India is the worlds fifth largest consumer of energy and as its economy is expanding, so will its energy needs. Hydroelectricity, nuclear energy and non-conventional sources of energy have had a marginal impact on Indias energy security, which has largely been dependent on coal, oil and gas and will remain so for the next quarter century. To meet its demand for gas, India is negotiating the import of gas from Iran via an overland pipeline transiting Pakistan. Apart from providing energy security to both India and Pakistan and a steady long-term customer to Iran for its gas, an Iran-Pakistan-India (IPI) pipeline would have great geopolitical significance for the region. As a regional energy project, the IPI could form the nucleus of a regional cooperation arrangement, in the first instance between South Asia and Iran and later perhaps within the framework of the Shanghai Cooperation Organization (SCO). Furthermore, despite several ambiguities surrounding the Turkmenistan-Afghanistan-Pakistan (TAPI) gas pipeline project, India is participating in discussions on the TAPI for geopolitical considerations.
The security objective of our economy foreshadows the economic ones. A unique characteristic of the natural gas trade in the Asian region is the limited amount of natural gas that is traded via pipelines, and the regions growing dependence on the global liquefied natural gas (LNG) supply chain. That global LNG market has become decidedly more short-term oriented and flexible over the past decade doesnt serve the purpose of the Asian economies of attaining energy security. A competitive natural gas market in Asia would need an even more flexible LNG supply than is currently in place. It would involve relaxing destination clauses in LNG supply contracts that allow for market segmentation and stiffen the overall supply chain. Another major difference between the Asian, European and the North American markets is the lack of high-pressure pipelines in Asia as compared to the other regions. Thus, theres a lot of shipping trade that carries on.
The pricing mechanisms identified by the International Gas Union are
? oil(product)indexation, whereby gas prices are linked to other fuel prices(mostly oil or refined products, sometimes coal);
? gas-to-gas competition, indicating an indexation to spot prices that reflect supply and demand for natural gas in a market; and
? netback from final product, which refers mostly to contracts where the gas price is linked to the price of ammonia
The government can set natural gas prices at levels suited to its domestic policy objectives. Globally, market-based pricing mechanisms are based on oil indexation and gas-to-gas competition.
The Indian and Chinese LNG import price levels have been markedly lower than those of the other economies due to contractual agreements.
The prices in Japan, Korea and Chinese Taipei have been comparatively higher. Dr. M. Veerappa Moily, Minister for Petroleum & Natural Gas, India, in his address at 5th Asian Ministerial Energy Roundtable held at Seoul, has called for creation of a unified Asian Trading Platform/Gas Hub on the lines of similar hubs of US and Europe. This shall help meet the growing demand of the Asian countries at an affordable, market linked price while enhancing liquidity of gas supplies from various sources. The reasons cited for the development of a unified hub rightly exemplify the need of the Asian economies. This shall help secure reliable supplies in the long run and is in accordance with the notion of attaining sustainability by upholding the use of natural gas as a fuel.
However, this shall also depend on the capacity of the Asian emerging markets to join together and develop an Asian marker price. While the worlds largest importers- Japan, India and China are Asian countries, gas is sold at rates traded on the US or European hubs. There is no regional benchmark for pricing of fuel in these countries.
The liberalisation of the British market may be taken as an example. Much has developed after the British gas market was opened in 1996 and the first of the trades took place in the contemporarily liberalised market. With the speedy acceptance of the National
Balancing Point as the delivery point by the traders and the development of new NBP contract to provide assistance in standardising the OTC trades, the market welcomed new participants and newer methods of trading. The ICE gas futures market was quick to establish itself in 1997 and gain adequate market dissemination. Brokers and the trade press helped circulate information which proved as a source of trust to the traders about the safety to trade NBP gas. The NBP seeded to integrate the North West European gas trading system.
The Continental markets too proved to be important for trading in the financial instruments. Continental European trading hubs did develop, albeit slowly. The primary purpose of the development of these platforms was to provide opportunities to build trading strategies in response to the dynamic patterns of demand and supply across a complex regional market. Large scale import, multiple transit flows have been a major factor in creating the conditions to improve the price relationships between the North east trading markets. This paved way for the development of cross-market trading instruments and enabled in moving gas physically between the hubs. This also led to an increase in the liquidity of the trading hubs.
A reliable and robust marker price with adequate liquidity and transparency is essential for a price to become the reference point. Whether the Asian price shall develop efficiently in this direction and establish itself as a touchstone of prospect and solidness, only time will tell.
Krutika Kshirisagar: After completing B.Tech from Institute of Chemical Technology (UDCT), Im currently pursuing MBA in Energy and Infrastructure from School of Petroleum Management, PDPU. I have been working as a co-ordinator of CII-Young Indian for the last one year. My strengths are good analytical ability, proficiency in public speaking, good writing, oratory and communication skills, zest and determination to explore new ideas and working in unison with various groups as a group member as well as a leader.