Wanted: a national benchmark price for gas

Written by Anupama Airy | Varun Jaitly | Updated: Jul 31 2007, 05:42am hrs
National commodity exchanges are gearing up for the next phase of expansion. And this time around, it is the energy basket that is the main focus of their agenda. The guiding factor into the foray is the recent spate of oil and natural gas discoveries in the country by companies that include Reliance Industries Ltd (RIL), ONGC, Cairn Energy and Gujarat State Petroleum Corporation (GSPC).

Also, the ongoing plans of gas utilities like GAIL to set up a national gas grid will provide them with the much-needed infrastructure to transport gas from one location to the other. The energy basket could include the entire gamut of products, from furnace oil, natural gas, naphtha, LNG, gasoil, gasoline, jet-kero, coal and power.

At a recent presentation before the petroleum ministry, the National Spot Exchange of India (NSEI) revealed its plans to set up a national-level electronic spot market for petroleum products and natural gas. This, NSEL said, will help refiners sell products at the best possible rates and will provide end-users a place to buy at the most competitive rate. Besides offering a neutral and unbiased platform, this will also help evolve a better transparent price discovery mechanism.

NSEL also said that it would stand counter-party guarantor with respect to all trades besides provide services like quality certification, storage of goods and other customised value-added services. With India moving from being a gas-deficit to a gas-rich country, the spot market will definitely become a necessity in coming years.

Although the commodity exchanges' initiative offers an exciting future for energy security, there are regulatory curbs prohibiting this leap to set up a benchmark price. The price of petroleum is regulated by the government, thus negating the effective price realisation mechanism that the commodity exchanges offer.

Asked about his company's plans in this direction, the managing director of NSEI, Anjani Sinha, said, "We do have plans in this direction, but perhaps it will take some more time to have a full-fledged trading platform for oil and gas. The regulatory provisions have to be conducive for this initiative, besides having adequate pipeline infrastructure. I think this is the time to identify bottlenecks and look at ways to remove them."

Another issue that requires attention before we have a full-fledged platform for oil and gas is the need to have a national benchmark price for the energy basket, independent of global price cues. "The energy basket on Indian commodity bourses mimics the London Metal Exchange, Chicago Metal Exchange and other global exchanges and relates to their price benchmarks like Brent and WTI. It is the need of the hour to have a national benchmark price for the Indian market and run our exchanges accordingly so as to have a more mature commodity platform and gain benchmarking prowess," said an executive with a leading commodity exchange.

Similarly, we need to have a benchmark price for domestic gas, which can be quoted on the proposed exchanges as ex-port (which could be ex-Hazira or ex-Kakinada or any other port location) in line with the existing and most popular `Henry Hub' benchmark in the US.

So, what would be the advantage of having a national benchmark price Firstly, refiners could use this price to buy or sell. The price will provide the refiner with better bargaining power with an alternative option of price discovery and the refiner would be able to choose from the best price offered by a number of participants visible on the trading platform. Last but not least, all the transactions would be in rupee terms and the oil companies can hedge the domestic rupee exposure of the Bombay High.

With massive oil and gas discoveries taking place on the domestic front, the Indian energy market is poised for massive growth in the coming years. Domestic pipeline projects, both existing and planned, would link Hazira, Uran, Dabhol, Goa, Mangalore, Kochi, Chennai, Kakinada and Haldia port terminals.

"Bombay high is the largest oil-producing oilfield in India with a production of 2.6 lakh barrel per day. The refining capacity of crude oil in India is estimated at around 2.1 million barrel per day. Regarding the consumption pattern of oil in India, it is the 6th largest consumer country in the world having a consumption of 2.5 million barrel per day. This leaves the country with a huge deficit and, thus, 70% of the consumption is met through imports," said Harmit Virvadia, research analyst, Angel Broking.

This scenario necessitates even more the need to have a domestic benchmark price while the oil companies go about new discoveries strengthening India's oil independence. Besides, taking cues from the global markets has very little relevance to the consumer.

A number of oil companies are exploring the option of trading their energy products on the exchanges. Reliance Energy, GAIL, BPCL and power companies like NTPC, and NHPC in collaboration with CERC are also looking at setting up power trading to ensure better price realisation.

Besides, the Solvent Control Order, 2000, hinders the liquidity in furnace oil. Power being a state subject, it lacks coherence needed to trade nationally. States have so far traded surplus power through the electricity regulator with agreements signed at the state level.

With the Indian energy supply-demand gap narrowing significantly, the exchanges have taken it upon themselves to honour the deals and, thus, bring about the much-needed assurance for greater market participation, taking India to the next step in asserting itself as a global player in the gas sector.