Beruflich Dokumente
Kultur Dokumente
Romain Davoust
April 2008
Gouvernance européenne
et géopolitique de l’énergie
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CONTENTS
INTRODUCTION ..................................................................................... 2
Methodological note: ..........................................................................3
B] EUROPE ....................................................................................... 11
1) The pricing structure in Continental Europe .................................11
2) Spot developments ..........................................................................13
3) LNG pricing .......................................................................................14
4) Retail prices ......................................................................................15
5) The case of the United Kingdom.....................................................16
5) a) main features............................................................................16
5) b) price history and formation.......................................................16
6) Table of European gas prices……………………………………..…...18
C] ASIA............................................................................................. 21
1) Gas sector overview.........................................................................21
2) LNG price determination and evolution in Asia ............................21
3) End-use prices ..................................................................................23
4) Table of Northeast Asian gas prices ..............................................26
CONCLUSIONS.................................................................................... 27
BIBLIOGRAPHY ................................................................................... 31
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R. Davoust / Gas Price Formation, Structure & Dynamics
Introduction
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R. Davoust / Gas Price Formation, Structure & Dynamics
Methodological note
In order to facilitate comparisons, all prices (wholesale and retail)
have been converted into a common unit: dollars per millions of
British Thermal Units ($ / MBtu). Also, in order to flatten the usual
volatility or seasonality in gas prices, we always use yearly average
prices.
All prices displayed in figures, tables and text are nominal
values (except figures n°11 and 13: prices are expressed in dollars of
2000). Using market prices (which integrate inflation) is suitable for
the present study. Indeed, the presence of inflation doesn’t impede
the analysis of price determination or structure. Regarding price
trends over time, inflation, with its distorting effect, can become more
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North America
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14.00
12.00
10.00
$/ 8.00
M
Bt
u 6.00
4.00
2.00
0.00
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
year
The North American market for gas consists of the United States,
Canada and, to a lesser extent, Mexico. The US natural gas market is
competitive, liquid and transparent, to such an extent that gas-to-gas
competition now prevails. But this physical spot market is frequently
volatile. Therefore, since 1989, agents manage price fluctuation risks
with futures contracts on the New York Mercantile Exchange
(NYMEX).
Henry Hub, a major pipeline junction in Louisiana is the
reference point of the North American pricing system; rates for other
hubs are defined by difference from it. These quote gaps (called
“basis differentials”) reflect the transportation costs required to bring
the gas to Henry Hub, but also correspond to market conditions at
different national hubs (ETC, 2007).
Although American gas prices are set by supply/demand
equilibriums, independently from any reference to oil, they run parallel
to petroleum trends in the long run. Indeed, due to inter-energy
substitution effects at the end-use side, monthly gas prices range
inside a corridor formed by a lower limit, heavy fuel rate, and an
upper limit, light fuel rate. Indeed, in case of a gas price spike,
households switch to light fuel oil, large industries switch to heavy fuel
oil and power plants switch to coal (Maisonnier, 2005).
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R. Davoust / Gas Price Formation, Structure & Dynamics
Several empirical studies (de Vanys & Walls 1993 & 1994, King &
Cuc 1996, Cuddington & Wang 2006, Park, Mjelde & Bessler 2007)
suggest that liberalization policies (pipeline open access since FERC
order n°436 in 1985), by reinforcing spatial arbitrage activity in the
long run, have strengthened the US gas market integration. A
common finding is that the number of co-integrated local markets has
increased within the 5 to 10 years following the reform. This
convergence is simply proved by the rising price spread correlations
between geographical locations. Finally, Serletis & Rangel-Ruiz
(2004, cited by Park, Mjelde & Bessler 2007) conclude that North
American natural gas prices are largely defined by Henry Hub price
trends. Nevertheless, King & Cuc (1996) and Cuddington & Wang
(2006, cited by Park, Mjelde & Bessler 2007) discover an East-West
spit inside the North American natural gas market, since the Western
side seems to be weakly integrated within the rest of the country.
