Natural Gas A Commercial Perspective

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Andrej Pustišek · Michael Karasz

Natural Gas:
A Commercial
Perspective
Natural Gas: A Commercial Perspective
Andrej Pustišek Michael Karasz
•

Natural Gas:
A Commercial
Perspective

123
Andrej Pustišek Michael Karasz
University of Applied Sciences, Stuttgart The Energy House GmbH
Karlsruhe Institute of Technology (KIT), Leipzig
Karlsruhe Germany
2Pi-Energy GmbH, Stuttgart
Germany

ISBN 978-3-319-53248-6 ISBN 978-3-319-53249-3 (eBook)

DOI 10.1007/978-3-319-53249-3

Library of Congress Control Number: 2017930165

© Springer International Publishing AG 2017

This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or
part of the material is concerned, specifically the rights of translation, reprinting, reuse of
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Cover photo: Gas pipe line laid through green field. © ssuaphoto/Getty Images/iStock

Printed on acid-free paper

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The registered company is Springer International Publishing AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Contents

1 Prologue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Historic Outline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2.1 North America . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2.2 Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2.3 Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2.4 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2.5 South-East Africa . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2.6 Global LNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Preliminary Overview—Development from Scratch . . . . . . 7
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3 Market Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.1 Primary Energy Consumption . . . . . . . . . . . . . . . . . . . . . 11
3.2 Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.3 Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.4 Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.5 Trade and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.6 Physical Capacities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.6.1 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.6.2 Underground Storages . . . . . . . . . . . . . . . . . . . . . 21
3.6.3 LNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4 Non-economic and Non-commercial Fundamentals . . . . . . . . 25
4.1 Technical Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.1.1 Reference Conditions . . . . . . . . . . . . . . . . . . . . . 26
4.1.2 (Chemical) Composition . . . . . . . . . . . . . . . . . . . 28
4.1.3 Physical Properties . . . . . . . . . . . . . . . . . . . . . . . 30
4.1.4 Specifications and Interchangeability
of Natural Gases . . . . . . . . . . . . . . . . . ........ 33
4.1.5 Environmental Effects . . . . . . . . . . . . . ........ 36

v
vi Contents

4.2 Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... 39

4.2.1 Natural Sources . . . . . . . . . . . . . . . . . . . ...... 39
4.2.2 Excursus: Upstream—Exploration
and Production . . . . . . . . . . . . . . . . . . . . . . . . . . 43
4.2.3 Anthropogenic Production of ‘Natural’ Gas . . . . . . 50
4.3 Usages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.3.1 Residential and Commercial . . . . . . . . . . . . . . . . . 51
4.3.2 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
4.3.3 Electricity Generation . . . . . . . . . . . . . . . . . . . . . 54
4.3.4 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.3.5 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5 Economic and Commercial Fundamentals. . . . . . . . . . . . . . . 59
5.1 Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.1.1 Natural Gas—Commodity and Capacity. . . . . . . . . 60
5.1.2 Competing Fuels and Interdependencies. . . . . . . . . 61
5.2 Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.3 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.4 Security of Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
5.5 Market Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
5.5.1 Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
5.5.2 Transitional . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
5.5.3 Competitive—‘Modern’ Markets. . . . . . . . . . . . . . 76
5.5.4 Excursus: Trading Instruments . . . . . . . . . . . . . . . 81
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
6 Sales Along the Value Chain . . . . . . . . . . . . . . . . . . . . . . . . 93
6.1 Players. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
6.2 Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
6.2.1 Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
6.2.2 Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
6.3 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
6.3.1 Quantities and Flexibilities . . . . . . . . . . . . . . . . . . 100
6.3.2 Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
6.3.3 Hardship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.3.4 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.3.5 Delivery Point . . . . . . . . . . . . . . . . . . . . . . . . . . 136
6.3.6 Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
6.3.7 Nominations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
6.3.8 Other Commercially Relevant (Contractual)
Elements of Commodity Deliveries . . . . . . . . . . . . 140
6.3.9 Standard Contracts . . . . . . . . . . . . . . . . . . . . . . . 142
6.3.10 Categorization of Deliveries and Contracts . . . . . . . 143
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
7 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
7.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
7.2 Outline of Physical Transportation and Assets. . . . . . . . . . 151
7.2.1 Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
7.2.2 LNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Contents vii

7.3 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

7.3.1 Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
7.3.2 LNG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
7.4 Players. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
7.5 Pipeline-Capacity Reservation Systems and Pricing
Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
7.5.1 Capacity Reservation. . . . . . . . . . . . . . . . . . . . . . 161
7.5.2 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
7.6 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
7.6.1 Pipeline Contracts . . . . . . . . . . . . . . . . . . . . . . . . 167
7.6.2 LNG Transportation Contracts . . . . . . . . . . . . . . . 173
7.6.3 Standard Contracts . . . . . . . . . . . . . . . . . . . . . . . 173
7.6.4 Categorization of Natural Gas Transportation
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .... 174
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 177
8 Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
8.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
8.2 Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
8.2.1 Balancing of Demand Fluctuations . . . . . . . . . . . . 180
8.2.2 Provision of Security of Supply . . . . . . . . . . . . . . 181
8.2.3 Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
8.3 Outline of Physical Storage and Assets . . . . . . . . . . . . . . 182
8.3.1 Types of Storages . . . . . . . . . . . . . . . . . . . . . . . . 182
8.3.2 Surface Facilities . . . . . . . . . . . . . . . . . . . . . . . . 185
8.4 Storage Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
8.5 Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
8.6 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
8.6.1 Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
8.6.2 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
8.6.3 Other Contractual Elements . . . . . . . . . . . . . . . . . 194
8.6.4 Standard Contracts . . . . . . . . . . . . . . . . . . . . . . . 196
8.6.5 Categorization . . . . . . . . . . . . . . . . . . . . . . . . . . 196
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
9 Portfolio Management . . . . . . ................ ....... 199
9.1 Historical Development . . ................ ....... 200
9.2 Portfolio Optimization and Management—Traded
Markets . . . . . . . . . . . . . ................ ....... 204
References . . . . . . . . . . . . . . . ................ ....... 205
10 Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Appendix A: Additional Recommended Literature . . . . . . . . . . . 209
Appendix B: Units and Prefixes . . . . . . . . . . . . . . . . . . . . . . . . . 211
Appendix C: Symbols and Abbreviations . . . . . . . . . . . . . . . . . . 217
viii Contents

Appendix D: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Appendix E: Flexibility Definition . . . . . . . . . . . . . . . . . . . . . . . 233
Appendix F: Equivalence of Additive
and Multiplicative Formulae . . . . . . . . . . . . . . . . . 239
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
About the Authors

Andrej Pustišek teaches energy economics at the University of Applied

Science, Stuttgart, Germany and at the University of Karlsruhe (KIT),
Germany, owns a consulting companys providing services to international
natural gas and energy companies, inter alia, in arbitration proceedings, and
lectures international courses on natural gas. He studied Geophysics and
Economy in Vienna, Cologne and Münster. He holds a Ph.D. in Geophysics
and a Ph.D. in Economy. In 1990, he started in international natural gas
purchasing of Wintershall, Kassel, Germany. As of 1993 he headed different
departments of WINGAS, Kassel, Germany (a Gazprom and BASF joint
venture). From 2002 to 2012, he worked for E.ON Ruhrgas, Essen,
Germany; first as Senior Vice President International Natural Gas Sales and
from 2008 as Senior Vice President Portfolio Management.

