Natural gas markets
Jan Osička
Production + treatment | Wholesale market | Retail market
Wholesale and retail markets
Oil
• Wholesale market
• World oil market
• Producers – traders – consumers (refineries, chemical plants)
• Price = benchmark + differential
• Retail market
• Gas stations
• Gas retailers – car users
• Price = wholesale price + costs of refining services + taxes and
tariffs
Gas
• Wholesale market
• Continental and regional gas markets
• World LNG market
• Transit (high pressure) network
• Producers – traders – large consumers (utilities, power plants,
factories)
• Price = price of commodity + transport + storage
• Retail market
• Distribution (low pressure) network
• Utilities – small consumers
• Price = wholesale price + taxes and tariffs
Setting the price of the commodity
• Regulated: end user prices set by a national authority
• Fuel indexation: pegging the price to competing fuel reflects fuel substitutability (oil, oil product basket, fuel basket)
• Market-based pricing: price set through the market mechanism
Fuel indexation
Two parties, direct negotiations, details typically business secret (Russia-China gas deal of 2014)
Content
• Duration
• Pricing formula
• Additional clauses
Duration
• 15-35 years, recently up to 20 years
• Example: RWE contract portfolio
Pricing formula
Pricing formula
Pricing formula
P(t) = P(c)
+ 0.60 × 0.80 × 0.0078 × P(LFO)
+ 0.40 × 0.90 × 0.0076 × P(HFO)
... P(t) = gas price in the target period
... P(c) = gas price in the current period
... P = change in price of the reference fuel during the pre-agreed period
... LFO = light fuel oil
... HFO = heavy fuel oil
... 0.60, 0.40 = market shares of competing fuels
... 0.80, 0.90 = pass through factors
... 0.0078, 0.0076 = FO/gas energy parity
Pricing formula
Pricing formula: Netback pricing
• Netback price = replacement value
• What is the maximum competitive price?
• Netback to natural gas
• Netback to other fuels
Kontrakty
Russian import price in 2012
Additional clauses
• Flexibility (take-or-pay): (70-) 85-90%
• Destination clause (reexport)
• Delivery point
Competitive pricing
Hubs and trading
Physical hubs
• Transit hub: infrastructure crossroad + OTC trading
• Trading hub: infrastructure crossroad + Exchange
• Transition hub: in between
Virtual hubs
• Regulated emergence
• Geographical delimitation (regional or national market)
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OTC (over-the-counter)
• Direct or broker-facilitated trading
• Negotiated units (mostly €/MWh)
• Non-regulated trading (general laws apply)
• Contracts are not guaranteed
Hubs = infrastructure crossroads where trading happens
Exchanges = trading places where gas is (also) traded
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Exchange
• Anonymous trading via the exchange system
• Standardized units (€/MWh)
• Trading is regulated
• Contracts are guaranteed by the exchange
(exchange acts as “central counterparty”)
Exchange trading: bids and offers
Price (EUR) Volume (MWh)
17.320 1,200
Offer/ask
17.022 450
16.921 600
16.853 300
16.789 100 Last trade
16.562 200
Bid
16.232 500
16.082 350
15.902 150
• Offer/ask = prices offered by sellers
• Bid = prices offered by buyers
Exchange trading: Buying 1,000 MWh at 17.100
Price (EUR) Volume (MWh)
17.320 1,200
Offer/ask
17.022 450
16.921 600
16.853 300
16.789 100 Last trade
16.562 200
Bid
16.232 500
16.082 350
15.902 150
Price (EUR) Volume (MWh)
17.320 1,200
Offer/ask
17.022 450 => 350
16.921 600
16.853 300
16.789 100 Last trade
16.562 200
Bid
16.232 500
16.082 350
15.902 150
Exchange trading: Selling 1,000 MWh at 15.900
Price (EUR) Volume (MWh)
17.320 1,200
Offer/ask
17.022 450
16.921 600
16.853 300
16.789 100 Last trade
16.562 200
Bid
16.232 500
16.082 350
15.902 150
Price (EUR) Volume (MWh)
17.320 1,200
Offer/ask
17.022 450
16.921 600
16.853 300
16.789 100 Last trade
16.562 200
Bid
16.232 500
16.082 350 => 50
15.902 150
European
hubs
Hub development
Hub maturity criteria
• Market participants (= number of active/registered
participants)
• Traded products (e.g. physical trade, balancing, risk
management)
• Traded volume (total volume of gas traded at a hub
per year)
• Tradability index (= bid/ask spread)
• Churn rate (ratio of the total traded volume and
the physical volume of gas going through a hub)
Gas-to-gas competition: arbitrage
Gas-to-gas competition: arbitrage
Competition
Traders‘ strategy
• Sourcing gas: hubs x contracts x LNG
• Utilizing arbitrage and risk-management opportunities
• Utilizing storage
The importance of storage: summer/winter spreads
World gas market and European supply dynamics
Oil, Gas, Coal 2010
(milion
MMBtu)
Oil Gas Coal
Reserves 8 021 000 6 657 200 16 441 176
Production 169 456 113 670 150 794
Traded 107 512 34 710 24 520
Seaborne
trade
59 096 10 573 13 631
Oil, Gas, Coal 2010
Oil Gas Coal
Trade/Production (%) 63.4 30.5 16.3
Seaborne trade/Trade (%) 55.0 30.5 55.6
Seaborne trade/Production (%) 34.9 9.3 9.0
LNG
Development of LNG trade
•Before 2000: strictly bilateral LTCs supplying premium markets (Spain,
France, Japan, South Korea)
•After 2000: the rise of Qatar
•1997: 0.16 bcm of LNG exported
•2012: 105.4 bcm of LNG exported
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Qatari NG production (bcmy)
Global Situation before 2010
• Two main production areas:
• Atlantic basin
• Pacific basin
• Three main consumption areas:
• North American market
• SE Asia
• Europe
• Growing share of LNG on the overall
traded volume.
• The rise of Qatar (and possibly Australia).
Changes after 2010
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
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5.0
10.0
15.0
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25.0
30.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
U.S. LNG balance (bcmy)
Export Import Balance (right axis)
Since 2010
•North America‘s import market collapses
•Rapid rise of flexible trading
•More LNG contracts with destination flexibility
•New exporters and importers
•Balancing needs in traditional markets
•The continued disparity between prices in different basins which has made
arbitrage an important and lucrative monetization strategy.
•The large growth in the LNG fleet
•The decline in competitiveness of LNG relative to coal and shale gas
•The large increase in demand in Asia and in emerging markets
Flexible LNG trading
Global LNG Fleet by Year of Delivery
European supply dynamics
European supply dynamics
Demand
Domestics
production
Pipeline
imports
LNG
imports
Case study: Russia‘s pipeline strategy
Case study: Russia‘s pipeline strategy
US storage level as a volatility factor
Case study: Russia‘s pipeline strategy
Case study: Russia‘s pipeline strategy
Case study: Russia‘s pipeline strategy
EU LNG imports
Contract reviews
Compromising oil and hub indexation: mixed formula (Gazprom – E.ON, RWE 2010)
Price formula:
85% oil indexed + 15% hub indexed
Compromising oil and hub indexation: „Indirect spot pricing“ (Gazprom – ENI,
PGNiG, 2013)