This document discusses global natural gas demand and liquefied natural gas (LNG) costs and pricing. Some key points:
- Global natural gas demand is expected to significantly increase as more nations adopt natural gas to meet economic growth and minimize the environmental impact of oil. Asia, the Middle East, and South America are rapidly growing gas markets.
- LNG costs rose dramatically in the early 2000s due to factors like materials inflation, contractor overload, and construction challenges. Typical plant costs increased from $200 to over $1000 per ton of capacity.
- There are regional gas markets that influence LNG pricing - North America, UK, Europe, and Northeast Asia. Pricing systems include oil indexing (
The Executive Summary for the IEA's 2015 Annual Medium-Term Gas Market Report. This year's report predicts global demand for natural gas will slightly decrease to 2% per year, down from 2014's prediction of 2.3% per year. Why? Asia's demand for natgas will decrease over the next five years. Implication: Some U.S. LNG export facilities will get delayed or even canceled.
The 25-page executive summary for a study published in January 2014 by IHS titled "Fueling the Future with Natural Gas: Brining it Home." The new study finds that because of the ongoing rush of new natural gas supplies from shale drilling, the Henry Hub benchmark price will likely stay between $4-$5 per Mcf until 2035. It also finds homeowners will save a signifcant amount of money by heating with natural gas.
Super majors have heavily invested in extraction and liquefaction projects; LNG shipping has received too little attention. Most of the players are developing gas extraction and liquefaction plants in key producing countries and regasification facilities in key consuming countries to secure gas reserves and gas distribution, especially to the Atlantic and Pacific Basin. Complex long terms contracts are also decreasing to give space to new short terms contracts in order to improve flexibility in distribution and allow benefits from market opportunities. The LNG demand is now getting higher than supply in targeted countries with extensive capacity of development.
Justin Dargin, a Research Fellow with The Dubai Initiative at Harvard University and a Fulbright Scholar of the Middle East, was invited by CIRS to deliver a lecture on “Gulf Gas Development: A Rational Development Strategy” to Georgetown University in Qatar faculty and staff. The lecture focused on the basics of the Gulf Gas/Power Sector and how the countries of the GCC are facing the current energy challenges.
Report: LNG and Renewable Power: Risk and Opportunity in a Changing WorldMarcellus Drilling News
A report titled "LNG and Renewable Power: Risk and Opportunity in a Changing World" from The Brattle Group. The report finds that competition between renewable power and gas-fired generation using liquefied natural gas (LNG) from North America is increasing in overseas markets as a result of declining renewable power costs. It has significant ramifications for many LNG export projects now on the books.
Fifty Years of Global LNG, Trafigura White PaperTrafigura
LNG has experienced remarkable developments in commercialization and export capacity in a span of just 50 years. In this paper produced for the 2014 LNG Asia Pacific Summit in Singapore, Professor Craig Pirrong probes where the industry is headed as oil-based pricing becomes a relic of the past. His analysis and insights describe a potential revolution in LNG pricing and contracting mechanisms that will rely on trading firms and commodity markets to secure supply and manage risk.
The white paper is written by Craig Pirrong, professor of finance and the Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business at the University of Houston. The white paper was written with the funding and support of The Trafigura Group.
(Trafigura, September 2014)
Read more about Trafigura on our website: www.trafigura.com
Meta-review of long-term energy & carbon pricesLeonardo ENERGY
This report presents the findings of a study on future energy and carbon costs, based on a review of 13 long-term scenarios for the energy transition
- Coal, oil, gas, electricity, and carbon future prices are included (throughout this report referred to as “energy vectors”)
- Facts and trends impacting future prices are identified, but not analyzed
- EU countries with available information and in different stages of the energy transition are included
The findings can be summarized as follows:
- Most scenarios expect coal prices will remain virtually flat, with yearly price increases that are lower than those of other fossil fuels.
- Oil prices will be affected by limited supply and a decreasing demand. Most scenarios project a moderate growth of oil real prices from 2020 to 2050, except for particular extreme cases.
- Natural gas demand is projected to increase, but price increases will be moderated by abundant global supply. Natural gas demand is projected to increase, but price increases will be moderated by abundant global supply.
- It is expected that end-user electricity prices will rise driven by fossil fuel prices, carbon prices, and increasing generation costs from RES. Industrial electricity prices are projected to increase in the short term and then stabilize towards 2050. Industrial electricity prices rise under scenarios with higher RES
- CO2 prices will increase and will shift the profitability of carbon intensive technologies towards less carbon intensive ones. All considered scenarios project a strong yearly growth of carbon prices . However, there is a wide variation of estimates.
- Coal, oil or gas prices are not correlated with RES penetration.
