Natural Gas Pricing and Its FutureNatural Gas Pricing and Its Future Europe as the Battleground...
Transcript of Natural Gas Pricing and Its FutureNatural Gas Pricing and Its Future Europe as the Battleground...
Natural Gas Pricing and Its Future
Europe as the Battleground
Oil-Indexation - 1962/3
• 1962 – Commercial quantities of natural gas forced a re-think
- Nota de Pous
• Prices based on “Netback Value” of alternative fuels, gasoil
and heavy fuel oil - from the burner tip backwards.
• It was recognized even at this stage that gas-on-gas
competition needed to be avoided.
• Agreements between the State, DSM, Shell & Exxon
formalized in 1963, & Gasunie established.
Oil-Indexed Pass Through
Producers
Wholesalers/
TransmissionCompanies
DistributionCompanies
Residential /
Commercial/Smaller Industrial
GazpromStatoilGasterra
Shell/Exxon
E-On, Wingas,RW E, VNG,Thyssengas,
BEB, EWE,Schleswag,
SFG, HGW, etc.
Stadtwerkes(about 500)
End-users
Key Contract Terms
Oil-indexed (GO/HFO)Duration: 20 years + 85% Take or Pay
Price renegotiaion clause
Oil- indexed (GO/HFO)Duration: 1-5 yrs (avg)75-90% Take or Pay
Entit ies
Price and Volume risk pass-through
Oil- indexed (GO) +Fixed Charge
Duration: 1-3 yearsFull Requirements
Regional
Transmission/Distribution
Companies
Large Industrials,
Chemicals,Generators
Oil- indexed (GO/HFO)Capacity Charge
Duration: 3-10 yrs (avg)Full-Requirements
Seller takes pr ice r isk and Buyer assumes volume r isk up to ToP
Buyer takes price risk, Sellers assume volume
r isk down to ToP
End-Users pay
Burner-Tip
Prices
Netherlands Household Energy
1963 to 1990 – Expansion & Linkage
• Across Europe, industry lobbied for lower prices.
• Margaret Thatcher (PM 1979-1990)
• UK gas privatization (1986) and liberalization:
– Privatized and unbundled British Gas,
– Allowed TPA to infrastructure, under Network Code,
– Introduced competition into all market sectors.
Who Spoiled the Party?
Commoditization of Gas
• Early 1990’s - Liberalization frees the gas field development log-jam.
• 1994 - Oversupply and hyper-competition. Producers lobby for connection to Europe.
• 1995 - Commodity markets begin to replace oil-indexation. British Gas in trouble.
• 1996 - British Gas unbundling, starts renegotiating oil-indexed deals to spot prices.
• 1998 – UK/Zeebrugge Interconnector. Commodity markets become connected to Europe.
Defending European Markets
• Incumbents observed the UK, and feared “contamination”by market-priced supplies.
• 1998 First gas flows were long-term contracts.
• Incumbents used their entrenched monopoly positions to manipulate access to supplies.
• Increasing spot supplies were “mopped up” by incumbents who expected flows to decrease as UK ran out of gas.
The “Middle Ground”
• Oil-indexed contracts have Max. Annual Qty. (Typically
115%) and Min. Bill Qty. (Typically 85%).
• Three market conditions:
– Undersupply, Middle Ground & Oversupply
• Continental incumbents operate profitably within the
Middle Ground or, better still, undersupply.
• Rule Number One - Avoid oversupply at all costs.
• 1988 EU Single Energy Market COM (88)238
• Gas Transit Directive (Council Directive 91/296/EEC of 31
May 1991)
• EU Directive 98/30/EC
(Gas Directive)
• Directive 2003/55/EC,
the second EU gas directive.
• Third Energy Package (2009/11)
1: EU Legislation
2: Contagion of European Markets
3: 2000-2008 – Supply/Demand Error
300
350
400
450
500
550
600
650
700
750
800
Bcm/yr
EU 2020 Baseline $61 EU 2020 Baseline $100
EU 2020 NEP $61 EU 2020 NEP $100
Eurogas 2007 Reference Case - OECD Europe
High Economic Growth Case - OECD Europe Low Economic Growth Case - OECD Europe
OECD 2002 - Bcm OECD 2004 - Bcm
4: Over-Committed Supply Position
Supply Source BCM BCM Notes
Indigenous Production 185 Excludes Norway
Pipeline Supplies Contracted: 321.1 Excludes Indigenous Contracted
Algeria 40.5 ACQ
Azerbaijan 6.6 ACQ
Iran 10 ACQ
Libya 8 ACQ
Norway 86 ACQ
Russia 170 ACQ
Other Committed Pipeline Supplies: 25 ACQ
Norway to UK 25 Vesterled/FUKA/Langeled/FLAGS
LNG Supplies (Oil Indexed Long Term) 56 Outturn number
LNG Spot Availability 15 Outturn number
TOTAL SUPPLY AVAILABILITY (2009) 602.1
The Anatomy of the Collision
• 2008 Recession – Demand falls
7% in 2009.
• Spot gas supply increases – More
contracted pipeline supply,
• LNG supplies surge.
• EU gas directives increasingly
effective.
• Second-tier suppliers gain market
share.
• Market priced gas supply increases,
oil-indexed supplies fall.
The Producers’ Revenues Fall
• Gazprom and Sonatrach fared worst of the producers, with
both governments heavily reliant on gas revenues.
• Russian gas exports were
significantly below take-or-pay
levels, but FSU customers were
clearly facing economic
hardship,
• Several major wholesalers
including E.ON, ENI, Gas
Natural, Botas reportedly owed
$Billions in minimum bill
payments to Gazprom and
Sonatrach at October 2009.
Wholesalers Face $Billions Penalties
Oil-Index Fights Back
• Prices negotiated down in competitive market areas.
• Suppliers make concessions on volume.
• Oil-index survival strongly assisted by cold winter 2009/10,
unscheduled outages of pipeline and LNG supplies, and some
demand recovery in 2010.
• Market ≈ balanced Q2’2010
How Long Will Oil-Indexation Survive?
• Angela Merkel (EEX Leipzig - 19 August 2010) called for an
end to oil coupling of gas prices. “This link is no longer
needed. Therefore, I'm happy to hear that the exchange is
working to develop a gas index that would make an
independent price formation possible.... This is a step
towards more competition in the energy market”.
• Putin (Sochi - 25 Sept 2010) “What makes a company more
profitable? To be flexible, make concessions and retain the
whole market share – or to be tough, not give in and accept a
loss of market share? Gazprom’s management has opted for
toughness, and so they will continue on this path.”
The Road Ahead?
• Dramatic Revolution – Oversupply, causing urgent
and revolutionary re-negotiations.
• Negotiated Revolution - Oil-indexed purchasers
negotiate a switch to commodity market pricing with
the key producers.
• Evolution - Oil-indexed contracts fall away. All new
volumes at market prices.
• EU legislation-driven change. And this depends on
their ability to identify the next big tool, and their
willingness to use it.
• Combination of the above.
Implications for ROW
Branko Terzic
Natural Gas Use in Power Generation
Vello Kuuskraa
Unconventional Gas: An Exportable North American
Revolution?
Hidehiro Nakagami
Mikhail Korchemkin
Christopher Goncalves