Foundations of Natural Gas Price Formation

Sergei Komlev

Description

In-depth analysis of the fundamentals of natural gas price formation

‘Foundations of Natural Gas Price Formation’ examines the fundamentals of natural gas price formation and the five principal features that make it unique in the world of commodities. It presents a model of hybrid gas pricing developed by Sergei Komlev from his detailed analysis of the interlinked impact of these features that is presented as a corrective to potential market failure.

Using mainstream economic theory, the book presents hybrid-pricing mechanisms not previously analyzed. Through a failure to understand the role of hybrid-pricing, boosters of spot pricing mechanisms through gas hubs are promoting an incorrect understanding of gas markets that will lead to market failure and to potential critical supply shortages in the near-term future. ‘Foundations of Natural Gas Price Formation’ defends the system of oil-indexed pricing as an accurate, market-based mechanism that has stood the test of time.

Preface; 1. What Makes Natural Gas Unique and How It Affects Pricing; 2. Role of Gas-on-Substitute Competition in Natural Gas; 3. Hybrid Pricing Mechanisms and How They Affect Price Levels; 4. Natural Gas as Waste Product of Oil and Liquids Extraction; 5. Natural Gas as a Financial Asset; 6. Pricing for Natural Gas and Investment Cycle; 7. Market Structures Affecting Gas-on-Gas Competition; 8. Pricing and Competition with Renewable Energy; Conclusion; Index.

Sujets

• POLITICAL SCIENCE
• Energy and society
• Energy policy
• Public policy
• World
• Central
• National

Informations

• Publié par: Anthem Press
• Date de parution: 25 septembre 2020
• Nombre de lectures: 0
• EAN13: 9781785273407
• Langue: English