The above findings are essentially assumptions behind some of the major scenarios using in energy policy planning. The analysis includes scenarios from Ecofys, the European Commission, DNV GL, Greenpeace, Eurelectric, European Climate Foundation, McKinsey, Enerrgynautics, Fraunhofer, Stanford, Imperial College and NERA.
A report published by the Center for Climate and Energy Solutions in June 2013 which looks at how the use of natural gas can be paired with renewable energy sources in the coming years to further reduce so-called greenhouse gas emissions--carbon and methane--which theoretically will help reduce (don't laugh), "climate change." Of course the climate changes all the time, but don't tell the politicians and Mother Earth worshipers that.
The Executive Summary for the IEA's 2015 Annual Medium-Term Gas Market Report. This year's report predicts global demand for natural gas will slightly decrease to 2% per year, down from 2014's prediction of 2.3% per year. Why? Asia's demand for natgas will decrease over the next five years. Implication: Some U.S. LNG export facilities will get delayed or even canceled.
The 25-page executive summary for a study published in January 2014 by IHS titled "Fueling the Future with Natural Gas: Brining it Home." The new study finds that because of the ongoing rush of new natural gas supplies from shale drilling, the Henry Hub benchmark price will likely stay between $4-$5 per Mcf until 2035. It also finds homeowners will save a signifcant amount of money by heating with natural gas.
Super majors have heavily invested in extraction and liquefaction projects; LNG shipping has received too little attention. Most of the players are developing gas extraction and liquefaction plants in key producing countries and regasification facilities in key consuming countries to secure gas reserves and gas distribution, especially to the Atlantic and Pacific Basin. Complex long terms contracts are also decreasing to give space to new short terms contracts in order to improve flexibility in distribution and allow benefits from market opportunities. The LNG demand is now getting higher than supply in targeted countries with extensive capacity of development.
Justin Dargin, a Research Fellow with The Dubai Initiative at Harvard University and a Fulbright Scholar of the Middle East, was invited by CIRS to deliver a lecture on “Gulf Gas Development: A Rational Development Strategy” to Georgetown University in Qatar faculty and staff. The lecture focused on the basics of the Gulf Gas/Power Sector and how the countries of the GCC are facing the current energy challenges.
Report: LNG and Renewable Power: Risk and Opportunity in a Changing WorldMarcellus Drilling News
A report titled "LNG and Renewable Power: Risk and Opportunity in a Changing World" from The Brattle Group. The report finds that competition between renewable power and gas-fired generation using liquefied natural gas (LNG) from North America is increasing in overseas markets as a result of declining renewable power costs. It has significant ramifications for many LNG export projects now on the books.
Fifty Years of Global LNG, Trafigura White PaperTrafigura
LNG has experienced remarkable developments in commercialization and export capacity in a span of just 50 years. In this paper produced for the 2014 LNG Asia Pacific Summit in Singapore, Professor Craig Pirrong probes where the industry is headed as oil-based pricing becomes a relic of the past. His analysis and insights describe a potential revolution in LNG pricing and contracting mechanisms that will rely on trading firms and commodity markets to secure supply and manage risk.
The white paper is written by Craig Pirrong, professor of finance and the Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business at the University of Houston. The white paper was written with the funding and support of The Trafigura Group.
(Trafigura, September 2014)
Read more about Trafigura on our website: www.trafigura.com
Meta-review of long-term energy & carbon pricesLeonardo ENERGY
This report presents the findings of a study on future energy and carbon costs, based on a review of 13 long-term scenarios for the energy transition
- Coal, oil, gas, electricity, and carbon future prices are included (throughout this report referred to as “energy vectors”)
- Facts and trends impacting future prices are identified, but not analyzed
- EU countries with available information and in different stages of the energy transition are included
The findings can be summarized as follows:
- Most scenarios expect coal prices will remain virtually flat, with yearly price increases that are lower than those of other fossil fuels.
- Oil prices will be affected by limited supply and a decreasing demand. Most scenarios project a moderate growth of oil real prices from 2020 to 2050, except for particular extreme cases.
- Natural gas demand is projected to increase, but price increases will be moderated by abundant global supply. Natural gas demand is projected to increase, but price increases will be moderated by abundant global supply.
- It is expected that end-user electricity prices will rise driven by fossil fuel prices, carbon prices, and increasing generation costs from RES. Industrial electricity prices are projected to increase in the short term and then stabilize towards 2050. Industrial electricity prices rise under scenarios with higher RES
- CO2 prices will increase and will shift the profitability of carbon intensive technologies towards less carbon intensive ones. All considered scenarios project a strong yearly growth of carbon prices . However, there is a wide variation of estimates.
- Coal, oil or gas prices are not correlated with RES penetration.
The above findings are essentially assumptions behind some of the major scenarios using in energy policy planning. The analysis includes scenarios from Ecofys, the European Commission, DNV GL, Greenpeace, Eurelectric, European Climate Foundation, McKinsey, Enerrgynautics, Fraunhofer, Stanford, Imperial College and NERA.
