With the Arctic blast, nicknamed ‘Beast from the East,’ lowering temperatures across the European Union (EU) and the UK, the tabloids during the weekend of March 3-4 highlighted not only the big freeze in the region, but also the flare up of gas prices to a 12-year high in the UK markets. Significantly, newscasts, besides citing supply outage as one of the reasons for price surge, also highlighted closure of a key storage facility (Rough Storage) last year, which accounted for more than 70% of the UK’s total gas storage capacity, in its coverage. Here, it is noteworthy to state that the US Natural Gas Markets clearly show that the development of a competitive deregulated market supported by necessary market infrastructure including storages facilities helped in neutralising fluctuations in gas prices, especially during the 1990s, besides assuring supplies to meet the fluctuating demand amidst relatively constant production levels. Studies claim that storages played a significant role in curtailing volatility in the natural gas markets arising out of weather fluctuations. Natural gas plays a major role in developed economies as a clean energy source. Critical for sustained development of natural gas usage in developed economies is the ability of the market mechanism to ensure utilities and consumers with the supply of natural gas at market clearing prices.
Various research studies in the past also prove that sufficient storage and enhanced transportation capacities played a key role in ensuring round-the-clock availability of natural gas to domestic and industrial consumers in the US amidst increasing demand for heating purposes. Towards undertaking efforts to develop markets for natural gas where the demand and supplies determine the prices, it is also essential to understand the role of storages in smooth functioning of the markets and the ability of the users to access it in a fair and transparent manner. Even in a market such as India, sustainable growth in natural gas consumption would not only be impacted by the development of transportation capabilities, but also by the ability of the markets to clear unscheduled industrial demand at more stable prices supported by well-developed storage capabilities.
Indian gas economy heating up
With the government’s active pursuit of developing India as a gas-based economy, India’s gas imports (in the form of liquefied natural gas, or LNG) have been increasing supported by lower prices. Gas imports during FY17 have nearly doubled from imports seen in FY11. Energy and commodities markets information provider Platts, in its 2017 report ‘Feeding the Tiger: Search for transparently priced Indian LNG,’ estimates that LNG imports are expected to continue grow by 10% annually over the next five years, overtaking domestic production in 2019. Besides, efforts are also directed towards boosting domestic gas production and exploring transnational gas pipelines.
Storage critical to healthy markets
Generally, while the development of a distribution network will increase accessibility to the cleaner source of energy, development of storage facilities is equally critical to smoothen out the differences between unstable demand and supply situations. Besides, a well-developed storage mechanism helps in storing of gas not required immediately rather than being just flared up; aids in fulfilling contractual supply obligations in periods of unforeseen supply outages; and meeting sudden and unexpected high demand scenarios. Consequently, availability of adequate storage facilities will help even out market volatility, besides maintenance of operational integrity of the pipelines, by ensuring that pipeline pressures are kept within the design parameters. While gas storage facilities are widely prevalent across major developed markets such as the US or the EU, emerging markets such as China, Turkey, Iran, etc, are also augmenting such facilities. In fact, according to a 2017 EY knowledge paper, China, which has about 7.4 billion cubic metres (bcm) of gas storage capacity, equivalent to about 13 days of its consumption, is planning to ramp up the storage capacity to cover 30 days of consumption.
Pricing of storage capacities
The US Federal Energy Regulatory Commission (FERC), in its Order 636 (1992), mandated companies in the country to operate their facilities, including gas storage, on an open access and non-discriminatory basis compared with complete control that pipeline operators had on a key infrastructure prior to it. Open access mandate led to the development of markets for gas storage with the ability of the players to reap arbitrage opportunities. However, the underlying pricing structure for storage was mandated to be cost-based unless the storage provider could demonstrate that prices are lacking market power, discouraging private investment in gas storage over a period of time. Hence, in an effort towards stimulating the development of new gas storage facilities, FERC, in 2005, enacted Order 678 enabling storage operators to charge market-based rates. Consequently, from 2005 through 2013, underground aquifer and depleted field storage capacities have increased by 6%, compared with 2% in the preceding 20 years. With well-connected storage facilities in addition to its connectivity to the pipelines spanning across the entire country, Henry Hub has since then emerged as a benchmark trading hub.
Improving information flow
For the successful transformation of the proposed natural gas markets towards a vibrant regional gas trading hub, there is a dire need for supporting infrastructure with optimum transparency and neutral outlook reports such as the Natural Gas Weekly Update and Weekly Natural Gas Storage Report, as also the short-term and annual energy outlook reports as published by the Energy Information Administration (EIA) of the US.
As per the India Gas Sector Survey 2016 conducted by PwC India, more than 90% of the industry respondents supported the ‘carrier first, commodity later’ principle as the approach for gas sector development. In other words, enabling regulations must play an active role in promotion and development of infrastructure facilities such as pipelines and storage facilities to meet the forecasted growth of the sector. As such, with increasing focus on development of gas economy and to deliver its benefits to all the stakeholders including upstream investors, the modified Say’s law—i.e. supply (with adequate infrastructure support) can create its own demand—would certainly hold good in the context of natural gas economy in India.
By V Shunmugam & Niteen M Jain
V Shunmugam is head and Niteen M Jain is senior analyst, Research, Multi Commodity Exchange of India Ltd. Views are personal.