Extrait

Foundations of Natural Gas Price Formation
Foundations of Natural Gas Price Formation
Misunderstandings Jeopardizing the Future of the Industry
Sergei Komlev
Consulting Editor: Daniel M. Satinsky
Anthem Press
An imprint of Wimbledon Publishing Company
www.anthempress.com
This edition first published in UK and USA 2020
by ANTHEM PRESS
75–76 Blackfriars Road, London SE1 8HA, UK
or PO Box 9779, London SW19 7ZG, UK
and
244 Madison Ave #116, New York, NY 10016, USA
Copyright © Sergei Komlev 2020
The author asserts the moral right to be identified as the author of this work.
All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
ISBN-13: 978-1-78527-338-4 (Hbk)
ISBN-10: 1-78527-338-8 (Hbk)
This title is also available as an e-book.
CONTENTS
List of Illustrations
Acknowledgments
About The Author and The Consulting Editor
Introduction
1. What Is the Mission of the Natural Gas Industry and How Can It Be Successfully Completed?
2. Long-Term Contracts: Their Role and Impact on Natural Gas Pricing
3. Price Envelopes for Natural Gas or How Interfuel Competition Makes the Price of Natural Gas Rangebound
4. Hybrid Pricing in Natural Gas: Search for an Efficient Pricing Model
5. Impact of Externalities on Natural Gas Pricing
6. Conclusion
Index
ILLUSTRATIONS
Figures
1.1 Organic Process of the Oil-to-Gas Switch
1.2 European Gas Market History Periodization
1.3 Average Deviation of TTF Forward Prices from the TTF Day-Ahead Price Index
2.1 IGU Estimates of LNG Spot and Short-Term Deliveries
2.2 Spot versus Conventional LNG Contracts in World Trade
2.3 Spot LNG Cargo Destination by Regions
2.4 Average New LNG Contract by Volume and Length of Duration
2.5 Predicted LNG Sales and Competition between Term and Spot Volumes
2.6 Equinor Contracts by Duration, 2010–21
2.7 Sonatrach Contracts by Duration, 2010–21
2.8 Interaction of UK National Balance Point (NBP) Prices and LTC Prices. Represented by German Border price (BAFA), 2001–09
2.9 Interaction of TTF Prices and LTC Prices. Represented by the German border price (BAFA), 2015–19
2.10 LTCs as Center of Gravity for Spot Hub Prices of NG in Japan
2.11 Pairing of LTC and Spot LNG Prices in the United States
2.12 LTCs as the Center of Gravity for Spot/Hub Prices in the NG Industry
2.13 Spot Price Overreaction to Market Oversupply and Undersupply
2.14 March 2014 Collapse in Asian Spot Prices
2.15 Schematic Spot Price Behavior in Europe, 2009 to 2014
2.16 Emergence of Paper and Physical Gas Disconnect in the Mature Hybrid Pricing System
2.17 Emergence of the Oversupply Illusion in the European Gas Market
2.18 Overcontracting as a Factor in Hub Price Degradation
2.19 Prices on Mature Hubs and in Immature Hybrid Pricing Systems, 2009–14
2.20 Cycle of Term Price Downward Revisions Ended up in Price Degradation
2.21 Demand growth, Decrease in Overcontracting and Contract/Hub Price Convergence
3.1 NG Prices Mirror Oil Prices with a Six-Month Lag
3.2 Interfuel Competition Sets up Corridor for NG Price Fluctuations
3.3 Commonalities in End-Use Market Argue in Favor of Competition between Gas and Oil, 2018
3.4 Competition with Other Carbon Fuels Locks Global NG in a Price Envelope
3.5 Interfuel Competition at Work: The NG Price Corridor Width Is Determined Mainly by Oil Price Volatility
3.6 Day-Ahead Prices on TTF and NBP in Abnormally Cold Weather of February–March 2018
3.7 Interfuel Competition at Work: Oil Price Sets a Resistance Level for NG Prices
3.8 Comparison of NG and Oil Prices in the Aftermath of the 2008 Economic Crisis
3.9 Comparison of Fuel Oil Prices with NBP and BAFA after Oil Price Double Dip in 2014–16
3.10 Russian Fuel Oil Prices Stayed Below NG Prices for Four Months in 2015–16
3.11 Interfuel Competition at Work: Coal Price Sets Bottom Support Level for NG Price
3.12 Depressed NG Prices Competitive with Only Expensive Grades of Coal (Compared on an Equivalent Energy Content and Efficiency Basis)
3.13 Oil Products in Power Generation Mix of Japan in 2018
3.14 Competition between NG and Oil Products in Power Generation. Final Energy Consumption in Power Generation Sector by Country in OECD Europe in 2016
3.15 Competition between NG and Oil Products in Commercial and Residential Sector. Final Energy Consumption by Country in OECD Europe in 2016
3.16 Competition between NG and Oil Products in Industry. Final Energy Consumption in Industry Sector by Country in OECD Europe in 2016
3.17 Competition between NG and Oil Products in the Transportation Sector. Final Energy Consumption in Transport Sector by Country in OECD Europe in 2016
3.18 NG and Oil Will Remain Competing Fuels in the Foreseeable Future: Commercial and Residential Sector in OECD Europe
3.19 NG and Oil will Remain Competing Fuels in the Foreseeable Future: Industry in OECD Europe
3.20 Growth of European LNG Sales Showing Increase of Three Times since Europe Became a Market for Spot LNG Cargoes
3.21 In 2019 NG Prices Received no Support from Oil and Coal Prices—Comparing 3Q 2010 to 2Q 2011
4.1 Share of the Two Major Mechanisms in Setting NG Price for Global Imports and the LNG Trade in 2019
4.2 Life Cycle of LTC and GOG Pricing
4.3 Average Oil-Inked Contract Slopes by Signing Year (2014–18)
4.4 Japan LNG Import Price and JKM in Relation to Average Brent Price, 2016–19
4.5 Japan LNG Import Price and JKM in Relation to Average Brent Price, 2009–19
4.6 Contract Price in Quasi-Oil-Indexed Contracts Moves in a Corridor to Mitigate Deviations from Hub Prices
4.7 IGU Assessment of the Interaction between OPE and GOG in Europe
4.8 Pricing Pattern for NG Imports to the EU
4.9 NG Price Navigation in Europe
4.10 Traded Products Offered on European Hubs, 2018
4.11 Major Change in European NG Market Design: From a Three- to a Four-Tier Structure
4.12 Volume of Trading in Relation to Total Sales for European Midstream Importers
4.13 Spreads between Summer and Winter Prices on TTF Are Insufficient to Cover Operation Costs of Many Storage Sites
4.14 Hypothetical Price Models
4.15 Asian Market Overcontracted
4.16 Share of New LNG Contract Volumes by Price Indexation, Share of Total Volume
5.1 Impact of Demand Enhancement Policies (Cash Subsidies) on NG Price
5.2 NG Import Prices and Average Domestic Consumer Prices in Pakistan
5.3 BOTAS’s Regulated Prices for Different Categories of End Users Compared to the Acquisition Import Prices
5.4 Impact of RSP and RBC on Pricing
5.5 Hybrid Pricing on the Turkish Gas Market in Loose and Tight Markets
5.6 Market Architecture for Pricing Reform in Russia over the Interim Period: Wholesale Replacement Value Principle + Guaranteeing Supplier Model + Free-market Pricing for Uncontracted Volumes
6.1 Paradigm Typical of the Shale Industry in the US—Pay for Two Products and Get a Third One Free
6.2 Unjustified Volatility of JKM Price Compared to Brent Price
Tables
2.1 Global and European Contract to Import Index for Pipeline Gas
3.1 Correlation Coefficients of TTF to Brent and ARA
3.2 Correlation of Exchange-Traded Commodity Prices with Oil Prices
4.1 Role of the Two Major Market Pricing Mechanisms in Global Imports in BCM by Continent in 2019
5.1 IGU Survey of Types of Regulated Wholesale Prices
5.2 Volumes of Domestically Produced NG Delivered to End Users under Regulated Prices in Selected Counties, by BCM in 2019
5.3 Below-optimal Unregulated Prices Adjusted by the Dominant Regulated Pricing Mechanisms, 2019
ACKNOWLEDGMENTS
My acknowledgments need a little explanation. As head of the Directorate for Contract Structuring and Pricing at Gazprom Export, the trading arm of the world’s largest natural gas company, my responsibilities do not include studying the foundations of natural gas (NG) pricing that I will present in this book. The job of the directorate is to provide analytical support to the operational departments of the company, which are responsible for selling gas to countries outside the former Soviet Union. As such, we have very practical business support responsibilities.
However, since I joined Gazprom Export, I have often thought about the saying that nothing is more practical than a good theory. I joined Gazprom Export during a stressful time for global, and particularly European, markets, as the gas industry was undergoing a profound transformation. It became more and more evident to me that the price behavior of NG was different from what I learned from textbooks on pricing mechanisms in the world of commodities. My background as an academic scholar specializing in the studies of the evolution of the trade sector in developed countries contributed to my interest in undertaking research to explain this phenomenon and bring perceptions closer to reality. This research work occupied muc