarks.
The gas exchange has already demonstrated its credibility in discovering a transparent and competitive price for natural gas. This needs to be strengthened by pushing more domestic gas through the platform. The free pricing of domestic gas — APM and HPHT, both in a phased manner — will help achieve liquidity in the markets. This will be further boosted with two reforms — first, uniform taxation like GST on natural gas and second, entry-exit tariff for each zone/node.
A well-functioning hub, where gas is traded freely based on supply and demand, would provide a clear price signal and attract more players into the market. As more domestic and foreign entities participate, the liquidity will grow, making it a reliable benchmark for India’s gas market. More international players, especially traders would be inclined to participate in India’s gas market if a credible transparent and liquid benchmark were in place, further integrating India’s gas market into the global energy ecosystem.
The writer was former CMD of Petronet LNG and former Director, HR, ONGC