Michael Karasz is managing director of THE ENERGY HOUSE GmbH a

company he founded in 2011. He holds master degrees in Geology and
Business Administration from the University of Cologne, Germany. His
long-lasting involvement in the natural gas business started in the early 90’s
at WINGAS, Kassel, Germany (a Gazprom and BASF joint venture). As of
1998 he held different senior management positions (inter alia, natural gas
purchasing and portfolio management) both, in Germany and Central &
Eastern Europe with E.ON, EEX, RWE, and Bayerngas. In these positions he
successfully negotiated and concluded complex long-term purchase, trans-
portation, storage, and sales agreements. He has extensive expertise in
preparing and successfully executing international arbitration proceedings.

ix
List of Figures

Figure 2.1 Simplified natural gas value chain . . . . . . . . . . . . .. 4

Figure 3.1 McKelvey diagram [Kleppe and McKelvey 1976,
p. A2] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13
Figure 3.2 Development of worldwide natural gas production
since 1970 [See British Petroleum (2016)] . . . . . . .. 15
Figure 3.3 Major trade movements of natural gas incl. LNG in
2015 [British Petroleum 2016, p. 29 (reproduced
with permission of British Petroleum)] . . . . . . . . . .. 17
Figure 3.4 Development of worldwide natural gas prices since
1996 (British Petroleum 2016. Average prices for
calendar years) . . . . . . . . . . . . . . . . . . . . . . . . . .. 18
Figure 3.5 US: crude oil (WTI) versus natural gas (Henry Hub)
prices compared [WTI spot price (US$/bbl); natural
gas at Henry Hub spot price (US$/mmBtu). Daily
data from 1 March 2008 until 30 June 2016 (trading
days). Data provided by ‘Montel
Nachrichtenservice’ (www.montel.de). For a further
comparison of long-term inter-fuel prices, see also
Sect. 5.1.2] . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18
Figure 3.6 Europe: crude oil (Brent) versus natural gas
(NBP) prices compared [Brent spot price (US$/bbl);
natural gas at NBP spot price (day-ahead)
(pence/therm). Daily data from 1 March 2008 until
30 June 2016 (trading days). Data provided by
‘Montel Nachrichtenservice’ (www.montel.de). For
a further comparison of long-term inter-fuel prices,
see also Sect. 5.1.2] . . . . . . . . . . . . . . . . . . . . . . .. 19
Figure 3.7 US (Henry Hub) versus Europe (NBP) natural gas
prices compared (in original units) [Natural gas at
Henry Hub spot price (US$/mmBtu); natural gas at
NBP spot price (day-ahead) (pence/therm). Daily
data from 1 March 2008 until 30 June 2016 (trading
days). Data provided by ‘Montel
Nachrichtenservice’ (www.montel.de)] . . . . . . . . . .. 20

xi
xii List of Figures

Figure 3.8 Europe [NBP (right axis), TTF, NCG (left axis)]
natural gas prices compared [PEGAS TTF spot
prices (day-ahead) (€/MWh); ICAP TTF spot prices
(day-ahead) (€/MWh); PEGAS NCG spot prices
(day-ahead) (€/MWh); ICE NBP spot prices
(day-ahead) (pence/therm). Daily data from 1 March
2008 until 30 June 2016 (trading days). Data
provided by ‘Montel Nachrichtenservice’
(www.montel.de)] . . . . . . . . . . . . . . . . . . . . . . . .. 21
Figure 3.9 European high-pressure pipeline grid 2015
(Picture provided by © Eurogas 2015) . . . . . . . . . .. 22
Figure 4.1 Natural gas terminology . . . . . . . . . . . . . . . . . . . .. 30
Figure 4.2 Wobbe Index specifications applicable in DE, AT,
CZ, and SK [based on: Eustream (2016), Net4Gas
(2010), Gas Connect Austria (2013), and Deutscher
Verband der Gas- und Wasserwirtschaft (DVGW)
(2013). The values for the Czech and Slovak
system, originally expressed at ‘basic conditions’
[see, e.g., Eustream (2016), p. 6], have been
recalculated to norm conditions] . . . . . . . . . . . . . . . 35
Figure 4.3 Anticlinal reservoir type . . . . . . . . . . . . . . . . . . . . . 41
Figure 4.4 Salt diapiric reservoir type . . . . . . . . . . . . . . . . . . . 41
Figure 4.5 Transgression and fault reservoir type. . . . . . . . . . . . 41
Figure 4.6 Development of US natural gas production
(Energy Information Administration 2016a). . . . . . . . 43
Figure 4.7 Typical production profile. . . . . . . . . . . . . . . . . . . . 48
Figure 5.1 ‘Product’ description . . . . . . . . . . . . . . . . . . . . . . . 62
Figure 5.2 Comparison of primary energy prices . . . . . . . . . . . . 63
Figure 5.3 Value chain—contractual and physical . . . . . . . . . . . 63
Figure 5.4 Traditional market model . . . . . . . . . . . . . . . . . . . . 74
Figure 5.5 Modern (transition) market model . . . . . . . . . . . . . . 76
Figure 5.6 Schematic illustration of a physical hub . . . . . . . . . . 77
Figure 5.7 Schematic illustration of a virtual hub . . . . . . . . . . . 77
Figure 5.8 Payoff profile of a short hedge with futures . . . . . . . 82
Figure 5.9 Time swap—business model, transactions,
and pricing requirements. . . . . . . . . . . . . . . . . . . .. 83
Figure 5.10 Location swap—business model, transactions,
and pricing requirements. . . . . . . . . . . . . . . . . . . .. 85
Figure 5.11 Payoff profile of a long put. . . . . . . . . . . . . . . . . .. 87
Figure 5.12 Payoff profiles of calls and puts. . . . . . . . . . . . . . .. 88
Figure 6.1 Schematic seasonal and short-term fluctuating
natural gas consumption pattern and illustration of
selected terms . . . . . . . . . . . . . . . . . . . . . . . . . . .. 96
Figure 6.2 Schematic short-term fluctuating natural gas
consumption pattern and explanation of selected
terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 97
Figure 6.3 Flat (baseload) natural gas consumption pattern . . . .. 97
Figure 6.4 Schematic seasonal band consumption pattern . . . . .. 98
List of Figures xiii

