European Gas Markets Summit. February 15th 2011

Transcription

1 Will oil indexation in long term take or pay contracts survive the current divergence between the prices of crude oil and traded gas? Howard V Rogers Senior Research Fellow, OIES Natural Gas Programme howard.rogers@oxfordenergy.org European Gas Markets Summit February 15th

2 OIES* Natural Gas Research Programme WE ARE: a gas research programme at an independent academic institute, part of Oxford University, specialising in fossil fuel research WE ARE NOT: consultants sellers of exclusive, high price business reports WE PRODUCE: independent research on national and international gas issues WE ARE FUNDED BY: sponsorship by companies and governments in gas producing and consuming countries Information about our Institute, our Programme and its publications can be found on our website: *Oxford Institute for Energy Studies is an educational charity 2 2 2

3 Relevant Published Papers Is there a rationale for the continuing link to oil product prices in Continental European long term gas contracts? Jonathan Stern, April 2007 Continental European Long Term Gas Contracts: is a transition away from oil product-linked pricing inevitable and imminent? Jonathan Stern, September 2009 LNG trade-flows in the Atlantic Basin, trends and discontinuities, Howard Rogers March 2010 Free to download from 3 3

4 Key Themes Why traditional long-term contracts are largely indexed to oil. The pressures for change parts 1 and 2 Are the current concessions the thin end of the wedge or just a temporary phenomenon? 4

5 The original rationale for indexing gas prices to oil in long term contracts Groningen Field, Holland Low Cost Base, pricing dilemma Priced on basis of competitiveness with consumers alternative fuels (oil products). Same rationale adopted for pipeline imports from Russia, Norway and North Africa. Contract price linked to time averaged values of fuel oil and gasoil with contract year (October September) requirement to take or pay for circa 85% of the Annual Contract Quantity. Price re-openers periodically. 5

6 Reasons cited for continuing the linkage between oil and gas prices Oil and gas compete for the same enduser market. Oil and gas compete for upstream resources. Oil Indexation required to mitigate upstream and transportation investment risk. 6

7 Oil and Gas Compete for Same End User Market? US Power Generation Produced from Natural Gas and Oil Products Source: EIA 7

8 Oil and Gas Compete for Upstream Resources? US Gas and Oil Operating Rig Count Source: Baker Hughes 8

9 A More Accurate Assessment: For the US for : Oil and gas prices only establish links infrequently because there is only limited burner tip competition, and this only pertains within a certain range of supply demand tension. Oil and Gas Upstream opportunities are pursued on their own merit, although upward pressure on upstream cost base will effect the LRMC of both oil and gas. 9

10 Oil Indexation Mitigates Upstream Risk? European Gas Market similar in size to US Market (550 bcma vs 650 bcma). If oil indexed contracts disappeared overnight there is no reason to believe Europe would be destined to remain less liquid* than US. UK Market has very successfully attracted new supply and infrastructure without resort to oil-indexed contracts. Oil Indexation passes risk onto end-users whose business may not be related to oil * Ability to absorb incremental new supplies without significant market disruption. 10

11 European Oil-Indexed Contract Prices have bunched to form an arbitrage band Source: Argus LNG 11

12 UK Gas Prices Past Convergence Nov 2005 cold weather. Limited IUK imports due to CSO on Continent. Coincided with High Asian spot LNG prices and Hurricane Katrina Rough Storage Facility down until June 2006 due to fire. Bacton Terminal fire. Russia- Ukraine Crisis. AGIP Recession hits demand & supply glut. Shutdown of IUK due to Liquids Contamination NBP UK Market tightening due to production decline. Langeled pipeline starts up. CATS Pipeline outage. Japanese Kashiwazaki- Kariwa Nuclear plant down; tight LNG market Cold winter 09/10 allows arbitrage with continent. LNG supply variable. Sources: Platts, BAFA, 12

13 The Pressures for Change 1 The Supply Glut Surge in Global LNG Supply, Surge in US shale gas production, Reduction in gas demand due to recession. 13

14 European LNG Imports Jan 2005 Dec 2010 The Wave Hits Europe Source: Waterborne LNG 14

15 mmcm/day 3,000 2,500 2,000 1,500 1, ,500 3,000 2,500 2,000 1,500 1, Demand in Key Global LNG Europe Demand vs 2008: - 5.3% YTD 2010 vs 2009: +7.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec US, Canada & Mexican Demand vs 2008: - 1.1% YTD 2010 vs 2009: +5.3% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: IEA Monthly Data, EIA, Waterborne LNG Markets 700 mmcm/day mmcm/day Asia LNG Imports vs 2008: - 3.9% vs 2009: % - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 600 Asia LNG Imports Japan, Korea, Taiwan Japan, Korea, Taiwan Japan, Korea, Taiwan 2010 vs 2009: % vs 2009: % 2010 China, India China, India China, India Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 15