A report published by the Center for Climate and Energy Solutions in June 2013 which looks at how the use of natural gas can be paired with renewable energy sources in the coming years to further reduce so-called greenhouse gas emissions--carbon and methane--which theoretically will help reduce (don't laugh), "climate change." Of course the climate changes all the time, but don't tell the politicians and Mother Earth worshipers that.
Quality defects in TMT Bars, Possible causes and Potential Solutions.PrashantGoswami42
Maintaining high-quality standards in the production of TMT bars is crucial for ensuring structural integrity in construction. Addressing common defects through careful monitoring, standardized processes, and advanced technology can significantly improve the quality of TMT bars. Continuous training and adherence to quality control measures will also play a pivotal role in minimizing these defects.
COLLEGE BUS MANAGEMENT SYSTEM PROJECT REPORT.pdfKamal Acharya
The College Bus Management system is completely developed by Visual Basic .NET Version. The application is connect with most secured database language MS SQL Server. The application is develop by using best combination of front-end and back-end languages. The application is totally design like flat user interface. This flat user interface is more attractive user interface in 2017. The application is gives more important to the system functionality. The application is to manage the student’s details, driver’s details, bus details, bus route details, bus fees details and more. The application has only one unit for admin. The admin can manage the entire application. The admin can login into the application by using username and password of the admin. The application is develop for big and small colleges. It is more user friendly for non-computer person. Even they can easily learn how to manage the application within hours. The application is more secure by the admin. The system will give an effective output for the VB.Net and SQL Server given as input to the system. The compiled java program given as input to the system, after scanning the program will generate different reports. The application generates the report for users. The admin can view and download the report of the data. The application deliver the excel format reports. Because, excel formatted reports is very easy to understand the income and expense of the college bus. This application is mainly develop for windows operating system users. In 2017, 73% of people enterprises are using windows operating system. So the application will easily install for all the windows operating system users. The application-developed size is very low. The application consumes very low space in disk. Therefore, the user can allocate very minimum local disk space for this application.
Event Management System Vb Net Project Report.pdfKamal Acharya
In present era, the scopes of information technology growing with a very fast .We do not see any are untouched from this industry. The scope of information technology has become wider includes: Business and industry. Household Business, Communication, Education, Entertainment, Science, Medicine, Engineering, Distance Learning, Weather Forecasting. Carrier Searching and so on.
My project named “Event Management System” is software that store and maintained all events coordinated in college. It also helpful to print related reports. My project will help to record the events coordinated by faculties with their Name, Event subject, date & details in an efficient & effective ways.
In my system we have to make a system by which a user can record all events coordinated by a particular faculty. In our proposed system some more featured are added which differs it from the existing system such as security.
Saudi Arabia stands as a titan in the global energy landscape, renowned for its abundant oil and gas resources. It's the largest exporter of petroleum and holds some of the world's most significant reserves. Let's delve into the top 10 oil and gas projects shaping Saudi Arabia's energy future in 2024.
Industrial Training at Shahjalal Fertilizer Company Limited (SFCL)MdTanvirMahtab2
This presentation is about the working procedure of Shahjalal Fertilizer Company Limited (SFCL). A Govt. owned Company of Bangladesh Chemical Industries Corporation under Ministry of Industries.
TECHNICAL TRAINING MANUAL GENERAL FAMILIARIZATION COURSEDuvanRamosGarzon1
AIRCRAFT GENERAL
The Single Aisle is the most advanced family aircraft in service today, with fly-by-wire flight controls.
The A318, A319, A320 and A321 are twin-engine subsonic medium range aircraft.
The family offers a choice of engines
NO1 Uk best vashikaran specialist in delhi vashikaran baba near me online vas...Amil Baba Dawood bangali
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Forklift Classes Overview by Intella PartsIntella Parts
Discover the different forklift classes and their specific applications. Learn how to choose the right forklift for your needs to ensure safety, efficiency, and compliance in your operations.
For more technical information, visit our website https://intellaparts.com
About
Indigenized remote control interface card suitable for MAFI system CCR equipment. Compatible for IDM8000 CCR. Backplane mounted serial and TCP/Ethernet communication module for CCR remote access. IDM 8000 CCR remote control on serial and TCP protocol.
• Remote control: Parallel or serial interface.
• Compatible with MAFI CCR system.
• Compatible with IDM8000 CCR.
• Compatible with Backplane mount serial communication.
• Compatible with commercial and Defence aviation CCR system.
• Remote control system for accessing CCR and allied system over serial or TCP.
• Indigenized local Support/presence in India.
• Easy in configuration using DIP switches.
Technical Specifications
Indigenized remote control interface card suitable for MAFI system CCR equipment. Compatible for IDM8000 CCR. Backplane mounted serial and TCP/Ethernet communication module for CCR remote access. IDM 8000 CCR remote control on serial and TCP protocol.