Figure 6.5 Schematic sketch of the sigmoid function

approximating a temperature dependent natural
gas consumption . . . . . . . . . . . . . . . . . . . . . . . . .. 99
Figure 6.6 Illustration of (annual) maximum and minimum
quantities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 103
Figure 6.7 Illustration of annual carry-forward (left part)
and make-up (right part) provision in long-term
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 107
Figure 6.8 Structure of the flexibility concept . . . . . . . . . . . . .. 107
Figure 6.9 Example of flexibility components defining volume
flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 108
Figure 6.10 Simplified example of flexibility components
defining volume flexibility . . . . . . . . . . . . . . . . . .. 109
Figure 6.11 Upstream aggregation of indexed pricing . . . . . . . .. 115
Figure 6.12 Example of sales and purchase prices, which may
‘overlap’ for single periods due to differing
adjustment periods . . . . . . . . . . . . . . . . . . . . . . . .. 116
Figure 6.13 Schematic illustration of reference period, time-lag,
and adjustment period . . . . . . . . . . . . . . . . . . . . .. 119
Figure 6.14 Influencing factors on prices for deliveries
at hubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 123
Figure 6.15 Screenshot for products traded at NBP on October
6, 2016 [Data provided by ‘Montel
Nachrichtenservice’ (www.montel.de)] . . . . . . . . . . . 124
Figure 6.16 Schematic example of a linear price cap and floor . . . 126
Figure 6.17 Schematic example of a fixed price cap and floor . . . 127
Figure 6.18 Schematic illustration of the delta-delta method . . . . . 134
Figure 7.1 Economically preferable options to transport natural
gas from sources in dependence of the quantity and
distance After Wood et al. (2008) . . . . . . . . . . . . .. 150
Figure 7.2 Temperature dependence of pipeline capacity
[see Fasold and Wahle (1996), p. 116] . . . . . . . . . .. 153
Figure 7.3 Schematic pressure along a pipeline with equidistant
compressor stations . . . . . . . . . . . . . . . . . . . . . . .. 154
Figure 7.4 Pipeline construction costs as a function of capacity
and length (schematic) . . . . . . . . . . . . . . . . . . . . .. 159
Figure 7.5 Capacity related specific pipeline construction costs
as a function of capacity and length (schematic) . . .. 159
Figure 7.6 Simplified network for the illustration of total
capacity availability (equidistant entry and exit
points assumed) . . . . . . . . . . . . . . . . . . . . . . . . . .. 162
Figure 7.7 Schematic illustration of the distance related pricing
system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 164
Figure 7.8 Schematic illustration of the entry-exit
pricing system . . . . . . . . . . . . . . . . . . . . . . . . . . .. 165
Figure 7.9 Schematic illustration of the ‘postage stamp’ pricing
system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 165
Figure 7.10 Transport capacity reservation—business model,
transactions, and pricing requirements . . . . . . . . . .. 167
xiv List of Figures

Figure 7.11 Basic concept of transportation and nomenclatures

of points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 168
Figure 7.12 Exceeding capacity reservation . . . . . . . . . . . . . . .. 170
Figure 7.13 Illustration of imbalances within the capacity
reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 171
Figure 8.1 Seasonal demand variation . . . . . . . . . . . . . . . . . .. 180
Figure 8.2 Use of (seasonal) natural gas storage to balance
supply and demand . . . . . . . . . . . . . . . . . . . . . . . . 181
Figure 8.3 Supply interruption . . . . . . . . . . . . . . . . . . . . . . . . 181
Figure 8.4 Supply cost minimization . . . . . . . . . . . . . . . . . . . . 182
Figure 8.5 Depiction of storage facilities . . . . . . . . . . . . . . . . . 186
Figure 8.6 Volumetric parameters of natural gas storages . . . . . . 186
Figure 8.7 Schematic illustration of relationship between
main storage parameters . . . . . . . . . . . . . . . . . . . .. 187
Figure 8.8 Storage capacity reservation—business model,
transactions, and pricing requirements . . . . . . . . . .. 189
Figure 9.1 Conceptual design of an integrated (deterministic)
portfolio-optimization model . . . . . . . . . . . . . . . . . . 202
Figure 9.2 Evolution of portfolio management . . . . . . . . . . . . . 203
Figure E.1 Illustration of annual components. . . . . . . . . . . . . . . 236
Figure E.2 Minimal seasonal off-take pattern. . . . . . . . . . . . . . . 237
Figure E.3 Maximal seasonal off-take pattern . . . . . . . . . . . . . . 238
List of Tables

Table 3.1 Primary fuels’ shares in 2015 world energy

consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 12
Table 3.2 Natural gas share in 2015 in primary energy
consumption in selected regions and countries . . . . .. 12
Table 3.3 Largest reserve-holding countries . . . . . . . . . . . . . .. 14
Table 3.4 Largest natural gas producing countries since
1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15
Table 3.5 Largest natural gas consuming countries since
1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16
Table 3.6 Correlation coefficients between US crude oil
(WTI) versus US natural gas (Henry Hub) for
different periods . . . . . . . . . . . . . . . . . . . . . . . . . .. 19
Table 3.7 Correlation coefficients between Europe crude oil
(Brent) versus natural gas (NBP) prices
compared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19
Table 3.8 Correlation coefficients US (Henry Hub) versus
Europe (NBP) natural gas prices compared . . . . . . .. 20
Table 3.9 Correlation coefficients between European
day-ahead quotations at hubs (NBP, UK; TTF,
NL; NCG, DE). . . . . . . . . . . . . . . . . . . . . . . . . . .. 21
Table 3.10 Countries with largest working gas capacities . . . . . .. 23
Table 3.11 LNG liquefaction capacities at the end of 2015 (excl.
the plants in Angola, Egypt, Libya, and Yemen that
had stopped for different reasons) . . . . . . . . . . . . . .. 23
Table 3.12 LNG regasification capacities at the end of 2015 . . .. 24
Table 4.1 Reference conditions for the definition of units . . . . .. 27
Table 4.2 Typical compositions of natural gas used in Europe
(@0 °C, 1.01325 bar)a. . . . . . . . . . . . . . . . . . . . . .. 28
Table 4.3 Worldwide average LNG compositions
(@15 °C, 1.01325 bar)a . . . . . . . . . . . . . . . . . . . . . . 29
Table 4.4 Calorific values for different gases . . . . . . . . . . . . . . 32
Table 4.5 Wobbe indices for different gases . . . . . . . . . . . . . . . 33
Table 4.6 Quality specification according to EASEE-gas . . . . . . 34
Table 4.7 Carbon dioxide emissions coefficients for different
fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 36
Table 4.8 Pollutants produced from combustion of various
fossil fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 37
Table 4.9 Inland sales of natural gas in the EU-28 in 2014a . . .. 52

