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CRICOS Provider No. 00126G copyright © The University of Western Australia

BL Oil & Gas History, Economics and Geopolitics OENA8433

Topic 4, Lecture 3: Natural Gas, LNG, markets & pricing

Dr. Karin Oerlemans

CRICOS Provider No. 00126G copyright © The University of Western Australia

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Unit Overview
ƒ Topic 1: Introduction – The Founders
ƒ Topic 2: The Global Struggle
ƒ Topic 3: War and Strategy
ƒ Topic 4: Oil and Gas Economics
ƒ Lecture 1: Fundamentals of Oil and Gas Economics
ƒ Lecture 2: Oil Pricing
ƒ Lecture 3: Natural Gas, LNG, Markets & pricing
ƒ Lecture 4: Government Revenues and taxation
ƒ Lecture 5: OPEC - Oligopoly & Oil Shocks
ƒ Topic 5: Oil and Gas Technology in context
ƒ Topic 6: The Energy Industry Today

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Lecture Outcomes
Upon successful completion of this lecture you should be able to:
ƒ Describe how Natural Gas and LNG are priced
ƒ Describe some of the factors affecting Natural Gas and LNG
pricing
ƒ Understand the use of diverse contracts
ƒ Appreciate the varying effects of market relationships in
securing investments in production of Natural Gas and LNG
ƒ Understand the requirements for competitive energy supply

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Recommended Reading
ƒ Hannesson, R. (1998). Petroleum Economics. Westport,
Connecticut: Quorum Books.

ƒ http://www.naturalgas.org/index.asp
ƒ http://www.turtletrader.com/beginners_report.pdf
ƒ http://www.energywindow.com/price/henry-forward.shtml
ƒ http://www.eia.doe.gov/oiaf/analysispaper/henryhub/

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Topics covered in lecture

ƒ Oil vs. Gas Projects
ƒ Oil Supply Chain
ƒ Gas Supply Chain
ƒ What's Different About Gas Contracts?
ƒ Long Term Contract
ƒ Gas Sales Contracts Details:
ƒ Short Term Contract
ƒ NYMEX Henry Hub
Natural Gas Spot Market
ƒ Australian Gas Spot Markets?
ƒ The LNG Value Chain

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Historical Prices

http://www.exxonmobil.com/files/corporate/hjlslide6.pdf
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LNG Exporters and Importers

BP Statistical Review of World Energy 2008

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Oil vs. Gas Projects

Oil Gas LNG

150,000bbl/d 31.8 mmboepa 3.3mtpa

Construction 5 Years 7 Years 10 years

Duration
40 years 20 years
Contract Duration SPOT ‘Take or Pay’ ‘Take or Pay’

Construction $740m $2.5bn (1984) $3.9bn

Value
Facility +
Contract Value $1.0bn Pipeline $ 25 bn (2004)

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Gas vs. Oil Treatment

Production Gas Treatment

from Separation
Dew Point
Wells
Conditioning
Oil Treatment
Water Treatment Contaminant
Degassing Removal
De-Oiling
Dehydration Valuable
Component
Removal
Re-injection Transmission
or or Storage Compression
Disposal
Re-injection or
Transmission
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Oil Supply Chain
ƒ Wellhead
ƒ Treatment (limited)
ƒ Storage
ƒ Transport
ƒ Pipeline
ƒ Ship
ƒ Refinery
ƒ Distribution
ƒ Storage
ƒ Sale

Well drilling equipment, Dongara, WA.

(Photo: K. Oerlemans)
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Gas Supply Chain

ƒ Wellhead
ƒ Treatment (extensive)
ƒ Pipelines (3rd Party)
ƒ Electrical Power Plant
ƒ Big Industry (Aluminia, Bricks,
Nickel)
ƒ Small Industry
ƒ Domestic use

Christmas Tree, Dongara, WA.

