Indian Gas Exchange and its value addition to the CGD Sector

Indian Energy Exchange Limited (IEX) is India’s first and largest energy exchange providing a nationwide automated trading platform for physical delivery of electricity. IEX has now launched country’s first national level Gas Exchange – the Indian Gas Exchange Limited. (IGX). IGX was inaugurated on June 15, 2020. IGX is India’s first and only automated national-level online trading platform where natural gas is traded and transported/delivered through a market-based pricing mechanism.

Petroleum and Natural Gas Regulatory Board (PNGRB) on December 02, 2020, authorised IGX to setup and operate India’s first ever Gas Exchange in the country. At IGX, standardise and uniform contractual terminologies for all the buyers and sellers across the nation are approved by PNGRB (which is termed as “Market rules and bye laws”). IGX operates under PNGRB oversight with strong governance structure and surveillance mechanism as per provisions of PNGRB (Gas Exchange) Regulations, 2020. Till date IGX has traded more than 8.5 MMSCM of Natural gas on its platform.

How CGD companies can benefit from IGX

In the last couple of years, there has been a lot of impetus on downstream, city gas distribution (CGD) business — specifically the way to improve the availability of natural gas to the industrial and commercial segments. The development of gas market through CGD usage is an important part of Government’s envisioned Gas-based economy also. CGD sector alone consumes around 17 per cent of the total natural gas consumed in India. At present, CGD sector is consuming approx. 26 MMSCMD of Natural Gas. 50 per cent of this gas is imported RLNG which is used by commercial and industrial segment of CGD sector. Additionally, after the 9^th and 10^th CGD bidding rounds, 136 more Geographical Areas (GAs) have been authorised. Post this 70 per cent of India’s population and 53 per cent of its geographical areas would have access to CGD Networks for supply of natural gas.

Thus, with the expected growth and development of CGD, it is important to put together an implementation plan for sourcing of cost-effective gas and establishing the economic viability of these investments. IGX can provide an opportunity to CGD entities for sourcing gas efficiently through its trading platform.

The value additions for CGD entities are as follows:

1. Contractual Arrangement on Exchange

Contract duration offered on exchange ranges from delivery of gas for 1 day (Daily Contract), 5 Days (Weekdays Contract – Monday to Friday), 7 Days (Weekly Contract), 15 Days (Fortnightly Contract) and up to 30/31 Days (Monthly Contract). These short duration contracts offer greater flexibility in managing gas price of non-contracted long or midterm quantities, especially against last minute production updates vis-a-vis the long-term fixed quantity contracts. Weekdays contract at IGX are specifically important for CGD entities as the downstream small-scale industries connected to CGD infrastructure generally observe weekend holidays and hence CGDs can source the fix volume under the weekdays contract and flexible volume under the daily contracts for Saturday and Sunday. In addition to this, CGD entity has option to even buy for any single day extra volume at IGX under the daily contract in case if its downstream customer demands more gas drawl on any particular day.

Simultaneous and multiple bidding options for any combination of contracts like fortnightly and monthly are useful in hedging demand-supply variations. In case, Buyer’s bids fail to clear or is higher than the market determined price for that day, the Buyer can still avail Market determined price benefits by participating in shorter contract duration like Weekly or Fortnightly instead of Monthly contracts.

2. Ex Hub & Delivered Transaction

IGX has signed umbrella Gas Transportation Agreement (GTA) with transporters wherein IGX facilitates Gas deliveries up to the buyer’s consumption facility in case if buyer does not have GTA with the transporter. Those buyers who have GTA in place with transporter, have the option of Ex-Hub transaction wherein buyer will buy the gas from IGX and will take care of deliveries of gas under their own GTA.