xv
xvi List of Tables

Table 4.10 Inland sales of natural gas in the US in 2015 . . . . . .. 52

Table 4.11 Example for approximation of power plant
utilization for different natural gas and electricity
prices and power plant efficiencies . . . . . . . . . . . . .. 56
Table 5.1 Principal characteristics of various market structures
(simplified, abridged) . . . . . . . . . . . . . . . . . . . . . .. 73
Table 6.1 Terms used for the description of commodity sales
and purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 101
Table 6.2 Example for quantity restrictions in various
periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 108
Table 6.3 Example for simplified quantity restrictions in
various periods . . . . . . . . . . . . . . . . . . . . . . . . . . .. 109
Table 6.4 Example of a calculation for an oil-product price
indexed natural gas price . . . . . . . . . . . . . . . . . . . .. 121
Table 6.5 Summarized comparison of typical major terms and
conditions of depletion- and supply-type contracts . .. 143
Table 6.6 Distinguishing features of selected delivery contracts
at various levels of the industry . . . . . . . . . . . . . . .. 145
Table 6.7 Characteristics of GSAs and LNG SPAs . . . . . . . . .. 146
Table 7.1 Summary of advantages and disadvantages
of transportation pricing systems. . . . . . . . . . . . . . .. 166
Table 8.1 Volumetric storage parameters . . . . . . . . . . . . . . . .. 187
Table 8.2 Identical storage costs with different prices of storage
components . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 192
Table 8.3 Example of two different storage products
with different component prices reduced to
one-dimensional prices . . . . . . . . . . . . . . . . . . . . . . 192
Table B.1 Prefixes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Table B.2 Large number abbreviations . . . . . . . . . . . . . . . . . . . 214
Table B.3 Conversion of volume units . . . . . . . . . . . . . . . . . . . 214
Table B.4 Conversion of energy units . . . . . . . . . . . . . . . . . . . 215
Table B.5 Conversion of pressure units . . . . . . . . . . . . . . . . . . 216
Table E.1 Summary of flexibility components’ boundary
functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 239
 Prologue
Odorless and colorless, ‘conventional’ but clean,
easy-to-handle, available for more than the future
century, relatively simple and uniform in com-
position, natural gas can be used for multiple
purposes. It is a source of primary energy for
heating, industrial processes, electricity produc-
tion or transportation, a feedstock, or can even be
converted to liquids. As such, natural gas has
been long regarded as the (conventional) fuel of
the future. Growth rates of natural gas’ shares in
primary energy consumption have been
impressing and significant—worldwide. Infras-
tructure, such as storages, pipelines, and LNG
facilities, has been constructed successfully and
helped fulfilling demand requirements while
safeguarding security of the supply and flexibil-
ity of deliveries.
On a worldwide scale, the demand for natural
gas keeps increasing. Yet, consumption in
European markets, with a few notable excep-
tions, either stagnates or decreases and might
continue to do so. Obviously, in these markets,
natural gas is considered (relatively) expensive,
still CO2 polluting, at least partly ‘captured’ in
mono- or oligopolistic market structures and less
secure than alternative fuels, as it is predomi-
nantly network based and available from remote
sources only—more and more from outside the
European Union. In short, at the time of writing
this book, market participants in Europe mostly
perceive that the political support for natural gas,
granted throughout the past decades, diminishes.
This, however, does not render natural gas
insignificant or even irrelevant. In most parts of
© Springer International Publishing AG 2017
A. Pustišek and M. Karasz, Natural Gas: A Commercial Perspective,
DOI 10.1007/978-3-319-53249-3_1
1
the world, natural gas is well established as one
of the most important, with regard to market
share, primary fuels. This applies, despite
decrease or stagnation, also to Europe.
Given the importance of natural gas as a pri-
mary source of energy, it remains surprising why
only a few authors are engaged in discussing the
challenging, interesting, and dynamic subject of
the natural gas business. Therefore, it is the
authors’ intention to deliver a contribution to this
subject by making the reader familiar with,
piquing his curiosity in more details about, and
commanding admiration of the up-to-date
achievements of the natural gas industry.
To this end, a textbook is provided covering
the commercial and economic topics of the nat-
ural gas business and markets and discussing
interdependencies with other fuels and between
international natural gas markets, as well as the
impact of technical issues on (economic or
commercial) results.
With such objectives and restrictions, the
book may serve to provide novices in the natural
gas business with first ideas. Whether the novice
is a bachelor student, a trainee in a company or
(governmental) institution, or an (otherwise)
experienced manager accepting a challenge in the
natural gas business, is irrelevant. The intention
is that all readers get an understanding of the
basic concepts of the natural gas industry. To
support this understanding, the general descrip-
tion will be illustrated by ‘real-world examples’.
These examples are—probably needless to say,
as they are written by European authors with
1
2 1 Prologue
European backgrounds—inevitably, European
biased.
In addition, we endeavor to provide ideas,
background information, and several detailed
discussions of advanced topics, which we hope,
might be useful for the practitioners’ day-to-day
business. Nonetheless, the selection of the topics
discussed in this book is unavoidably subjective,
as, of course, there are no logical (or, in any other
way, objective) rules for their selection.
It is equally important to note what this book
does not attempt to accomplish. This list is
(necessarily) longer than the one above. Among
the important topics, which may be expected in a
book about natural gas, are: the description of the
technical background or details, be it for explo-
ration, production, transportation, storage, dis-
tribution, or utilization. So, the descriptions of
these subjects provided in this book just illustrate
in highly simplified manner the basics considered
necessary for an understanding of the commer-
cial perspective of the industry. Hence, the
treatment of these topics merely serves the pur-
pose to provide an overview. The interested
reader is referred to the further reading (see
Appendix A). The same applies to the descrip-
tion of (general or specific) economic or com-
mercial, mathematical, and geological, physical
or chemical basics and details. In the section on
portfolio management, the main principles are
described but not discussed in detail. This applies
to methods used for portfolio optimization and
risk management. The reason is simple; any
textbook-like approach will necessarily
over-simplify and, consequently, lack practical
relevance,1 or, if, e.g., portfolio optimization
were covered in depth, the section would by far
exceed the intended size of the entire book.
Furthermore, national details of sales, trans-
portation, and storage, including the contracts
and regulations on various levels of the natural
1
Therefore, we will also refrain from formulating any
approach in mathematical form.
gas industry, will be discussed only when used as
examples—it is not the intention of this book to
provide details of individual markets, neither is it
intended to serve as a database. The intention of
providing selected market data is to support the
reader’s understanding of markets. As we have
experienced rapid and remarkable changes of
objectives, tasks, strategies, and even names of
companies, institutions, and associations, in the
general text we try, as far as reasonably possible,
to refrain from referring to specific ones. Finally,
we will refrain from discussing or describing
organizational issues. Natural gas companies
worldwide are not uniformly organized, neither
the processes nor the structures. Moreover,
organization helps companies coping with the
challenges of the business but an understanding
of the organization is not considered essential for
an understanding of the business.
Since we are convinced that only by com-
bining experience with knowledge or, in other
words, practice with theory, will the reader gain a
(profound) understanding of the subject, exactly
this amalgamation of alleged antipodes is
attempted in this book. Successful or not—this
judgement shall be left to the reader.
It has become a habit to express sincere
thanks to a (sometimes) long list of friends and
colleagues at the end of a prologue. We would
like to restrict ours to a short list. When thanking
in particular (in alphabetical order) Silke
Baumann, Darya Bomberger, Georg Fuchs,
Harald Granser, Harald Kraft, and Heiko
Lohmann for their support and help preparing the
manuscript, this does not mean that all valuable,
challenging, and intellectually thrilling com-
ments and advices from others are neglected or
forgotten. By expressing our general whole-
hearted anonymous thanks, we are at least sure
not to have omitted anyone.
 Introduction
2

