Natural Gas Pricing and Its Future

Transcription

1 Natural Gas Pricing and Its Future Europe as the Battleground Oil-Indexation / Commercial quantities of natural gas forced a re-think -Notade 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.

2 Oil-Indexed Pass Through Entities Key Contract Terms Gazprom Statoil Gasterra Shell/Exxon Producers Oil-indexed (GO/HFO) Duration: 20 years + 85% Take or Pay Price renegotiaion clause Seller takes price risk and Buyer assumes volume risk up to ToP E-On, Wingas, RW E, VNG, Thyssengas, BEB, EWE, Schleswag, SFG, HGW, etc. Stadtwerkes (about 500) Distribution Companies Wholesalers/ Transmission Companies Regional Transmission/ Distribution Companies Price and Volume risk pass-through Oil-indexed (GO/HFO) Duration: 1-5 yrs (avg) 75-90% Take or Pay Oil-indexed (GO/HFO) Capacity Charge Duration: 3-10 yrs (avg) Full-Requirements Oil-indexed (GO) + Fixed Charge Duration: 1-3 years Full Requirements End-Users pay End-users Burner-Tip Prices Residential/ Commercial/ Smaller Industrial Large Industrials, Chemicals, Generators Buyer takes price risk, Sellers assume volume risk down to ToP Netherlands Household Energy

3 1963 to 1990 Expansion & Linkage Who Spoiled the Party? Across Europe, industry lobbied for lower prices. Margaret Thatcher (PM ) UK gas privatization (1986) and liberalization: Privatized and unbundled British Gas, Allowed TPA to infrastructure, under Network Code, Introduced competition into all market sectors.

4 Commoditization of Gas Early 1990 s -Liberalization frees the gas field development log-jam Oversupply and hyper-competition. Producers lobby for connection to Europe Commodity markets begin to replace oilindexation. British Gas in trouble British Gas unbundling, starts renegotiating oilindexed deals to spot prices UK/ZeebruggeInterconnector. Commodity markets become connected to Europe. Defending European Markets Incumbents observed the UK, and feared contamination by market-priced supplies 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.

5 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. 1: EU Legislation 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)

6 2: Contagion of European Markets 3: Supply/Demand Error r /y 600 m c B 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 OECD Bcm Low Economic Growth Case - OECD Europe OECD Bcm

7 4: Over-Committed Supply Position Supply Source BCM BCM Notes Indigenous Production 185 Excludes Norway Pipeline Supplies Contracted: 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) The Anatomy of the Collision 2008 Recession Demand falls 7% in 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.

8 The Producers Revenues Fall Gazpromand Sonatrachfared worst of the producers, with both governments heavily reliant on gas revenues. Wholesalers Face $Billions Penalties 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, Botasreportedly owed $Billions in minimum bill payments to Gazpromand Sonatrach at October 2009.

9 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 Market balanced Q 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 smanagement has opted for toughness, and so they will continue on this path.

10 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