India's cap on trading margins for deepwater, HPHT gas seen crimping trade

India's move to require natural gas producers with challenging fields to prioritize city gas distributors over other bidders and cap margins on resale trades has dissuaded traders from participating in auctions, reducing market activity, industry sources told S&P Global Commodity Insights.

The Ministry of Petroleum and Natural Gas revised guidelines on the sale and resale of gas produced from discoveries in deepwater, ultra-deepwater and high pressure-high temperature or HPHT areas with marketing and pricing freedom in a Jan. 13 notice.

"Few are still doing it [trading the gas] for a small profit," a local industry source said March 1. "Also, the volumes are not there as the gas is being prioritized."

While traders were unhappy, end-users would mostly benefit from the changes because the gas would reach them at reasonable prices, he added.

A second industry source said they were now focusing on procuring spot cargoes rather than HPHT gas as prices have weakened, while the priority allocation for HPHT gas has restricted trades.

The decline was reflected in lower trading volumes on the Indian Gas Exchange and higher prices on the IGX Gas Index in January than the month before, sources said.

IGX trading volumes fell 38% month on month to 5.48 million MMBtu in January, but were still up 211% from COVID 19-impacted January 2022, IGX data showed.

The IGX reported about 3.6 million MMBtu of domestic ceiling price gas traded at the ceiling price of $12.46/MMBtu in January, down from around 5.66 million MMBtu at the same ceiling price in December.

The volume allocations in January were city gas distribution, which includes compressed and piped natural gas, at 79% of the total, fertilizer (urea) at 6%, power 2% and others 13%, the IGX said.

The IGX did not comment at the time of writing.

Two-tier system

India's natural gas market has two sets of domestic gas pricing policies, one for the nomination fields of ONGC and OIL and the other for deepwater and HPHT assets.

Domestic gas prices for nomination fields were raised around 40% last September to $8.57/MMBtu for October 2022-March 2023, and for deepwater and HPHT gas raised to a ceiling price of $12.46/MMBtu, a near 26% increase, reflecting the impact of elevated global LNG spot prices and fuel oil costs.

High gas prices have raised input costs for end-user sectors and increased costs for consumers, prompting the government to introduce other measures to check prices and supply.

The ministry in a Jan. 13 notice required participants submitting e-bids for gas to specify whether they were purchasing for their own use, as an end-consumer or as a trader.

Any volume purchased that remained unconsumed for any reason, including unplanned shutdown, could be resold subject to conditions.

This meant traders could sell the gas to another trader or end-user, however the "overall trading margin on resale... would be capped at rates of marketing margin previously notified by the government on Nov. 25, 2015, for its resale to urea and LPG producers," the ministry said in the notice.

For resale to other end consumers or traders, the overall trading margin would be the maximum Standard Marketing Margin, it added.

The Standard Marketing Margin is the marketing margin charged by offtakers of regasified LNG under a long-term contract with Petronet LNG to consumers, which is set at Rupees 16.62/MMBtu for 2023.

The value of the margin is the cumulative value of the trading margins charged by all traders in the chain of transactions between the contractor and the ultimate buyer.

In any situation requiring the proportionate distribution of the gas offered under the bidding process, such as a tie in bid levels, the contractor is required to prioritize bids from the city gas distribution sector -- CNG for transport /PNG for domestic requirements -- fertilizer, LPG and power sectors in that order, with any leftover gas offered to other bidders.