IGX hopes to trade 5% domestic gas

Kuwar Singh New Delhi | Updated on February 14, 2021

Currently, only imported gas is allowed to be sold in the market

Indian Gas Exchange (IGX) has reached out to the Ministry of Petroleum and Natural Gas and the Directorate General of Hydrocarbons, asking the government to allow domestic natural gas producers to also sell on the exchange’s platform.

“We hope that at least 5 per cent of the domestically-produced gas will be allowed on the exchange,” Rajesh Kumar Mediratta, Director, IGX, told BusinessLine. “Then there would be a good volume of gas coming to the exchange.”

A majority-owned subsidiary of Indian Energy Exchange (IEX), IGX is the country’s first trading platform for natural gas. Currently, only imported gas is allowed to be sold in the market. Citing the example of ONGC, which has also announced a purchase of 5 per cent stake in IGX, Mediratta said the public sector producer ends up losing money in gas production due to regulated pricing based on foreign benchmarks.

“This can be averted if ONGC also sells some part of their gas production through the exchange, and then there would be a price discovery happening within India,” Mediratta said.

“We want domestic and international gas to be pooled in the market and discovery of one price,” he said, adding “Once you start discovering price inside India, then policymakers can start using this as a benchmark for Indian domestic gas.”

However, IGX has to first grow its trading volumes and raise the confidence of buyers and sellers, he said. “In the case of electricity too, IEX has gotten good credible prices only after about four years, when people have started using it as a benchmark while signing long-term contracts.”

Rough start

Growing volumes has been a challenge for the fledgling exchange, which launched operations on December 10 last year. “For the past two months, gas prices in the international market have been quite high. So there used to be a huge difference in the prices quoted by buyers and sellers on the exchange. The buyers used to bid in the range of ₹500-800 per mmbtu. Sellers were asking for ₹1,400-1,500 per mmbtu. Due to that difference, we could not trade much in December and January,” Mediratta said.

As gas demand from Europe and East Asia, where it is used for heating, subsides after a frigid winter, the exchange hopes to see better trade volumes from March.

IGX also hopes to improve the supply of gas on its platform by onboarding a foreign supplier during the ongoing financial year. Shell and Total are also likely to join trading from the supply side, he said.

Fertilizer industry

To improve its demand side, IGX has asked the Ministry of Chemicals and Fertilizers to redirect the fertilizer industry, the fastest-growing consumer of gas in India, to the platform for their imported gas demand.

The industry currently pools its demand contract, bids for which are conducted and awarded by GAIL India. “Right now, the fertilizer companies have to buy in quarterly contracts, but they don’t have that kind of visibility in terms of what their requirement will be. This situation was good when there was no exchange because everything used to be bilateral. Now that there is an exchange and we allow them to buy for the month and the week, they can buy according to their exact requirement.”

International benchmark

IGX plans to get permission to allow trading over quarterly and six-monthly contracts by the end of this financial year. Presently, the platform enables trading over daily, weekday, weekly, fortnightly, and monthly time periods. The pricing is not benchmarked to any international exchange.

“When have a quarterly and six-monthly contract, then we are thinking to link it to one of the international benchmarks, because over three months a lot of changes can happen in the international market,” that would affect the procurement cost for suppliers of imported gas in India, Mediratta said. “We are finding out which benchmark is most suitable. We can use JKM or Brent, or a combination of both. We are discussing with a few of our market participants over what is suitable.”

The platform is also likely to introduce dollar-denominated pricing for longer-term contracts.

“We have not yet gone for any dollar-denominated price as we wanted that our buyer should not be exposed to any foreign exchange risk. But, of course, beyond a month there will be some hedging required,” Mediratta said.

Published on February 14, 2021

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