3. Competitiveness in Price discovery on Exchange

IGX’s trading mechanism is based on open, uniform price, double-sided auction approach for price discovery. In double-sided open auction, sellers and buyers submit their bids wherein the bid price and quantity are visible to the market participants without disclosing the identity of the bidder. The auction results in discovery of a single uniform clearing price for each contract type. The price discovered on the exchange on a particular hub for a particular contract is applicable to all the participants uniformly. The advantage of this mechanism is that whenever the trade is successful, buyer will get the gas at a price equivalent to or lower than his bid price. The primary goal of such auctions is to ensure increased competitiveness.

IGX aggregates all the offers from sellers and bids from buyers and clear the market based on the supply-demand equilibrium concept (Refer image representation of Double-Sided Auction). The intersection point of the supply and demand curves will determine the Market Clearing Price and Market Clearing Volume. At the intersection point, the following bids will be cleared:

• Buy Bid: where the bid price is higher than or equal to the Market Clearing Price, and
• Sell Bid: where the offer price is lower than or equal to the Market Clearing Price.

Besides the double-sided auction approach, IGX also offers continuous trade in Daily contracts to fulfil the energy requirement based on parameters that can be customised to meet the consumer’s needs.

4. Other Salient features of Gas sourcing through IGX 

At IGX, natural gas is traded on gas hubs where multiple buyers and sellers submit their most competitive price bids along with their volume requirement. At present, five trading hubs are operational on IGX: Dahej, Hazira, KG Basin, Dabhol and Jaigarh for physical delivery of natural gas. Buyers and sellers which are physically connected to these trading hubs through national gas grid can trade for the physical delivery of the natural gas. CGD entities would be able to select the hub from which the cheapest gas would be available across India, especially after the implementation of ‘unified tariff’ by PNGRB. The customers falling in zone two would then be able to source gas from any hub in India with same transportation charges thus adding to competitiveness in gas sourcing along with price discovery. Additionally, the present mix of domestic and RLNG suppliers at IGX further ensures supplies at competitive prices.

The platform allows trade for firm delivery on non-transferrable basis for quantity as low as 50 MMBTU with no upper volume limit. Gas traded on IGX platform flows from the same existing pipeline and metering systems. Additionally, the bids on exchange are in INR/MMBTU as against US$/MMBTU, thereby, removing the currency exchange risk which are prevalent in current bilateral pricing contracts.

Snapshot of recent trade volumes at IGX (March’21 to July’21)

As on July 21, 2021, IGX has traded total of ~ 8,50,000 MMBtu equivalent to 22.5 mmscm of natural gas. As on date, total 19 members and 500+ clients are registered on IGX platform. After receiving authorisation from PNGRB in December 2020, we have seen consistent growth in trades at the Gas Exchange at a very competitive price.  A brief snapshot of volumes traded, and price discovered at IGX is provided below.

Graph below shows the prices discovered on IGX vis a vis long term contract and spot LNG:

It is observed that most of the time IGX prices are lower than other gas assessment prices linked to WIM & Brent. Existing Gas supply agreements (GSAs) provide a flexibility to buy some percentage of gas from a competitive source and IGX can be that source whenever the price discovered of our platform is cheaper compared to the GSA price. 

Conclusion: Ease of Gas Purchase

IGX provides an end-to end solution for gas buy and sell on the exchange. The entire risk management, delivery, clearing, and payment settlement activities in the exchange transaction are taken care by IGX. It acts as a counter party to all trades at exchange and provides a facility of trading at fingertips. To conclude, IGX is taking the lead in forming a benchmark natural gas price index in India based on transparency, flexibility, and market participation. This will increase competitive trading, boost natural gas usage in CGD sector leading to the growth and development in a cost-effective manner thus realising the government’s target of increasing the natural gas share to 15 per cent in the overall energy mix.  

Mr Deepak Mehta is the Head, Business Development of IGX. He has over 20 years of experience in the oil & gas industry and commodities. He has also worked with Multi Commodity Exchange of India and Mahanagar Gas Limited. Mr Mehta is a mechanical engineer and has a post-graduate degree in MBA Marketing.