understanding but not being a focus of this

2.1 Concept
book—sources and sinks, i.e., the initial and final
stages of the value chain, namely, ‘exploration
The guiding principle for structuring this book is
and production’ and ‘final usage’. However, the
the natural gas value chain—exactly in this order,
description of these stages will have to remain
i.e., ‘natural gas’ and then (its) ‘value chain’.
superficial. In the next preliminary treatment, i.-
Explanation of commercially relevant elements
e., the economic and commercial fundamentals,
of what is commonly referred to as the ‘natural
the ‘product’ and the market structures are
gas business’ is believed to be achieved best by
described. This delineates the framework for the
choosing a ‘mid-stream bias’, i.e., by focusing on
subsequent description of the selected stages of
the stages of transportation, storage, and sales.1
sales, transportation, and storage. As all entre-
Implicitly or explicitly, such discussion will
preneurial activities are reflected in contracts,
involve all ‘levels’ of the natural gas industry, i.e.,
contractual elements often are used to structure
all distinguishable groups of enterprises active in
and explain the subject. Basic elements of port-
bringing natural gas from the source to the sink,
folio management, i.e., the main ideas and
i.e., to the end user’s burner tip.2
objectives, are used to demonstrate the interde-
The detailed discussion of sales, transportation,
pendence of the stages, strategic and tactic
and storage is preceded by brief discussions of
options for market participants, and the impor-
fundamentals, specific for the natural gas industry.
tance of risk identification.
First, an overview of worldwide natural gas market
To facilitate reading, units and a glossary of
is provided by depicting selected figures, and then
terms are included, as well as a list of literature
non-economic and non-commercial fundamentals
recommended for further reading that covers
are discussed. This comprises the description of
primarily basics, which could not and should not
the chemical and physical properties of natural gas
be mentioned or discussed in this book, inter
(in more-or-less technical terms) and environ-
alia, the economic and technical background
mental effects, as well as—to facilitate the general
knowledge required in the natural gas business.
Throughout the book, case studies and examples
1 will be included wherever appropriate.
See Fig. 2.1. The separation of these three stages of the
value chain is, by default, consistent with the require- In short3: Natural gas, a hydrocarbon, formed
ments of unbundling, see Sect. 5.3. over millions of years, is trapped in subsurface
2
These levels are represented by producers, importers, reservoirs worldwide. Various, however, pre-
regional utilities, regional distributors, local distributors, dominantly seismic, methods of exploration are
and end user for the commodity sales. For transportation
applied in order to ‘find’, i.e., discover, the
and for storage the equivalent transport system operators
and storage system operators exist. See also the market
3
structure in Sect. 5.4. Partly depicted in Fig. 2.1.

© Springer International Publishing AG 2017 3

A. Pustišek and M. Karasz, Natural Gas: A Commercial Perspective,
DOI 10.1007/978-3-319-53249-3_2
4 2
‘upstream’ ‘midstream’
ExploraƟon/
Transport Storage
ProducƟon
Fig. 2.1 Simplified natural gas value chain
reservoirs and, subsequently, to start production.
The natural gas produced, i.e., ‘brought to the
surface’, is processed, eventually cooled to be
transported as LNG, and transported, in liquid or
gaseous state, from the production site to the
region or country, where it is consumed, i.e.,
(primarily) combusted to accomplish the ener-
getic requirements of households or industrial
end users, to produce electricity, or used as a
feedstock. As demand for quantities at each point
in time typically does not comply with produc-
tion, natural gas is stored on its way from source
to sink—often in vicinity of consumption sites.
Additional services may be offered to the end
user—primarily to increase demand and reduce
problems of utilization.
Market participants acting at each level4 could
cover several, but not necessarily all, stages of
the value chain. So, even if, e.g., a regional utility
(or regional distributor) is neither active in ex-
ploration and production nor in sales to end
users, it might offer sales, transportation, storage,
and other services, i.e., act along a selected stage
or stages of the value chain. However, products,
prices, and costs incurred can best be distin-
guished for the stages of the value chain. More-
over, the stages of the value chain are, contrary to
some ‘levels’ of the industry, universally present.
Hence, the description of commercial perspec-
tives for the industry will be structured ‘along the
stages of the value chain’, not for different levels
of the industry. For sales, transportation, and
storage, the products and pricing principles are
explained in detail. In addition, some details of
technical basics of transportation and storage as
well as costs will be given.
4
For an explanation and illustration of the ‘levels of the
industry’, see Sect. 5.5 and Fig. 5.4.
Introduction
‘downstream’
Trading/
DistribuƟon Services
Sales
Any commercial transaction is based on con-
tracts. Yet, despite being essentially a legal topic,
commercially relevant contractual issues, be it
for sales, transportation or storage, are an integral
part of any explication of the natural gas busi-
ness. The business and even its technical
opportunities and restrictions are reflected in
contracts and, therefore, such contracts are both
instructive and relevant. Consequently, the main
commercially relevant contractual elements, in
addition to products and prices, will be included
in each of the sections covering one element of
the value chain. By default, this will also be
consistent with the regulatory requirements con-
cerning, in particular, unbundling.
2.2 Historic Outline
While the history of oil can be traced through a
broadly internationally perspective, the natural
gas industry was developed differently in differ-
ent regions. Nothing like a ‘worldwide history of
the natural gas industry’ exists. Therefore, the
history of the industry will be outlined by
describing briefly the development of the natural
gas industry in selected regions.5
2.2.1 North America
The first natural gas company of the world was
Fredonia Gas Light Company founded in 1858.
5
The interested reader is referred to various national
publications. An overview, broader and deeper than the
one presented here, is given by Colombo et al. (2016).
2.2 Historic Outline 5

