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Discover efficiency prices to meet growing demand-supply mismatch
There is much loud thinking on a new mechanism for pricing natural gas. The growing shortfall in production in the deeper offshore in the Krishna-Godavari basin, India’s biggest gas find in three decades, has led to calls for import-parity pricing for the domestic output. Such a price link has long been operational for crude oil. However, the gas market, with its reliance on dedicated pipelines, is fundamentally different from the market for a heavily-traded commodity like crude. The world over, gas is priced mostly on a regional basis.
Since 2009,for instance, the Centre has approved a gas price of $4.20 per mmBtu that is valid for a five-year period for KG basin gas. Meanwhile, gas consumers have reportedly been importing liquefied natural gas at up to $16 per unit. Users are welcome to source supplies at steep quotes, but the fact is that the bulk of domestic sales are at the going government-vetted rate. Yet, instead of ministerial intervention and opaque bilateral contracts, we do need efficiency prices to better determine scarcity value and boost supplies.
There is, after all, a growing demand-supply gap in gas, which barely makes up a tenth of our commercial-energy mix. Hence the pressing need for price transparency and a clear set of market rules, so that there is firm and continuing demand, and which would give rise to an extensive pipeline network. Gas prices have been pegged to a basket of fuel oils, but the global trend is to price it as a commodity in its own right.
The way ahead is to design a short-term trading market, complete with offers to sell and bids to purchase gas at select hubs, even as most sales take place via the long-term bilateral route. Such a complimentary market would enhance liquidity, provide pricing transparency and yield other valuable signals for gas consumers and investors to augment pipelines, storage and supply. The deviations and variances from scheduled bilateral contracts would provide much scope for short-term price discovery, which can then be used to correct imbalances and better manage supplies. We need oversight, market discipline and attendant standardisation.
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