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Energy Journal Issue

The Energy Journal
Volume 30, Special Issue

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Natural Gas Across Country Borders: An Introduction and Overview

Hillard G. Huntington

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-1View Abstract

In the last several years, market forces and institutions have transformed international natural gas markets in fundamental ways. Natural gas today is relatively easy to transport over water, and an increasing volume of purchases flow through the spot market. As trade grows, regional prices start to move with each other. Although one does not need formal modeling to describe these new developments, it is also evident that the modeling process improves our basic understanding of how these trends reshape the natural gas outlook.

A Practitioner's Perspective on Modeling Prices and Trade in a Globalizing Natural Gas Market

Robert D. Stibolt

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-2View Abstract

This paper advances some principles for practical application of natural gas models that were used during the EMF 23 study. These principles emphasize a decision-focused perspective, embrace uncertainty, demand consistency of model results with observable facts, are capable of navigating the complexity of systems, and distinguish insight from unattainable precision. The principles are designed to foster the assistance of better decision making by models and modelers.

Spatial Price and Quantity Relationships in World and Continental Commodity Markets

Dr. Dale M. Nesbitt and Dr. Jill N. Scotcher

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-3View Abstract

Modeling world or continental natural gas, oil, coal, or electricity requires a representation of the spatial nature of such commodity markets� multiple interconnected and/or independent source points, intermediate points, and consumption points. Spatial commodity models, properly constructed, expose the underlying economic fundamentals�prices, basis differentials, flowing quantities, and why prices and quantities embrace certain relationships but not others. This paper examines spatial market equilibrium from a methodological perspective and puts forth results that explain interrelationships of prices and quantities of commodity throughout a market of competing/complementary supply chains. The objective is to allay common �myths� by counterexample and at the same time posit some realities both methodologically and by example.

Globalisation of Natural Gas Markets - Effects on Prices and Trade Patterns

Finn Roar Aune, Knut Einar Rosendahl and Eirik Lund Sagen

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-4View Abstract

The regional natural gas markets are expected to gradually become more integrated. The major driving forces are lower LNG costs, more spot trade, and increased need for imports into the US and other key markets. In this paper we examine various scenarios for a future global gas market, particularly focusing on natural gas prices and trade patterns. We use a numerical model of the international energy markets, with detailed modelling of regional gas production and international gas transport. Scenarios with different assumptions about future demand and supply conditions are simulated. Our results suggest that trade between continents will grow considerably over the next couple of decades, and that prices in the main import regions will remain around current levels. However, significant constraints on exports from the Middle East may alter this picture.

The Impact of High Oil Prices on Global and Regional Natural Gas and LNG Markets

Justine Barden, William Pepper, Vineet Aggarwal

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-5View Abstract

Oil prices are notoriously hard to predict, but they are an important input in many energy and economic models. This paper explores the effects of different oil price assumptions on natural gas markets (production, consumption, prices in different regions) in the International Natural Gas Model (INGM). Three cases from the INGM are presented: a reference case, a high oil price case and a second high oil price case, where gas-to-liquids (GTL) capacity additions are constrained. The results show that regardless of constraints on GTL capacity additions, higher oil prices lead to higher production and consumption of natural gas. However, when GTL capacity is allowed to expand, higher oil prices generally lead to higher natural gas prices and to less gas consumption in the electric power and industrial sectors as they switch to cheaper fuels and more natural gas is diverted to the production of GTLs.

Potential Futures for Russian Natural Gas Exports

Peter R. Hartley and Kenneth B. Medlock III

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-6View Abstract

Russia is a dominant supplier of natural gas, especially to Europe, and has the resources to become even more dominant in the future. Nevertheless, we show that Russia�s ability to influence the world natural gas market is limited in the longer term by competition from alternative suppliers.

Representing GASPEC with the World Gas Model

Ruud Egging, Franziska Holz, Christian von Hirschhausen and Steven A. Gabriel

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-7View Abstract

This paper presents results of simulating a more collusive behavior of a group of natural gas producing and exporting countries, sometimes called GASPEC. We use the World Gas Model, a dynamic, strategic representation of world gas production, trade, and consumption between 2005 and 2030. In particular, we simulate a closer cooperation of the GASPEC countries when exporting pipeline gas and liquefied natural gas; we also run a more drastic scenario where GASPEC countries deliberately hold back production. The results show that compared to our Base Case, a gas cartel would reduce total supplied quantities and induce price increases in gas importing countries up to 22%. There is evidence that the natural gas markets in Europe and North America would be affected more than other parts of the world. Lastly, the vulnerability of gas importers worldwide is further illustrated by the results of a sensitivity case in which price levels are up to 87% higher in Europe and North America.

