A study on the development of interregional gas pricing mechanism

-Focused on the Russia-Korea gas contract-
Zelenovskaya, Ekaterina Vitalievna
일반대학원 에너지시스템학부
The Graduate School, Ajou University
Publication Year
Alternative Abstract
Traditionally, natural gas trade has been limited geographically within three main regional gas markets, namely North American, European and Asian-Pacific. This regional segmentation implies in turn that different gas pricing methodologies are applied within each regional gas market that thus also creates different price levels in each region. For instance, in 2009 the gas spot price at the Henry Hub in the United States was $4 per MBtu, at the National Balancing Point (NBP) in Britain it was $5/MBtu, and in Japan about $9/MBtu. In view of the increasing interregional gas trade, these price differences, and even more importantly the big differences in the pricing methodologies, would be a principal barrier to the development of new gas supply contracts between sellers and buyers that were historically working in different regional gas markets. Since natural gas is a very important and increasingly abundant source of energy in general, and the cleanest and most efficient fossil fuel in particular, facilitation of natural gas penetration into world energy markets is important both to satisfy the global energy need and to reduce greenhouse gas and other pollutant emissions. Sustainable development of the gas industry for these aims thus demands an urgent development of new gas pricing methodologies for interregional gas supply and procurement contracts that would eliminate the obstacles posed by the current regional contracts which are so different from region to region and thus inapplicable to interregional gas trade. This dissertation consequently focuses on the development of a transparent and universal methodology for determining the gas price range, which reflects the interests of both seller and buyer, as an important step to resolve the possible misunderstandings and conflicts that could occur between sellers and buyers in the increasingly interconnected regional gas markets, and in consequent costly delays. A critical part of this methodology is the determination of the gas price range for long-term gas supply contracts, conducted by a series of analyses of regional gas markets and market fundamentals. Study of the regional gas markets development has shown that all gas markets pass the similar stages during their development, regardless of their location. A particular method of gas pricing and type of supply contracts (long or short) dominates in each stage of gas market development and change as soon as the market enters into a new stage. Long-term contracts as a convenient instrument for hedging the long-term risks in the gas industry could be used in any market, regardless of the stage of its development. The proposed methodology consists of a sequential procedure for determining the floor and ceiling price of the gas price range which reflect the willingness to sell and buy the gas by seller and buyer, respectively. The floor price is calculated on the base of estimated investment costs through a series of cost-benefit analyses (CBA) of each project related to the gas supply in question: the gas production, liquefaction and transportation projects with the consequent calculation of the break-even price of gas (BEP) in each project. BEP of gas is the price assigned to each unit of gas over the analysis period, which allows the project to financially break even for the acceptable rate of return on capital. The investment cost of the gas supply is calculated by using computational fluid dynamics methods for determining the optimal parameters (diameter and working pressure) of the trunk gas pipelines as well as the bottom-up cost estimation methodology to make pre-engineering estimation of investment costs for the gas production, and the alternatives of pipeline and LNG transportation. The ceiling price is determined through the determination of the corresponding stage of the buyer?s market development and consequent identification of the buyer?s maximum willingness to pay according to the identified market development stage. The proposed methodology was tested on a specific detailed case study of determination of the gas price range for the possible Russia-Korea gas supply contract. The case study results have shown a high degree of validity of our methodology. For example, for cases in which comparison was possible with actual data, such as the gas pipeline Yakutia-Khabarovsk in Russia which is a component of the possible Russia-Korea gas supply contract, the difference between the investment cost calculated by our methodology and the officially-reported cost is only 3%. The obtained range of gas price for the possible Russia ? Korea gas supply contract in constant 2011 prices was computed to be from 12.91 to 22.08 $/MBtu if the gas was transported as PNG, and from 13.22 to 22.08 $/MBtu if transported as LNG, during the entire contract period from year 2017 to 2041. The sensitivity analysis (SA) of the floor price conducted in the Case Study showed that this price is relatively sensitive to the changes of the investment and operational costs. The SA also showed that the expected reduction of the tax charges for the planned gas supply project could decrease the floor prices of PNG and LNG by 21% and 4%, respectively. The price range would then be 10.14 to 22.08 $/MBtu if the gas was transported as PNG, and 12.75 to 22.08 $/MBtu if transported as LNG. Our results for the gas price range for the possible Russia-Korea gas supply contract agree well with the projections of the International Energy Agency about the level of the gas price in Asia during the same period of time. The price interval calculated in this study coincides therefore with the global trend in the gas pricing, implying that the proposed methodology for gas price range determination is quite relevant and could be used for determining the gas price range for other long-term contracts in other interregional gas markets. The proposed methodology can be applied by specialists from either or both the buyer and seller side, for determining the acceptable price range, which can serve as a quantitative rational basis for negotiations of the gas price in long-term contracts. This methodology is one of the first studies on the interregional gas pricing mechanisms and is the main contribution of this dissertation to the critically important and advancing interregional gas trade

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