(Photo: K. Oerlemans)
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The LNG Value Chain
ƒ LNG can be economically produced and delivered to the U.S. as
LNG at $2.50 - $3.50 per million Btu (MMBtu) depending largely
on shipping cost

Images: http://www.beg.utexas.edu/energyecon/lng/LNG_introduction_08.php

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Liquefied Natural Gas Plant

Image courtesy of Woodside.

http://www.highway1.tv/northwestshelfventure/
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Oil vs. Gas
Oil Gas
ƒ Storage ƒ Storage
ƒ Tanks ƒ Line Pack
ƒ Tanks (Liquefied)
ƒ Reservoir storage

ƒ Transport ƒ Transport
ƒ Ship ƒ Truck or Ship (Liquefied)
ƒ Pipeline ƒ Pipeline
ƒ Truck
ƒ Rail

Gas storage and treatment facility, Dongara,

WA. (Photo: K. Oerlemans)
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Gas Storage
ƒ Line Pack:
ƒ Extra gas is pumped into the pipeline over the weekend to
ensure that by Friday the pressure has not dropped below the
minimum pressure

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 Gas Storage
ƒ Liquefied Natural Gas for ‘Peak Shaving’:
ƒ Used for storing ‘surplus’ natural gas that is to be used to meet the
requirements of peak consumption later during winter or summer
ƒ Facility has a regasification unit attached but may or may not have a
liquefaction unit
ƒ Facilities without a liquefaction unit depend upon tank trucks to
bring LNG from other nearby sources to them

ƒ Tank Storage

A natural gas to liquids, or "gas liquefaction" ultra clean fuels facility in

the U.S
http://www.cogeneration.net/Gas_Liquefaction.htm
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Gas Storage
ƒ Depleted Reservoir:
ƒ Natural gas/oil reservoir into which gas can be pumped and
stored for later use
ƒ Supplier or a consumer can place gas there and draw on it to
provide:
ƒ Regular supply
ƒ Peak loading facility
ƒ Back-up emergency supplies

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Gas Transport
ƒ Truck or Ship (Liquefied Natural Gas)
ƒ A convenient method of gas (methane) transportation by reducing
the temperature to -161oC at room pressure to take up 1/625th the
space of gas
ƒ Formed by refrigerating natural gas by external refrigeration and
cooling by compression and expansion

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Gas Pipelines
ƒ The pipeline gas market has been transformed in the past 20 years
around the world
ƒ Separation of gas sales and gas transport activities
ƒ Creation of ‘contestable’ competitive gas markets via ‘Spot Markets’
eg. Henry Hub
ƒ Gas production and sales are competitive activities
ƒ Gas transport by pipelines is a natural monopoly – Pipeline ‘Open
Access’ legislation
ƒ Pipeline on pipeline competition

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US Gas Pipelines

http://www.eia.doe.gov/pub/oil_gas/natural_gas/analysis_publications/ngpipeline/ngpipelines_map.html

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Henry Hub
ƒ Owned and operated by ChevronTexaco
ƒ Interconnects 9 interstate and 4 intrastate pipelines to provide
access to markets in the Midwest, Northeast, Southeast, and
Gulf Coast regions of the United States
ƒ Transports 1.8 bcf/d (3% of US average daily gas consumption)

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Australian Gas Pipelines

Australian gas pipelines

www.aph.gov.au/library
/pubs/rp/2007-
08/08rp25.htm
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What's Different About Gas Contracts?

Normal Contract Gas Supply
ƒ Short term (certainty) ƒ Long term (uncertainty)
ƒ Ad hoc infrastructure ƒ Dedicated infrastructure
ƒ Rigid ƒ Flexible
ƒ Repetitive ƒ Once off
ƒ Standard form ƒ Unique

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The LNG Contract
ƒ Predominantly long term contracts with limited customers who have
receiver terminals

ƒ Excess capacity can be sold on Spot market

SOUTHWEST PACIFIC RIM

Liquefied Natural Gas (LNG)
Terminals
http://www.energy.ca.gov/lng/w
orldwide_southwest_pacific_ri
m.html 25
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Long Term Contract

ƒ Required when:
ƒ Market:
ƒ Few customers
ƒ Few suppliers
ƒ Infrastructure:
ƒ None
ƒ Limited
ƒ Leads to New investment:
ƒ Monopoly
ƒ State ownership

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Gas Sales Contracts Details:
ƒ Volume
ƒ Specified product
ƒ Place
ƒ Price
ƒ Responsibilities
ƒ Enforceability

ƒ E.g.: http://www.kyivpost.com/business/34682

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Volume
ƒ Supply type
ƒ Dedication/Depletion/Baseload
ƒ Only one field – buyer shares production risk – daily volumes
reduce as reserves are used

ƒ Supply/Firm
ƒ Variety of fields – producer owns risk – guaranteed daily volumes