Key Features
Indigenized remote control interface card suitable for MAFI system CCR equipment. Compatible for IDM8000 CCR. Backplane mounted serial and TCP/Ethernet communication module for CCR remote access. IDM 8000 CCR remote control on serial and TCP protocol.
• Remote control: Parallel or serial interface
• Compatible with MAFI CCR system
• Copatiable with IDM8000 CCR
• Compatible with Backplane mount serial communication.
• Compatible with commercial and Defence aviation CCR system.
• Remote control system for accessing CCR and allied system over serial or TCP.
• Indigenized local Support/presence in India.
Application
• Remote control: Parallel or serial interface.
• Compatible with MAFI CCR system.
• Compatible with IDM8000 CCR.
• Compatible with Backplane mount serial communication.
• Compatible with commercial and Defence aviation CCR system.
• Remote control system for accessing CCR and allied system over serial or TCP.
• Indigenized local Support/presence in India.
• Easy in configuration using DIP switches.
Courier management system project report.pdfKamal Acharya
It is now-a-days very important for the people to send or receive articles like imported furniture, electronic items, gifts, business goods and the like. People depend vastly on different transport systems which mostly use the manual way of receiving and delivering the articles. There is no way to track the articles till they are received and there is no way to let the customer know what happened in transit, once he booked some articles. In such a situation, we need a system which completely computerizes the cargo activities including time to time tracking of the articles sent. This need is fulfilled by Courier Management System software which is online software for the cargo management people that enables them to receive the goods from a source and send them to a required destination and track their status from time to time.
Explore the innovative world of trenchless pipe repair with our comprehensive guide, "The Benefits and Techniques of Trenchless Pipe Repair." This document delves into the modern methods of repairing underground pipes without the need for extensive excavation, highlighting the numerous advantages and the latest techniques used in the industry.
Learn about the cost savings, reduced environmental impact, and minimal disruption associated with trenchless technology. Discover detailed explanations of popular techniques such as pipe bursting, cured-in-place pipe (CIPP) lining, and directional drilling. Understand how these methods can be applied to various types of infrastructure, from residential plumbing to large-scale municipal systems.
Ideal for homeowners, contractors, engineers, and anyone interested in modern plumbing solutions, this guide provides valuable insights into why trenchless pipe repair is becoming the preferred choice for pipe rehabilitation. Stay informed about the latest advancements and best practices in the field.
3. 338
The LNG price formula is one of the most critical
factors in LNG contract negotiations. When
buyers and sellers argue for different formulas
during negotiations, there is no mutually
agreeable way to compare these formulas with
different slopes, constants or kink points, not to
mention of other conditions like quantity
tolerances and seasonality, into the evaluation.
As a result, buyers and sellers adhere to
subjective arguments, frequently causing
negotiations to become deadlocked. Therefore,
the establishment of a metric for valuing LNG
formulas will lead to more efficient
negotiations.
4. 339
Global Natural Gas Demand
Global demand for natural gas is expected to expand significantly as
more nations adopt environmentally cleaner fuels to meet future
economic growth and prioritize alternatives tominimize the impact of
increasing oil – based energy costs. The environmental benefits of
natural gas are clear. Natural gas emits 43% fewer carbon emissions
than coal, and 30% fewer emissions than oil, for each unit of energy
delivered. Many of the most rapidly growing gas markets are in
emerging economies in Asia, particularly India and China, the Middle
East and South America, economies which battle the balance between
air quality and living standards on a daily basis.
According to the U.S. Energy Information Agency (EIA), worldwide
natural gas demand grew by 57 Bcf/d from 2000 to 2007, nearly 25%.
The EIA also projects global natural gas demand to grow over 40 Bcf/d
by the year 2015, and projects a further growth in demand of over 50
Bcf/d by 2025.
LNG is the fastest-growing component of the global natural gas
market, increasing at a 7% annual rate over the last decade. For
countries that lack indigenous natural gas resources and delivery
infrastructure, LNG represents a rapid and cost-effective means of
introducing natural gas into their local fuel mix. Currently there are 25
LNG-importing countries in Europe, Asia, South America, Central
America, North America and the Middle East, up from 17 importing
countries in 2007. Numerous developing countries, including Poland,
Croatia, Bangladesh, Jamaica, Colombia, Panama, El Salvador, Costa
FIGURE 1:GLOBAL NATURAL GAS DEMAND
5. 340
Rica and Lebanon, among others, are considering plans to build new
LNG terminals and enter the global LNG trade.
LNG Costs
During the late 1990s and early 2000s, LNG costs were steadily declining
and there was a widespread expectation that the trend would continue
and be a major driver of the growth of LNG trade. But in the early part of
this decade, severe cost inflation set in and costs are now much higher
that they were expected to be in the earlier period.