To summarize, the North American gas sector is a single, fully
liberalized, highly competitive and strongly integrated market. This
spot market maturity should then bolster the futures market efficiency
in its capacity to integrate the sum of private information and
expectations concerning gas supply and demand. In other words,
prices as formed in the futures market should represent an accurate
forecast of future spot prices. Indeed, Walls (1995, cited by Wong-
Parodi, Dale & Lekov 2006) finds that gas futures prices are unbiased
predictors of future spot prices. Wong-Parodi, Dale & Lekov (2006)
state that the futures market is a more accurate predictor of natural
gas prices within a two-year horizon than is the Short-Term Energy
Outlook (STEO) of Energy Information Administration. As an
explanation, Henry Hub forward prices are determined economically
by the agent’s expectations while the STEO derives analytically from
an extrapolation of past price trends.
However, Felder (1995) affirms that the deregulation of gas
industries has created new price volatility, and therefore one should
give up deterministic approaches of price forecasting and opt for
random walk models.
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4) LNG prices
North America is part of the Atlantic Basin LNG market (with Europe).
But in America, LNG trade is encompassed in the overall competitive
evolution that affects the whole gas and electricity sector. As a result,
LNG price determination is more or less disconnected from oil
reference, and follows the trends of the existing gas-to-gas
competition in the US.
Figure n°2 confirms this statement: pipeline import prices and
LNG import prices follow a similar trajectory, which is given by market
conditions at Henry Hub spot. As for an explanation, LNG is imported
through short-term contracts on a netback basis, including a constant
reference to gas market yardsticks like Henry Hub (ETC, 2007). More
generally, such common movements between LNG, piped and spot
gas (econometrically proved by Siliverstives, l’Hegaret, Neumann &
von Hirschausen, 2004) have witnessed the better integration of
American gas prices since the industrial deregulation.
10
9.00
8.00
7.00
$/MBtu
6.00
5.00
4.00
3.00
2.00
1.00
0.00
year 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
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5) End-use prices
$/MBtu
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
year 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: US DOE
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6) US gas prices
WHOLESALE END-USE
Spot Well Pipe LNG House
year Industry Power G
(Hen.H.) head import* import* holds
1989 1.70 1.64 1.76 2.15 5.47 2.87 2.36
1990 1.64 1.66 1.85 2.40 5.63 2.84 2.31
1991 1.49 1.59 1.76 2.29 5.65 2.61 2.11
1992 1.77 1.69 1.78 2.46 5.71 2.75 2.29
1993 2.12 1.98 1.96 2.13 5.98 2.98 2.53
1994 1.92 1.79 1.80 2.21 6.22 2.96 2.21
1995 1.69 1.50 1.44 2.23 5.88 2.63 1.96
1996 2.75 2.10 1.90 2.72 6.15 3.32 2.61
1997 2.52 2.25 2.09 2.66 6.73 3.48 2.70
1998 2.08 1.90 1.89 2.55 6.62 3.05 2.33
1999 2.27 2.12 2.16 2.40 6.49 3.01 2.54
2000 4.23 3.57 3.86 3.40 7.53 4.35 4.25
2001 4.06 3.88 4.31 4.22 9.34 5.08 4.47
2002 3.34 2.86 3.04 3.31 7.65 3.90 3.57
2003 5.62 4.73 5.07 4.65 9.34 5.71 5.40
2004 5.85 5.30 5.63 5.65 10.43 6.33 5.93
2005 8.80 7.11 7.85 8.01 12.45 8.30 8.23
2006 6.76 6.23 6.63 6.97 13.34 7.65 6.88
* average price
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Europe
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$/MBtu
14.
12.
10.
8.0
6.0
4.0
2.0
0.0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
year
14
12
10
$/MBtu 8
0
99 00 01 02 03 04 05 06
year
Austria Belgium Finland
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2) Spot developments
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3) LNG pricing
$/MBtu
14.
12.
EU pipe gas
10. import
8.0 EU LNG
6.0 import
4.0 Brent
2.0
0.0
99 00 01 02 03 04 05 06
year
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4) Retail prices
40.00
Austria
35.00 Czech Republic
30.00 Denmark
Finland
25.00
France
$/MBtu
20.00 Greece
Hungary
15.00
Ireland
10.00 Italy
5.00 Netherlands
Poland
0.00
Slovak Repub-
98 99 00 01 02 03 04 05 06
lik
Spain
year
14.00
Czech Republik
12.00
Finland
10.00 France
Greece
8.00 Hungary
$/MBtu
6.00 Ireland
Italy
4.00 Netherlands
Poland
2.00
Portugal
0.00 Slovak Republik
98 99 00 01 02 03 04 05 06 Spain
year
Two main features emerge: since 1998, end-use prices have strongly
risen on average, and the price spread between member states has
even widened. On those two points, gas directives seem to have
more or less failed in the short term since the opening policy was
theoretically supposed to generate both lower prices and price
convergence. However, conjuncture factors, like the recent surge in
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international oil markets, account for the boost in retail gas prices
(final gas prices in the residential, industrial and power sector are
indeed based on the market value of substitutes, mainly fuel oil).
