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India prepares launch of gas hub

If all goes to plan, by the end of this year India should have established a gas trading hub

The establishment of a hub is an attempt to meet operators' demands for the adoption of a market-based gas-pricing regime. But India faces challenges in making the dream a reality, amid concerns over third-party access and competition.

The gas-hub plan ties in with prime minister Narendra Modi's efforts to boost the share of natural gas in India's energy mix to 15% by 2030, from just over 6% now. More gas is reaching India from a variety of sources. June saw the first cargo of Russian liquefied natural gas, from Gazprom, reach its shores, just three months after India received its first US LNG cargo.

Domestic supply is also increasing. More than 60m cubic metres a day of domestic gas production is due to be added over the next five years from projects located off the eastern coast. ONGC, India's largest producer, supplied 23.5bn cubic metres of gas in the 2017-18 financial year and plans to almost double this within the next four years.

Regasification capacity is expanding at a steady clip, with 2023 expected to see at least 20m tonnes of additional capacity in operation. The new market entrants building this regasification capacity will give an additional competitive impetus for establishing a gas hub.

The Indian authorities, meanwhile, are considering overhauling the policy of fixed domestic gas prices, currently based on a formula derived from prices in the US, Canada, UK and Russia. Delhi sees itself as a potential candidate for Asia's largest LNG trading hub, in a region that lacks accurate benchmarks reflecting Asian gas fundamentals.

Reforms needed

Oil majors have urged the Indian authorities to ramp up domestic reforms, calling for the unbundling of Gail India's gas marketing and pipeline transportation businesses—although the government appears tepid about plans to split the state-owned company into separate entities.

The planned gas hub would have to be located near India's main gas pipeline networks, most likely in the states of Gujarat, Maharashtra or Andhra Pradesh, where more advanced infrastructure is located.

Yet analysts see India's morphing into a gas-hub as a slow process. "There are a number of technical issues that need to be ironed out before you can have something that looks like a gas market and looks like a meaningful price, where people can trade and undertake risk management," says Trevor Sikorski, head of Natural Gas and Carbon Research at consultancy Energy Aspects.

Lack of clarity

India lacks some of the underlying regulation in how the market works and making sure there's good third-party access and competition. "It's quite easy for somebody to put a gas contract on an exchange and say we've got a gas hub here, people can trade this," Sikorski adds. "It's quite another to get anyone actually trading that and getting liquidity and providing any meaningful price information. India lacks a liberalised gas market and that's always the hardest thing."

The Shanghai gas exchange is a caution in this respect. That also has a lot of different contracts, and yet, Sikorski says, no one is quite sure what they mean and who is trading them, adding: "There's a risk that India could be going down the same route."

Given the growing gas import requirements of neighbours Pakistan and Bangladesh, India could nonetheless serve as a suitable South Asian gas hub.

"There are three big importers in the region—Pakistan, India and Bangladesh—who are all price sensitive. But gas isn't really competing with coal in Pakistan or Bangladesh. So, you're looking at a potentially very big market for LNG, but one that is highly price-sensitive," says Sikorski.

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