Unfortunately, there are very few LNG projects completed in any one year
and their costs may vary significantly based on design constraints and
local conditions. That fact, together with the fact that plants have been
exposed to changing cost inflation over an extended period of plant
construction, limits the amount and value of publicly available cost data
making it very difficult to get a reliable current handle on what is
happening to costs
Liquefaction Plants
During the earlier period of declining costs, there was a widespread
expectation that typical plants were approaching a capital cost level of
about $200 per ton. Much of the decline was attributable to scale
economies that came from larger plant sizes. Figure 3 illustrates the scale
effect. It utilizes typical costs from a 2008 perspective.
FIGURE 2:REGIONAL NG & LNG PRICES
6. 341
Until the late 1990s, train sizes were limited by existing compressor
designs to about 2.5 million tons per train. Then designs began to break
free of those limitations and train sizes have been rising steadily ever
since.
In the early part of this decade, the pattern of declining costs dramatically
reversed and costs are now rising. Figure 5 provides four illustrative cost
estimates for the same LNG facility made at different periods. While
materials inflation has been a factor in rising LNG costs, most LNG plant
inflation is attributable to the overload of experienced Engineering,
Procurement, Construction(EPC) contractors. In addition to cost inflation
there are frequently substantial individual variations from typical costs for
LNG plants.
Three recent high cost plants have been Norway’s Shohvit, Russia’s
Sakhalin 2 and Australia’s Pluto. The first two appear to have been
affected by the challenges of construction in an Arctic environment, while
Pluto may be an example of remote construction. The costs of these plants
have come in at 33% to 125% higher than the level on which the costs in
Figure 3 are based.
One LNG project that made its Final Investment Decision (FID) in 2008 is
the Gassi Touil LNG liquefaction facility in Algeria. Its construction bid
came in at roughly double estimates that were used in the Figure 3. But
since costs for individual plants can vary significantly, particularly if there
are special “problem” issues, it is not clear how representative this single
quote is of the current market.
FIGURE 3: UTILIZES TYPICAL COSTS FROM A 2008 PERSPECTIVE
7. 342
The construction cost of green-field LNG projects started to skyrocket from
2004 afterward and has increased from about $400 per ton of capacity to
$1000 per ton of capacity in 2008.
The main reasons for skyrocketed costs in LNG industry can be described as
follows:
1. Low availability of EPC contractors as result of extraordinary high level of
ongoing petroleum projects world wide.
2. High raw material prices as result of surge in demand for raw materials.
3. Lack of skilled and experienced workforce in LNG industry.
4. Devaluation of US dollar.
Recent Global Financial Crisis and decline in raw material and equipment
prices is expected to cause some decline in construction cost of LNG plants,
however the extent of such a decline is still unclear.
Regasification Terminals
There are large variations in the costs of regasification terminals, based
largely on specific local conditions. But the same pressures that have
escalated liquefaction plant costs are also operating for regasification plants.
FIGURE 4:: ILLUSTRATIVE CAPITAL COSTS OF A NEW 4.5 MMT GREENFIELD
LIQUEFACTION PLANT
8. 343
Tankers
Costs for tankers have also been rising but not as dramatically as for
liquefaction plants. And the increases have been partially offset by some
limited scale economies for larger tankers. The average size of the tankers
launched in 2000 (excluding small specialty vessels) was 137,200 cubic
meters.
While the average size had risen to 150,900 by 2007, this included several
of Qatar’s Q Flex vessels. Excluding these, the average size was only
147,500, a 7% increase.
LNG pricing
There are now four major regional markets whose gas pricing
patterns influence the price of LNG in world gas trade. They are:
North America
the UK
the European Continent
Northeast Asia
Two emerging LNG markets – China and India – gas importers with
both pipeline and LNG options, have not yet developed consistent
pricing patterns of their own.
The market regions differ in their sources of gas supply, their reliance
on contracts, and the extent to which they have liberalised their gas
industries. These factors have had a strong influence on price
behaviour and thus affect the way in which LNG is priced to compete in
their markets.
There are three major pricing systems in the current LNG
contracts:
Oil indexed contract used primarily in Japan, Korea, Taiwan and
China;
Oil, oil products and other energy carriers indexed contracts used
primarily in Continental Europe.
Market indexed contracts used in the US and the UK.
9. 344
The formula for an indexed price is as follows:
CP = BP + β X
BP: constant part or base price
β: gradient
X: indexation
The formula has been widely used in Asian LNG SPAs, where base price
refers to a term that represents various non-oil factors, but usually a
constant determined by negotiation at a level which can prevent LNG
prices from falling below a certain level. It thus varies regardless of oil
price fluctuation.