Moreover, the persistent price divergence across Europe has
a structural explanation, such as substantial differences in national
taxation (especially in the residential sector, where the percentage of
taxes ranges between 5% in the UK and 33% in Netherlands as of
2006). Recently, an important bias was introduced by the termination
of cross-subsidies between end-use sectors (large users would
indirectly finance small users). Put more simply, the gaps can be
linked to differences in transportation and distribution costs that are
included in the final price (for example, Eastern countries, closer from
Russia, bear lower transportation charges). Asche, Osmunden &
Tveteras (2002) justify the relative price discrepancy through Europe
by pointing to the natural complexity of gas import contracts, which
depend on a wide range of elements, including political risk and even
oil taxation.
However, Robinson (2007) analyses retail gas prices
trajectories in the long term inside the European Union. Based on a
sample of member states, he notices a long-run convergence of
national prices between 1978 and 2004, reflected by diminishing price
differentials over time.
a) main features
Contrary to the Continent, which is still dependent on long-term
contracts, the British gas industry is fully liberalized. In this sense, it
follows closely the current North American paradigm, thus displaying
similar features: spot transactions, responsive short-term pricing and
gas-to-gas competition. But while Henry Hub represents a physical
spot, the National Balancing Point is a virtual point, an intangible
trading place which quotes prices for all gas passing through the
national grid according to a system of “entry-exit” rights (ETC, 2007).
Linked to the NBP, a futures market for gas has developed at the
International Petroleum Exchange.
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Figure n°9: Comparison between NBP spot, EU import and oil barrel
(1999-2006)
14.00
12.00
10.00
8.00
$/MBtu
6.00
4.00
2.00
0.00
99 00 01 02 03 04 05 06
year
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Italy Netherlands
Year H I P H I P
1998 19.19 4.76 - 10.93 3.69 3.38
1999 17.73 - - 10.25 3.24 -
2000 - - - 9.98 4.63 -
2001 - - - 11.15 4.88 -
2002 - - - 12.70 4.57 -
2003 - - - 16.74 6.18 -
2004 21.62 8.35 - 18.96 - -
2005 22.87 9.77 - 22.23 - -
2006 26.02 12.62 - 24.99 - -
Source: BP, Energy P&T
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Asia
Liquefied Natural Gas import prices in the Pacific Basin are more
expensive by roughly 1 $ / MBtu compared with the Atlantic Basin.
This premium (the “Asian premium”) is due to long-haul shipping of
gas, high charges applied to the use of LNG terminals and lastly the
absence of competition from piped gas.
Since the 90’s, the Northeast Asian pricing formula is based
on the Japanese pattern, and is P=a+bX type. It is split between two
components: a base part (a), constant, set firmly by negotiation, and
a floating part, termed “escalator” (X), designed to reflect variations in
oil rates. Usually, a coefficient (“pass-through factor”, b, inferior to
unit) is used to integrate petroleum tendencies in the Liquefied
Natural Gas price.
A very common price escalator in the Asia Pacific region is the
Japanese Crude Cocktail (JCC), a basket of different crude oils
imported from the Middle East. Such a benchmark is another factor of
the Asian gas price premium: shipping crude oils from the Middle
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$/MBtu
14
12
10
8 Japan LNG
import
6 Crude oil import cost
4 in Japan
2
0
86
05
06
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
year
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3) End-use prices
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Figure n°11: Sectoral end-use gas prices and crude oil prices in Japan
(1985-2000)
40.
35.
30.
25. Industry
20. Residential
$/MBtu
15. LNG
10.
5.0
0.0
98 99 00 01 02 03 04 05 06
year
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Conclusions
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9.00
8.00
7.00
$/ 6.00 US
Mbtu 5.00 Europe
4.00
3.00 Japan
2.00
1.00
0.00
99 00 01 02 03 04 05 06
year
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Bibliography
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