A Dynamic Simulation of Market Power in the Liberalised European Natural Gas Market

Wietze Lise and Benjamin F. Hobbs

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-8View Abstract

Recent increases in the world price of oil have led to higher gas prices in Europe, possibly leading to greater opportunities for exercising market power. The effect of different gas producer strategies upon price levels in the liberalised European gas market over the period 2005-2030 is analysed using a dynamic gas market model that accounts for demand, supply, and investments in pipeline transport, LNG, and storage. The multi-period model formulation allows exploration of the dynamics of market power as transportation and storage capacities are augmented and interact with demand growth. The combined effects of spatial configuration of the supply network and supplier location upon intensity of competition in ten different regions in Europe are considered. Differences in prices are due to the interaction of (1) inherent ability of producers to exercise market power (determined by production capacity and costs) with the (2) accessibility of the market (determined by gas transport infrastructure).

Perspectives of the European Natural Gas Markets Until 2025

Franziska Holz, Christian von Hirschhausen and Claudia Kemfert

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-9View Abstract

We apply the EMF 23 study design to simulate the effects of the reference case and the scenarios to European natural gas supplies to 2025. We use GASMOD, a strategic several-layer model of European natural gas supply, consisting of upstream natural gas producers, traders in each consuming European country (or region), and final demand. Our model results suggest rather modest changes in the overall supply situation of natural gas to Europe, indicating that current worries about energy supply security issues may be overrated. LNG will likely increase its share of European natural gas imports in the future, Russia will not dominate the European imports (share of ~1/3), the Middle East will continue to be a rather modest supplier, the UK is successfully converting from being a natural gas exporter to become a transit node for LNG towards continental Europe, and congested pipeline infrastructure, and in some cases LNG terminals, will remain a feature of the European natural gas markets, but less than in the current situation.

European Natural Gas Markets: Resource Constraints and Market Power

Gijsbert T.J. Zwart

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-10View Abstract

The European natural gas market is characterized by declining indigenous resources, particularly in the UK and the Netherlands, and a growing dependence on a small number of large exporters who, as a consequence, see their market power increasing. In this paper we analyze long-run scenarios for the European natural gas markets in a model, NATGAS, that explicitly includes both factors, resource constraints and producers� market power. Finite resources lead to interdependencies of current production decisions and future opportunities. These decisions in turn depend on the potential for large producers to set market prices above marginal costs. We analyze the impact of conditions on the global LNG market on market shares of pipeline gas suppliers, as well as on the speed of depletion of indigenous European resources. We focus on how shadow prices of resource constraints affect substitution patterns in the various scenarios.

Market Arbitrage: European and North American Natural Gas Prices

Stephen P. A. Brown and Mine K. Yucel

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-11View Abstract

The development of an international market for liquefied natural gas (LNG) and the resulting opportunities for intercontinental arbitrage are seen as creating a world in which movements in natural gas prices are linked between continents. Increased flows of LNG into the United States and the potential sensitivity of these shipments to price differentials between Europe and North America suggests the possibility of a strengthening relationship between natural gas prices on these two continents. At the same time, there is considerable evidence linking natural gas price movements in Europe and North America to those for crude oil. Accordingly, we use a series of econometric tests to determine whether the co-movement between natural gas prices in Europe and North America is mediated through crude oil prices or is being shaped directly by gas-to-gas arbitrage.

Linking Natural Gas Markets - Is LNG Doing its Job?

Anne Neumann

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-12View Abstract

The increase in liquefied natural gas trade has accelerated the integration of previously segmented markets in North America, Europe, and Asia. This paper provides evidence on the integration of the transatlantic natural gas market; it thus complements other papers in the EMF 23 study that focus on prices and international natural gas trade. We test the theoretical proposition that in integrating markets commodity prices should move closer than before. Using 2,059 pairs of daily spot prices for natural gas in North America and Europe we investigate price dynamics covering the period from 1999 until 2008. We apply the Kalman Filter technique which measures convergence by allowing for dynamic structural change to gain detailed information on trends inherent in prices over time. Results suggest an increasing convergence of spot prices on either side of the Atlantic Basin.

Modelling the Growth in Gas Reseves From Known Fields

Kevin F. Forbes and Ernest M. Zampelli

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-13View Abstract

The extent to which future United States demand for natural gas is satisfied by imports of LNG is contingent on the adequacy and cost competitiveness of North American supplies. One of the cheaper and more important sources of natural gas supply is accounted for by reserve appreciation, i.e., reserve growth, in known fields. Based on an extensively applied methodology developed by Arrington (1960), the increase in proved ultimate recovery is presumed to increase at a diminishing rate with the age of the field. In this paper, a single equation model of natural gas reserve growth in the Gulf of Mexico is developed and estimated. The results strongly suggest that the annual growth rate in the reserves of a field is significantly affected by initial discovery size, price, water depth, and unobserved field-specific effects. Hence, estimating oil and gas reserve growth using an Arrington based approach may underestimate the response of reserve growth to changes in economic fundamentals.