Oil parity
Oil parity is the LNG price that would be equal to that of crude oil on a
Barrel of oil equivalent basis. If the LNG price exceeds the price of crude
oil in BOE terms, then the situation is called broken oil parity. A
coefficient of 0.1724 results in full oil parity. In most cases the price of
LNG is less the price of crude oil in BOE terms. In 2009, in several spot
cargo deals especially in East Asia, oil parity approached the full oil parity
or even exceeds oil parity.
S-Curve
Many formula include an S-curve, where the price formula is different
above and below a certain oil price, to dampen the impact of high oil
prices on the buyer, and low oil prices on the seller.
Brent and other energy carriers
In the continental Europe, the price formula indexation does not follow
the same format, and it varies from contract to contract. Brent crude price
(B), heavy fuel oil price (HFO), light fuel oil price (LFO), gas oil price
(GO), coal price, electricity price and in some cases, consumer and
producer price indexes are the indexation elements of price formulas.
Price review
Usually there exists a clause allowing parties to trigger the price revision
or price reopening in LNGSPAs. In some contracts there are two options
for triggering a price revision.
10. 345
Defining the market value of LNG price formulas
Modeling LNG price formulas
LNG price formulas are price functions taking the crude oil price as an
input. The JCC price (average CIF price for imports of crude oil to Japan)
is used as an input for all LNG except Indonesian LNG, which uses REP
(the realized export price for Indonesian crude oil).
For the purposes of the study, complexity is avoided by assuming there is
just a single type of oil, so no attempt is made to take into account the
different types of crude oil. Also, in practice, LNG price formulas index to
the crude oil prices for several months ahead, but for the purpose of
simplification, only the price for the current month is considered.
Also, it was assumed that the S-curve would only have 2 kink points. With
these simplifications the LNG price formula is modeled as shown in Fig.
6. P1 is called the lower kink point, and P2 is called the upper kink point.
Also, a1 is called the low price band slope, a2 is called the middle price
band slope, and a3 is called the high price band slope. Fig. 5 shows the
concept of the price formula, not a formula utilized in an actual contract.
FIGURE 5:MODELING LNG PRICE FORMULAS (CONCEPT)
11. 346
Defining the market value of LNG price formulas
In this study, the market value of an LNG price formula is defined as the
swap price indexed to the LNG price as determined by the price formula
(hereinafter referred to as the "LNG swap price"). Swap transactions are
financial transactions that exchange a pre-determined fixed price for the
value of the fluctuating index price at a specific point in the future, and
the swap price refers to that fixed price. Swapping a fixed price for a
varying price may only occur once, or it may occur at a number of
predetermined points within a certain period. For example, if the
arrangement is to swap each month over a 3-year period, the swap
buyer pays the same price each month for 36 months, and receives in
exchange the index price, which varies from month to month. The
market value of a LNG price formula for a 3-year contract is the fixed
price for 3 years of swap transactions indexed to an LNG price
determined according to the price formula.
Breaking down LNG swaps into crude oil derivatives
The LNG price formula shown in Fig. 5 can be broken down into the
components shown in Fig. 6. These can be expressed mathematically as
Equation (1). Noting that the second term and third term in Equation (1)
represent the cash flow of put options and call options, and taking into
consideration the fact that the option price is defined as the current value,
the LNG swap price can be broken down into crude oil derivatives as
shown in Equation (2). A long term LNG swap price can similarly be
broken down as shown in Equation (3). The first term in Equation (3) is
the crude oil swap price, calculated directly from the NYMEX futures
price for up to 7 years ahead. In contrast, the second term and third term
can use the NYMEX option prices for up to 1 year ahead directly as the
price for the crude oil options, but for the option prices over the long term
a model calculation is necessary using financial engineering techniques.
The evaluation method for the crude oil option prices is shown in the next
Section.