The first natural gas well was drilled more than 2.2.3 Russia
30 years earlier in 1821. Yet, until the middle of
the Nineteenth century, ‘town’ gas dominated the The natural gas industry in the Soviet Union
market. This was nearly exclusively used for started effectively in the 1960s only. The Min-
lighting. Heating, electricity production, and in- istry of the Gas Industry was created in 1965 and
dustrial usages were developed during the second promoted the increase of natural gas consump-
half of the Nineteenth century only. In the 1890s, tion. In the 1960s, exports began, first to Eastern
natural gas ‘pipelines’ began to emerge from Europe and by the end of the decade with the first
Texas and Oklahoma. In the 1950s, 93% of exports to Western Europe. By the end of the
world’s natural gas was produced in the US. 1980s, Gazprom was designated the state-owned
Continuous growth caused natural gas to account monopoly for natural gas.
for 44% of primary energy consumption in 1965.
Autarky in the US ended at the beginning of the
How Brotherhood Changed the Politi-
1970s, when natural gas imports from Canada
cal Landscape
began. In later years, increasing natural gas
It is common knowledge that, today, Rus-
consumption in the US was also supplied by
sia earns a considerable share of its export
LNG imports. LNG-receiving terminals were
income with the export of natural gas.
constructed primarily in the Northeast and the
This success story started on 3 December
South of the US. The shale-gas boom, starting by
1964 when an intergovernmental agree-
the middle of the first decade of the new mil-
ment between the Soviet Union and
lennium, made most of the receiving terminals
Czechoslovakia was signed in Moscow.
otiose. As several companies in the US are
Both countries were, since 1949, members
preparing for exports, liquefaction plants have
of the Council for Mutual Economic
been constructed or are under construction. First
Assistance, or COMECON, an organiza-
exports of LNG were executed in early 2016.
tion that focused mainly on building
trustful commercial relationships between
the participating countries. One of these
2.2.2 Europe
commercial relationships was the delivery
of crude oil and natural gas from the Soviet
Europe relied for decades on coal gas that was
Union into the COMECON countries, as
abundantly available. Ruhrgas, later for decades
did the December 1964 agreement. The
the most important player in the German natural
agreement foresaw the building of the
gas industry, was founded in 1926 as
Brotherhood pipeline (бpaтcтвo or brat-
‘Aktiengesellschaft für Kohleverwertung’ (stock
stvo) from Daschawa in today’s Ukraine
company for coal utilization). The era of natural
to Bratislava (former Czechoslovakia),
gas started in Europe not before the Groningen
today’s capital of Slovakia, and subsequent
field in the Netherlands was discovered and
deliveries of natural gas. The pipeline went
production started in 1965. In the 1970s, imports
into operation in June 1967, and the natural
from the Soviet Union (giving rise to intense
gas was delivered to a power plant and
political discussions at the time) and Algeria, as
chemical production facilities.
well as Norway started, while town gas produc-
Geographically, Bratislava is not far
tion gradually declined, effectively ceasing in the
from Vienna, and so Austria became a few
1980s. Starting at the end of the Twentieth cen-
years later the first Western state that
tury indigenous production in the European
imported natural gas from the Soviet Union.
Union decreased and imports increased. Diver-
sification of supplies, either by LNG or via
pipelines, is, therefore, one of the political pri-
orities of the European Union.6 6
For the history of regulation in Europe, see Sect. 5.3.
6 2
The basis for these deliveries, which started
in 1971, was a contract between the Soviet
Union and the Austrian company ÖMV
(today OMV) signed in June 1968. The
contract included a so-called barter com-
ponent, i.e., Western companies (in this
case, Austria’s VÖEST and Germany’s
Mannesmann and Thyssen) delivered pipes,
and, in return, the Soviet Union delivered
natural gas. This barter idea became the
blueprint for other natural gas sales of the
Soviet Union to, e.g., Germany and Italy,
and is the nucleus of Russia’s strong posi-
tion today as an exporter of natural gas to
Central and Western Europe.
2.2.4 Japan
The Japanese archipelago is not connected by
natural gas pipelines to the Asian mainland, and
natural gas was not used until the 1960s. Then, in
the early 1960s, the interest of Japanese compa-
nies to import LNG was triggered as a conse-
quence of the enactment of environmental
regulations. The first LNG import to Japan star-
ted in 1969. Further contracts were signed in the
1970s, inter alia, for imports from Brunei and
Indonesia, principally to cope with an increased
demand for natural gas in the agglomerations of
Tokyo and Osaka. Increased utilization of natural
gas for electricity generation necessitated further
imports from Malaysia and Australia. Japanese
companies were also pivotal for the development
of the Ras reservoir offshore Qatar. Starting at the
beginning of the new millennium, Japanese
companies also participated in or initiated up-
stream developments in Russia, Australia,
Mozambique, and Papua New Guinea and
endeavored to import natural gas from the US.
The successful development of the natural gas
industry in Japan has helped other industries to
develop and attain leading global positions,
amongst them shipbuilders, machinery manufac-
turing, and thermal-power system construction.
Introduction
2.2.5 South-East Africa7
In Mozambique and Tanzania, natural gas was
found already in the 1960s. However, natural gas
production started only decades later. Only
beginning in 2009 did major oil companies, like
Anadarko, Eni, Statoil, (former) BG Group, and
Ophir Energy, make several huge natural gas
discoveries. As the total reserves are still not
finally appraised, estimation for Mozambique’s
recoverable natural gas resources range from 2.8
to 5.1 tcm, and Tanzania’s at about 1.1 tcm.
Companies are planning to build LNG trains,
both in Mozambique and in Tanzania. It is
envisaged to construct up to four LNG trains in
Mozambique within the next years. Even further
extensions are discussed for the mid-term future.
Tanzania proposed to the operators the con-
struction of an offshore LNG facility with two
liquefaction trains. Yet, exploration in the area is
still ongoing.
Already today, natural gas is used to generate
electricity in Tanzania, and is exported by pipe-
line from Mozambique to South Africa. Origi-
nally considered as a by-product of oil, natural
gas is gaining importance in the region. How-
ever, marketability requires investments in fur-
ther exploration and infrastructure—for
processing and transportation, eventually also for
storage, but general infrastructure, like roads,
