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The UK Market for Natural Gas, Oil and Electricity: Are the Prices Decoupled?

Frank Asche, Petter Osmundsen and Maria Sandsmark

Year: 2006
Volume: Volume 27
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No2-2
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Abstract:
After opening up of the Interconnector, the liberalized UK natural gas market and the regulated Continental gas markets became physically integrated and the Continental gas price became dominant. However, in an interim period � after deregulation of the UK gas market (1995) and the opening up of the Interconnector (1998) � the UK gas market had neither government price regulation nor a physical Continental gas linkage. We use this period � which for natural gas markets displays an unusual combination of deregulation and autarky � as a natural experiment to explore if decoupling of natural gas prices from prices of other energy commodities, such as oil and electricity, took place. Monthly price data in the period 1995-1998 indicates a highly integrated market where wholesale demand seems to be for energy rather than a specific energy source.



Valuation of International Oil Companies

Petter Osmundsen, Frank Asche, Bard Misund, and Klaus Mohn

Year: 2006
Volume: Volume 27
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-4
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Abstract:
According to economic theory, exploration and development of new oil and gas fields should respond positively to increasing petroleum prices. But since the late 1990s, stock market analysts have focused strongly on short-term accounting return measures, like RoACE , for benchmarking and valuation of international oil and gas companies. Consequently, exaggerated capital discipline among oil and gas companies may have reduced their willingness to invest for future reserves and production growth. Based on panel data for 14 international oil and gas companies for the period 1990-2003, we seek to establish econometric relations between market valuation on one hand, and simple financial and operational indicators on the other. Our findings do not support the general perception of RoACE as an important valuation metric in the oil and gas industry. We find that the variation in company valuations is mainly explained by the oil price, oil and gas production, and to some extent reserve replacement.



Shale Gas Boom Affecting the Relationship Between LPG and Oil Prices

Atle Oglend, Morten E. Lindbäck, and Petter Osmundsen

Year: 2015
Volume: Volume 36
Number: Number 4
DOI: 10.5547/01956574.36.4.aogl
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Abstract:
Liquefied petroleum gases (LPGs) together with other natural gas liquids (NGLs) have played an important role in the current U.S. shale gas boom. Depressed gas prices in recent years have made pure natural gas operations less profitable. The result is that liquids components in gas production have become increasingly important in ensuring the profitability of shale gas operations. In this paper we investigate whether the shale gas expansion, which has led to an increase in associated LPG production, has also affected the historically strong relationship between LPG and oil prices. Revealing the strength and stability of the LPG/oil relationship is relevant when it comes to the future profitability and development of the U.S. natural gas sector. Our results suggest that the LPG/oil relationship has weakened in recent years with a move towards cheaper liquids relative to oil. This is consistent with developments in the natural gas sector with increased liquids production. A consequence is that U.S. natural gas operations cannot automatically rely on high liquids prices to ensure profitability.



Petroleum Taxation Contingent on Counter-Factual Investment Behaviour

Petter Osmundsen, Magne Emhjellen, Thore Johnsen, Alexander Kemp and Christian Riis

Year: 2015
Volume: Volume 36
Number: Adelman Special Issue
DOI: 10.5547/01956574.36.SI1.posm
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Abstract:
Petroleum administration can be regarded as a principal-agent problem. The government allocates exploration and production rights to petroleum companies on behalf of the population. The government is the principal and the companies are agents. With the aim of capturing revenue for the state, the government devises a petroleum tax system which takes account of the investment decisions made by the companies, while acknowledging for the fact that the companies may report strategically to the government. An important issue is how tax deductions are to be treated in investment analysis. A discrepancy arises here between assumptions made in some areas of tax theory and the actual investment analyses conducted by the companies. Tax theory has given rise to discussion and controversial tax proposals for the petroleum sector in Norway, Denmark and Australia. It led, for example, to reductions in tax-related depreciation for the Norwegian petroleum industry in May 2013. The article reviews this tax debate and analyses the implications of basing tax design on counter-factual investment behaviour.



Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price

Frank Asche, Atle Oglend, and Petter Osmundsen

Year: 2017
Volume: Volume 38
Number: Number 2
DOI: 10.5547/01956574.38.2.fasc
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Abstract:
When natural gas prices are subject to periodic decoupling from oil prices, for instance due to peak-load pricing, conventional linear models of price dynamics such as the Vector Error Correction Model (VECM) can lead to erroneous inferences about the nature of cointegration relationships, price adjustments and relative values. We propose the use of regime-switching models to address these issues. Our regime switching model uses price data to infer whether pricing is oil-driven (integrated) or gas-specific (decoupled). We find that UK natural gas (NBP) and oil (Brent) are cointegrated for the majority of the sample considered (1997-2014). UK gas prices tend to decouple during fall and early winter, when they increase relative to oil consistent with seasonal demand for natural gas creating gas-specific pricing. When evidence favors integrated markets, we find that the industry 10-1 rule-of-thumb holds (the value of one MMbtu of natural gas in the UK market is one tenth the value of one barrel of Brent oil), while the overall relationship, including decoupling periods, is 9.2-1. The paper highlights that what relative value to use, depends on the purpose of its use.



Time Commitments in LNG Shipping and Natural Gas Price Convergence

Atle Oglend, Petter Osmundsen, and Tore Selland Kleppe

Year: 2020
Volume: Volume 41
Number: Number 2
DOI: 10.5547/01956574.41.2.aogl
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Abstract:
Inter-continental Liquefied Natural Gas (LNG) trade can facilitate the development of a global natural gas market. However, in addition to explicit shipping costs, such trade requires time commitments in shipping due to the long hauls of many shipping routes. We show that this time commitment adds an additional economic cost to LNG shipping, and creates a positive relationship between the economic cost of LNG trade and regional natural gas price spreads. Necessary time commitment therefore augments the other costs of LNG trade, and contributes to weaken the ties between global natural gas markets.



Investment Allocation with Capital Constraints. Comparison of Fiscal Regimes

Petter Osmundsen, Kjell Løvås, and Magne Emhjellen

Year: 2022
Volume: Volume 43
Number: Number 1
DOI: 10.5547/01956574.43.1.posm
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Abstract:
The dramatic fall in oil prices after 2014 has led to more extensive capital rationing in international oil companies, and subsequent fierce competition between resource extraction countries to attract scarce investment. This situation is not adequately addressed by the large general literature on international taxation and multinational companies, since it fails to take account of capital rationing in its assumption that companies sanction all projects with a positive net present after-tax value. The paper examines the effect of tax design on international capital allocation when companies ration capital. We analyse capital allocation and government take for four equal oil projects in three different fiscal regimes: the U.S. GoM, UK upstream and Norway offshore. Implications for optimal tax design are discussed.





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