FIGURE 6:BREAK DOWN OF LNG PRICE FORMULAS
12. 347
LNGt: LNG price at time t
Oilt: Crude oil price at time t
F [Xt]: Swap price indexed to Xt
F [XST]: Swap price for start S and term T indexed to fX
Put [Xt,P]: Call option price for a strike price P indexed to Xt
Call [Xt,P]: Put option price for a strike price P indexed to Xt
S: LNG contract start date
T: LNG contract maturity date
r: Risk-free interest rate
𝐿𝑁𝐺𝑡 = 𝑎2 𝑥 𝑂𝑖𝑙𝑡 + 𝑏2 + 𝑎2 − 𝑎1 X MAX[𝑃1 − 𝑂𝑖𝑙𝑡, 0] − a2 − a3 x max [ Oilt − P2, 0]
1
𝑒𝑟𝑡 𝑥 𝐹 𝐿𝑁𝐺𝑡]
1
𝑒𝑟𝑡 𝑥 𝑎2 𝑥 𝐹 𝑂𝑖𝑙𝑡] + 𝑏2 + 𝑎2 − 𝑎1 𝑥 𝑃𝑢𝑡 𝑂𝑖𝑙𝑡 , 𝑃1]
1
𝑒𝑟𝑡
𝑇
𝑡−𝑠 𝑥 𝐹 𝐿𝑁𝐺𝑆
𝑇]
1
𝑒𝑟𝑡
𝑇
𝑡−𝑠 𝑎2 𝐹 𝑂𝑖𝑙𝑡] + 𝑏2 + 𝑎2 − 𝑎1 𝑥 𝑃𝑢𝑡
𝑇
𝑡−𝑠 𝑂𝑖𝑙𝑡 , 𝑃1] =
− 𝑎2 − 𝑎3 𝑥 𝐶𝑎𝑙𝑙
𝑇
𝑡−𝑠 𝑂𝑖𝑙𝑡 , 𝑃2]
FIGURE 7:PRICE DETERMINATION OVER TIME (US MARKET)
14. 349
Potential Sources of Competition for Contract-
Dependent Markets – LNG
The ability of pipeline trading to provide commodity competition in gas
markets is necessarily restricted by geography and capacity
constraints. LNG is far more flexible since LNG cargoes can go
anywhere in the world. Thus LNG trading is the prime force in the
development of a global gas market.
From Figure 9 The traditional long-term contract commonly linked
specific buyers and sellers facilities in a relatively inflexible pairing. The
ability of LNG to introduce commodity competition into world markets
depends heavily on the emergence of “destination-flexible” cargo
trading.
The most obvious form of destination-flexible trade is the growing
short-term market. “Short term” includes spot, short term “balancing”
trades among long term contract holders and contracts of three years
or less. Figure 9 shows the growth of short-term trading from less than
2% of trade in 1993 to nearly 20% by 2007.
FIGURE 9:SHORT-TERM TRADING IN LNG (BCM)
15. 350
But short-term trading is not the only source of destination-flexible volumes.
Another form of flexible volumes is the relatively recent development, which
might be called “self-contracting”.
The traditional long-term contract linked specific LNG supply to specific
customers. Since most of these traditional customers were either
regulated utilities or government monopoly companies, they could usually
absorb an oil-linked pricing clause if the government overseers agreed to
the contract and allowed the buyer to pass along the pricing
consequences to its customers. The seller in these contracts was often
the production joint venture acting on behalf of the venture partners as a
group.
Since oil linked-pricing clauses may put the buyer in a difficult position in
markets where gas to gas competitive prices fall below oil, such clauses
have largely disappeared in the fully liberalised markets of North America
and the UK Buyers would prefer a linkage to gas market indicators, such
as Henry Hub in the US or the NBP in the UK But since the buyer can so
easily resell unwanted volumes in the liquid spot market with limited
financial loss, his risk has been significantly reduced. Risk has thus
migrated upstream to the seller. The response of sellers has been to
“self-contract” marketing directly to the end use market.
Increasingly, one or more partners are contracting with the joint venture
for volumes that they can market independently without specifying the
ultimate destination. These, like short term volumes, are destination
flexible.
Nigeria’s Bonny project illustrates this new pattern. The first three trains
of the project were originally contracted to various European customers
under traditional contract terms. But trains 4 and 5 have contracted with
Shell and Total, two of the NLNG partners, which are now free to take
their volumes anywhere they see fit. Both Trinidad and Egypt have
moved increasingly towards destination flexibility by permitting producers
to toll volumes through liquefaction for marketing directly.
FIGURE 10:: REGIONAL CONTRACT COMMITMENTS – 2008 , SHOWING
UNCOMMITTED OR SELF-CONTRACTED VOLUMES (BCM)
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Price Formation in the Liberalised Commodity Markets
The early price behaviour of both North American and UK markets appeared
to confirm early expectations that gas-to-gas competition would decouple
gas pricing from oil pricing. Since both North America and the UK liberalised
when they had substantial supply surpluses, they experienced severe
producer price competition and their gas prices were indeed well below
those of oil. But both regional commoditised markets have shown that, in
shortage, inter-fuel competition can set prices that may be indirectly linked to
oil after all.
The decoupling of oil and gas prices in surplus and the recoupling during
shortage is economically rational. Economic theory (Figure 10) outlines the
behaviour of price to changes in supply and demand. But for gas, demand is
a function of its market share in inter-fuel competition and thus is dependent
on competitive fuel prices such as oil.
Short term demand can be quite inelastic – with volatile pricing – when oil
has been displaced from dual fired boiler markets and relatively elastic –
with stable pricing when limited gas supply forces dual fuel customers to
switch to oil.
Both the US and UK recent experience with oil and gas prices illustrate the
economic driving forces on price. Both regions started with decoupling, but
both have experienced prices that are higher than oil prices. Recently, both
regions have been in gas to gas competition with gas priced below oil and
thus in a position to threaten the oil linked contractual markets with price
competition. Figure14 shows a recent comparison of the US Henry Hub gas
price with the WTI oil price. Figure 14 provides a similar comparison for the
UK NBP price and Brent.