harbors and airports, too.8
2.2.6 Global LNG
The first (US) patent for LNG handling/shipping
was awarded in 1917, but it was not before the
early 1940s that an LNG peak-shaving plant was
constructed in Cleveland, Ohio. The first exper-
imental LNG cargo reached Canvey Island in the
UK in 1959, and only five years later, i.e., 1964,
7
See Copinschi and Smedley (2016), p. 198 et seq.
8
This has been recognized: For example, airports and
roads in Mozambique have been constructed with the help
of Chinese investors, in preparation for future exports of
oil and natural gas to China.
2.2 Historic Outline
the state-owned natural gas-producing companies
of Algeria and later Libya supplied France, the
UK, Italy, and Spain with LNG. Japanese
imports started at the end of the decade.9 The first
imports to South Korea took place in 1974, to
Taiwan in 1990. Australia started exporting LNG
in 1991 and Trinidad and Tobago in 1999.
However, only in the mid-2000s did LNG
become what the industry observers dub as ‘one
of the hottest topics of the natural gas industry’.
One of the main ‘game changers’ was the
perceived change in the US supply and demand
balance. Deliveries dedicated for the US were
detoured, as the ‘shale-gas revolution’ started
and solved perceived US-supply constraints. US
import projects were cancelled. The world’s
LNG market globalized. However, the main
geographic regions, i.e., the Atlantic Basin,
involving trade in Europe, northern and western
Africa, and the US Eastern and Gulf coasts and
the Pacific Basin, involving trade in South Asia,
India, Russia, and Alaska, both complemented
by Middle-Eastern LNG-exporting countries
between these regions, remained and still char-
acterize the global LNG market. Yet, implication
for price alignment between these markets started
to be evident only by 2015.
2.3 Preliminary Overview—
Development from Scratch
As in most of the network industries, both natural
gas networks and consequently the markets, are
characterized by economies of scale, sometimes
economies of scope and also direct, as well as
indirect, network effects.10 Furthermore, other
economic, commercial, legal, and technical
restrictions apply. Therefore, when starting from
scratch or intending to extend a natural gas
business in a region or country, several require-
ments have to be fulfilled in order to ensure the
9 11
See Sect. 2.2.4.
10
Network effects are often equated to economies of scale.
This view is not shared. While economies of scale (as well
as economies of scope) refer to the supply side, (other)
network effects result from demand side effects, e.g.,
interoperability.
7
economic viability, technical operability, and
legal compatibility. The essential requirements
are briefly described.
First and foremost, natural gas has to be
available, i.e., sufficient reserves of natural gas
should be present and ready for development and
production. The closer these reserves are located
to the market, the easier and cheaper the devel-
opment of a natural gas market will be. The
availability of a potential downstream market
thereby fosters upstream developments. Con-
tracts for the sale of natural gas can be used by
producers to finance their investments in pro-
duction facilities.
Sweden
The Swedish natural gas market is less
developed than are others in Europe. With
a population of nearly 10 million people,
Sweden’s natural gas consumption did not
exceed 20 TWh/a during recent years.
Overall, only 3.5% of the total Swedish
primary energy requirements are covered
by natural gas. Yet, in the southwest of
Sweden, where a natural gas infrastructure
has been established, this figure increases
to approximately 20% of the primary
energy consumption.11
There are several reasons for this (prac-
tically) insignificant market penetration.
Except for some small quantities of biogas
(and biomethane), Sweden has to import all
its natural gas. The only pipeline connec-
tion to Sweden exists via Denmark.12
Physical diversification of supplies is not a
feasible option. At Skallen, one lined
rock-cavern storage facility with a (very
limited) capacity of 10 million Nm3 was
constructed. In addition, Sweden’s popula-
tion density of 24 inhabitants/km2 is con-
siderably lower than the average for the
See Energimarknadsinspektionen (2012), p. 1.
12
South of Stockholm, at Nynäshamn, an LNG facility is
in operation since 2011. The supplies received are used in
the area of Stockholm only. A connection to the natural
gas transportation system in the southwest of Sweden
does not exist.
8 2
European Union, with approximately
120 inhabitants/km2 or, to choose an
extreme example, the Netherlands with
more than 500 inhabitants/km2.13 This
implies that (potential) investors cannot
profit from noticeable economies of scale
(or sometimes also referred to as ‘econo-
mies of density’). The end users are spar-
sely distributed, and the marginal costs of
connecting the next end user to the grid are
high, as it (at least on average) requires
considerable pipeline extension.
In summary, the market participants and
investors claim that the following factors
are hindering a sustainable and economi-
cally viable extension of the Swedish nat-
ural gas market: Supplies are not
diversified and only hardly diversifiable;
local geology thwarts plans to construct
significant storages; the specific trans-
portation costs, i.e., costs per quantity, are
high, as long distances have to be bridged;
and, finally, end users in most parts of
Sweden have not had the chance to get
acquainted with natural gas.
If a natural gas infrastructure, consisting pri-
marily of transportation, LNG, and storage
facilities does not exist, and sales of natural gas
are intended, such infrastructure has to be con-
structed. In order to be economically viable,
primarily the following prerequisites should be
ideally fulfilled:
• Potential demand/end users has/have to exist
or can reasonably be expected to
develop. Ideally, demand/end users will:
– be ‘large’, ensuring ‘sufficient’ revenues
and reduction of specific costs;
– be diversified with regard to price (struc-
ture), quantity and flexibility require-
ments, and segments, in order to reduce
risks,14 in particular:
13
See World Bank (2016).
Introduction
• credit risk,15
• price risk,16
• volume risk,17
• flexibility requirement (by equilibra-
tion of deliveries to end users with
different requirements18);
– be located in clusters, i.e., in case a new
region has to be developed, economies of
scale will be more pronounced in clusters,
as the marginal costs for connecting
additional end users will decrease.
• Infrastructure can be developed at (relatively)
low costs.
This implies that a transportation and distri-
bution system can be constructed efficiently,
i.e., that a sufficiently large number of end
users can be connected to the system.
Therefore, locally clustered demand/end users