16 Gas Prices AGIP = Average German Import Price (Oil Indexed Gas) NBP = UK National balancing Point Price HH = Henry Hub US Price Brent Japanese cif LNG AGIP Predictor AGIP NBP HH Sources: Argus, BAFA, EIA, ICIS Heren, Own analysis 16

17 North Atlantic LNG Balance North America LNG Imports 0 Storage Inj./Withdrawal Europe Supply & Demand Demand LNG Imports Domestic Production Pipeline ACQ CY 07/08 109% CY 08/09 CY 09/10 CY 10/11 CY 11/12 CY 12/13 Pipeline of ACQ 92% 98% % 102% 112% Pipeline imports (Russia, N Africa, Azerbaijan & Iran) Sources: IEA Monthly Data, Waterborne LNG, Own Analysis % of TOP level achieved 17

18 The Pressures for Change 2 Buyer Psychology Liberalisation has changed the market characteristics (to the detriment of LT contract buyer): EU and National Legislation (3 rd Package) Destination clauses abolished. Unbundling Rules TPA for Infrastructure Capacity Allocation and Congestion Management Rules. Commitments of EU gas-importing companies regarding release of entry capacities. Limitations of long-term sales contracts Reduction of TSO market areas in Germany. Source: E.On Ruhrgas 18

19 Klaus Schafer, Eon-Ruhrgas, ONS 2010 Hubs are the reference point when customers talk to us LTC s in their current form no longer reflect the market We have to re-engineer the LTC s to anticipate the future needs of the market: price levels, indexation and review mechanism

20 Europe s Gas Schizophrenia Traditional Utility Mindset Trading Mindset If necessary I m willing to pay a premium over spot prices for flexibility. I (hope I) can force my customers to buy gas from me at oil indexed prices. I m not especially concerned what the absolute hub price level is, provided I m not exposed to higher cost supply positions. I can take storage capacity if I need flexibility. 20

21 Concessions & Impacts Norwegian Gas to European Continent: 15% priced on spot (WGI 21/4/2010). Gazprom to Unspecified Italian buyer: Period of carry forward of underlifted 2009 gas extended from 3 to 5 years, reductions in take or pay volumes for a few years, lower price for gas taken above take or pay levels. (WGI 17/2/2010) Wingas to Eneco an element of non-traditional pricing (WGI 5/1/2011) Gazprom to E.On Ruhrgas: future take or pay gas from Gazprom will be partially indexed to spot prices; the portion being in the low double digits (WGI 24/2/2010) 21

22 Observed Impact on Average German Import Price 22

23 European Long Term Contracts: Evolution? Trader? 23

24 European Contracts - Evolutionary Paths? UK Liberalisation & Oversupply Uncontracted Gas UK British Gas Long Term Indexed Contracts Hub indexed LTC s Renegotiated Multi/mixed -? Indexed Contracts EU Policy & Oversupply Continental European LT Oil Indexed Contracts 24

25 Be Careful What you Wish for. A liberalised European market would be one where 25% of supply is Russian Pipeline gas. Gazprom export monopoly could heavily influence hub prices through market power. However, this would encourage other supply sources to supply Europe (shale gas, LNG ). At least we would have a grown-up commodity market where price reflected fundamentals. 25

26 Conclusions Continuing Rationale for Oil Indexed Contracts? Largely historic: Gas preferred fuel in domestic and residential space heating and the power sector. But producers like it. In the short term it provides the perception of a low-risk cocoon. In the longer term it erodes power demand growth relative to coal, and industrial demand to overseas markets where gas prices are lower. Oil-Indexed Contracts have Dominated the European Market Apart from periods of abnormal supply surplus/tightness, European hub prices have converged on oil indexed prices through arbitrage. The argument that traded hub liquidity is too low, when used to justify maintaining oil indexation, is a circular one. If oil indexation disappeared tomorrow, Europe would be a liquid traded market almost as large as the US. Pressures for Change The supply glut left many buyers unable to meet ToP in CY 2008/9 and they are still disadvantaged relative to hub prices in CY 2009/10. As the system tightens (in large part due to cold winters and Asian LNG demand growth) the supply glut catalyst is receding. The ongoing pressure for change is now driven by buyer psychology. Mixed indexation and even hub-indexed long term contracts may be transitionary species on an evolutionary path to a liberalised European market. Be Careful What You Wish For.. Upstream producers who like oil-indexed contracts could be tempted by the prospect of being able to fine tune hub prices given their market power. However, like OPEC in the oil sector, this may also incentivise new sources of supply, more able to access a liberalised European market. 26

27 Thank You for your attention. Howard V Rogers Senior Research Fellow, OIES Natural Gas Programme howard.rogers@oxfordenergy.org 27

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