FIGURE 11:THEORETICAL BEHAVIOUR OF SUPPLY, DEMAND AND PRICE
ACCORDING TO “ECONOMICS 101”
17. 352
FIGURE 12:A MORE REALISTIC US SHORT-TERM GAS SUPPLY/DEMAND
CURVE
FIGURE 13:HENRY HUB GAS PRICES RELATIVE TO WTI CRUDE OIL PRICES
FIGURE 14:RELATIONSHIP BETWEEN BRENT CRUDE OIL PRICES AND
UK GAS PRICES AT THE NBP
18. 353
Pricing in the Contract-Dependent Markets – Northeast
Asia
Northeast Asia, without significant domestic production, has developed its
gas industry based on LNG imports. When the first LNG contracts were
negotiated with Japanese buyers, Japanese power generation was heavily
dependent on oil firing, crude oil as well as heavy fuel oil. The early pricing
clauses tied price escalation to crude oil prices the Japanese Customs
Clearing Price for Crude Oil JCC or “the Japanese Crude Cocktail”. This
precedent was adopted by Korea and Taiwan, as well as by some Chinese
contracts. And although there have been some modifications over time, the
precedent remains for Northeast Asia and has been hard to break.
The basic form of the typical Asian contract is in the form :
Price = Constant+Slope*JCC,
where the price and the constant are quoted in $/MMBtus and JCC is
quoted in $/Bbl. For an extended period of time price formulas for the
Pacific Basin were relatively stable, with the principal competition among
suppliers coming in the form of changes in the constant or in side terms,
such as price floors and ceilings.
One of the features of the Pacific Basin market was the development of “S
curves” as a means of reducing price risk. As oil prices became more
volatile, oil-linked pricing clauses posed significant risks to the original price
expectations of the contracting parties. For the sellers, an oil price collapse
risked making the venture unprofitable and suppliers became interested in
some form of price floor.
But as a trade off for granting such a shift in risk, buyers wanted upside
protection. In simplest form this could be a core relationship (called the
“slope”) where the linkage between oil and gas prices operated, but floor
and ceiling prices could be added to offset risk. But more common is a
change in the oil/gas price relationship – or slope – above and below
certain price levels (“pivot points”). Figure 15 illustrates a typical S Curve.
Since the “S curves” limit price response in times when oil prices are high
or low, they can have the effect of decoupling oil and gas prices when oil
prices rise above the upper pivot point. Until the recent oil price collapse,
suppliers were contesting S curves who argued that S curves were
designed for “temporary” oil price volatility and high oil prices were the new
norm.
19. 354
Pricing in the Contract-Dependent Markets –
Continental Europe
Continental Europe has developed its substantial gas grid based on
imported pipeline supply supplemented by some LNG. In this regional
market, long term contracts for imports were established early in the
development of the industry and many of them remain in force.
The contracts also typically utilise lags between the recording of the oil
price changes and their effect on the gas price. The effect of these two
features – pass through factors and lags – has been to reduce the linkage
between oil and gas prices, particularly in markets with rising oil prices.
During a period of price increases they work like a discount, however
during price drops (especially steep price drops like in 1985 and 2008)
they risk pricing the gas out of the market. The relationship between
European gas prices and oil prices is illustrated in Figure 17.
FIGURE 15:AN “S CURVE” (BASIC SLOPE – 0.1485, PIVOT POINTS AT USD25
AND USD50)
FIGURE 16:BRENT CRUDE OIL PRICES COMPARED WITH GERMAN AND
SPANISH BORDER PRICES
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Current Pricing Trends
The sharp changes in energy price levels and the market shifts
between buyers’ and sellers’ markets has severely complicated the
patterns of price negotiation. Thus price competition that once seemed
to be relatively stable within regions has now provided significant
differences depending on the state of the market and the relative
bargaining power of buyer and seller at the time price negotiations take
place.
Atlantic North America
The UK
Spain
Other Europe
Northeast Asia and China
India
Pacific North America
Future Trends and Key Issues
Ongoing High CAPEX Costs Will Affect LNG Pricing
21. 356
Reference
Tannehill, C.C., Budget Estimate Capital Cost Curves for Gas Conditioning
and Processing, Proceedings of the Seventy-Ninth Annual Convention of the
Gas Processors Association, Tulsa, OK, 2000, 141.
Tannehill, C.C., Update if Budget Estimate Capital Cost Curves for NGL
Extraction with Cryogenic Expansion, Proceedings of the Eighty-Second
Annual Convention of the Gas Processors Association, Tulsa, OK, 2003.
Tannehill, C.C., private communication, 2005.