Natural Gas Pricing

Abstract

Natural gas commands an important position in the global primary energy basket. Natural gas prices are mainly a function of market supply and demand. As with any commodity, the prices of natural gas are also determined by the demand–supply equilibrium. However, it would be interesting to understand the uniqueness of natural gas and the subsequent context with its pricing. Given its physical and chemical properties, natural gas witnesses significant logistical constraints and challenges, and hence, although a hydrocarbon, it is to be treated differently as compared to crude oil in all economic and business contexts. Unlike crude oil, natural gas is still wanting of a structured international market. The overriding mechanism for the international gas trade nevertheless remains oil indexation. The phenomenon of international natural gas trade and pricing is under evolution also because technology in infrastructure and logistics has enabled natural gas intra-regional movements. Starting with Natural Gas International Demand and Supply Matrix, this chapter discusses distinctiveness of natural gas pricing followed by international context of natural gas pricing including the conventional oil indexation-based pricing. Natural gas pricing in India has later been discussed in detail with a brief mention of the concept of natural gas price pooling in India. This chapter concludes with a reality check on the prospects of evolution of global natural gas trading hub.