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Volume
ƒ Supply type:
ƒ Swing/Interruptable
ƒ Producer and buyer are not obliged to take agreed quantity
(unreliable supply/demand) (1 to 30 days)
ƒ Peak shaving
ƒ Eg. Supply from 11am to 3pm at specified rate
ƒ Associated gas
ƒ Only when available and demanded
ƒ Spot
ƒ Very short periods and small volumes

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Volume
ƒ DCQ Daily Contract Quantity
ƒ The amount of gas necessary for an individual customer’s daily
needs

ƒ ACQ Annual Contract Quantity

ƒ The sum of Daily Contract Quantities (DCQ's)
ƒ The average over a given year
ƒ The average over a period of years

ƒ DDR Daily Delivery Rate

ƒ The volumetric flow per unit time (applicable under swing)

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Volume
ƒ Sellers shortfall
ƒ Entitling buyer to difference between sales price and alternative fuel
which buyer needs to buy in

ƒ Buyer shortfall
ƒ Entitling seller to difference between contracted sales price and
price achieved for sale of gas to another buyer

ƒ Take or Pay
ƒ Agreement between a buyer and seller in which the buyer will still
pay some amount even if the product or service is not provided

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Specified product
ƒ Quality
ƒ Composition
ƒ Heating value
ƒ Condensable hydrocarbon dew point
ƒ Impurities
ƒ Nitrogen
ƒ Water content (dew point oC at pressure or concentration)
ƒ Hydrogen sulphide
ƒ Carbon dioxide
ƒ Mercaptan odorant
ƒ Solids concentration
ƒ Temperature
ƒ Consequences

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Place
ƒ Point of Transfer
ƒ E.g.. City gate – where the high pressure upstream gas
transmission lines meet the downstream low pressure reticulation
system
ƒ Pressure
ƒ Minimum
ƒ Maximum
ƒ Nominal

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Price
ƒ Base
ƒ Indexation
ƒ Fixed
ƒ C.P.I
ƒ Crude (WTI? Brent? Saudi Light? Basket?)
ƒ Currency
ƒ Charges and taxes
ƒ Payment terms

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Responsibilities
ƒ Warranties
ƒ Permits and Approvals
ƒ Infrastructure
ƒ Timing
ƒ Performance Standards
ƒ Safety
ƒ Rights Assignment

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Damages
ƒ Force Majeure
ƒ Liability
ƒ Arbitration and Experts
ƒ Revision and Early Termination
ƒ Applicable Law and Language
ƒ Political Constraints

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Short Term Contract
ƒ Required when:
ƒ Markets:
ƒ Many established suppliers
ƒ Many established customers (freedom of choice)
ƒ Infrastructure:
ƒ Integrated and networked
ƒ Sunk costs
ƒ Leads to:
ƒ Privatisation

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NYMEX Henry Hub – Natural Gas Spot Market

ƒ Spot market is the daily market

ƒ Natural gas is bought and sold ‘right now’

ƒ Trading can occur 24 hours a day, seven days a week

ƒ Negotiated between buyers and sellers

ƒ over the phone
ƒ electronic bulletin boards
ƒ e-commerce trading sites
ƒ Allowing more physical transactions to take place over the internet

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NYMEX Henry Hub – Natural Gas Futures Market
ƒ Futures market consists of buying and selling natural gas under
contract at least one month, and up to 36 months, in advance

ƒ Largest volume of trading occurs in the last week of every month ‘bid
week’ when producers are trying to sell their core production and
consumers are trying to buy for their core natural gas needs for the
upcoming month

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Australian Gas Spot Markets?

ƒ Developing markets for gas in Australia continues to be a major
challenge
ƒ Market
ƒ Small number of producers (3 provide 95% of production)
ƒ A small number of consumers
ƒ Limited depth in consumption (identified as lack of diversity in end users)
ƒ Legacy agreements that limit competition

http://www.abareconomics.com/publications_html/energy/energy_04/lng_outlook.pdf

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In Summary
ƒ Prices of non-oil hydrocarbons are based on the ease of
transportation and storage rather than solely on their energy
value
ƒ Markets which require significant investment in transportation
and storage will require long term relationships in the form of
contracts to secure the investment
ƒ Competitive energy supply requires:
ƒ Many players
ƒ Infrastructure

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Lecture Conclusion
ƒ This is the end of lecture 3 topic 4
ƒ You may now progress to Lecture 4, Topic 4

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