will decrease marginal costs for connecting
additional end users.
In addition, infrastructure to safeguard secu-
rity of supply, as well as short-, mid- and
long-term flexibility will have to be con-
structed. As the ‘tools’ used to provide such
services are predominantly either under-
ground storages located in the vicinity of
demand or (flexible) production, the (geo-
logic) conditions to develop storage facilities
14
Excursus: In this book, the following distinction will be
used: While ‘uncertainty’ describes a state or situation (in
the future) for which neither the values of (a) variable(s)
nor its/their probability distribution(s) is/are known, ‘risk’
refers to a situation (in the future) where the probability
distribution(s) of (a) variable(s) is/are known but not the
value(s). (Often risk is solely referring to the probability
of loss).
15
Credit risk refers to the risk that a debtor defaults, i.e.,
will not pay back a loan.
16
Price risk is caused by the probability of any ‘adverse
movement’ in the (market) price of an asset, commodity,
or any other good.
17
Volume risk, having been defined in the traditional
natural gas market as the risk of incompatible sales and
supplies, i.e., over- or undersupply, (by definition) does
not exist in liquid markets. Here any quantity can be
purchased or sold, yet at different prices, i.e., in modern
markets, volume risks are converted to price risks.
18
Also referred to as ‘foisonnement’ (using metaphorical
French).
2.3 Preliminary Overview—Development from Scratch
have to be favorable or the production has to
be in or near the region of consumption.
• The investors have to have sufficient capital at
their disposal to bear all costs for infrastruc-
ture construction, operation, and
maintenance.
• A legal (or regulatory) framework, including
technical standards, has to be established
providing investment security and fostering
further market development.
• Supplies are available at competitive prices,
either from indigenous production or from
international sources. Ideally such supplies
will:
– on an annual basis, match demand,
– be diversified in order to:
• ensure optimal utilization of the
network,
• increase security of supply by reducing
the impact in case one source is
interrupted,
• enable the customer to optimize its
portfolio, and
– fulfill potential regulatory requirements.
If, on the other hand, infrastructure exists
already and non-discriminatory third-party
access to infrastructure is granted (or its own
infrastructure is available) and it is intended to
enter a market competitively, then competitive
sales products, as well as competitive supplies,
low costs of infrastructure utilization, and a legal
framework encouraging such market entry, are
essential.
WINGAS
While today entry into most mature natural
gas markets is facilitated by non-
discriminatory rules of third party access
to transportation and storage capacities, this
was not the case in Germany in the early
9
1990s. To supply its mother company
BASF, in 1990, Wintershall made efforts to
purchase natural gas directly from North
Sea producers and in parallel asked
incumbent Ruhrgas for access to its trans-
portation capacities. Such access was not
granted. Natural gas from producers in the
Norwegian North Sea was also not avail-
able. Instead, Wintershall, supported by
BASF, and Gazprom agreed to co-operate.
To this end, joint ventures, one of them
WINGAS, were founded, and pipelines
across Germany and Germany’s largest
storage at Rehden were constructed. Due to
non-existing third party access to pipelines,
some of the pipelines were laid parallel to
existing pipelines. At the same time, the
sales organization was established, and
major long-term delivery contracts with
Gazprom’s export affiliate, Gazexport,
were concluded. Investment-based market
entry was achieved in a mature market, with
already existing, but at that time not
accessible, infrastructure.
References
Colombo S, Harrak M El, Sartori N (2016) The future of
natural gas–markets and geopolitics. In: Colombo S,
El Harrak M, Sartori N, (eds) Lenthe/European Energy
Review, Hof van Twente
Copinschi P, Smedley M (2016) Sub-saharan Africa: a
future global gas player? In Colombo S, El Harrak M,
Sartori N (eds) The future of natural gas. Market and
geopolitics. Hof van Twente, pp 181–207
Energimarknadsinspektionen (2012) An overview of the
Swedish natural gas market
World Bank (2016) Population density. Available at
http://data.worldbank.org/indicator/EN.POP.DNST?
year_high_desc=false
 Market Data
Summary
• The world’s natural gas consumption in
2015 was 131 EJ. Natural gas accoun-
ted for approximately 24% of the
world’s primary energy requirements.
• While the share of natural gas in
the primary energy consumption of
Western Europe and the US is approx-
imately 30%, it is more than 50% in
Russia and 11% in the Asia-Pacific
region.
• The world’s largest natural gas reserves
are located in Iran, Russia, and Qatar.
• In recent years, the largest natural gas
production was reported to be in the
US, followed by Russia, Iran, and
Qatar.
• In absolute terms, the natural gas con-
sumption in the US is the world’s lar-
gest, followed by Russia, China, and
Iran. European natural gas consumption
decreased during recent years.
• The total storage capacity is largest in
the US, followed by Russia, the
Ukraine, and Germany.
• The largest LNG-liquefaction capacities
have been constructed in Qatar. Con-
siderable investments have also been
made in Australia and Indonesia.
© Springer International Publishing AG 2017
A. Pustišek and M. Karasz, Natural Gas: A Commercial Perspective,
DOI 10.1007/978-3-319-53249-3_3
3
• In Japan, the US, and South Korea, the
LNG-regasification capacities are the
world’s largest. Yet, in the US, after
self-sufficiency in natural gas supply has
been achieved during recent years, their
regasification capacities are mainly idle.
• The prices for natural gas traded at hubs
in Europe align, i.e., the differences are
small and the correlation coefficients
high.
• In Europe, the correlation coefficients
between crude-oil prices and natural
gas prices traded at hubs increased in
recent years after having been lower in
the preceding decade.
3.1 Primary Energy Consumption
The world’s energy consumption in 2015 was at
550.5 EJ.
The various primary fuels’ shares are depicted
in Table 3.1. Behind oil and coal, natural gas is
the third most important primary energy.
The natural gas share in primary energy con-
sumption was largest in Trinidad & Tobago
(91.4%). Table 3.2 shows the shares of natural
gas in primary energy consumption for various
world regions and selected countries.
11
12 3 Market Data

Table 3.1 Primary fuels’ shares in 2015 world energy consumption

Oil Coal Natural Hydro Nuclear Renewables (other Total
gas electric energy than hydro)
Consumption [EJ] 181.3 160.8 131.3 37.4 24.4 15.3 550.5
Share (%) 32.93 29.21 23.85 6.79 4.43 2.78 100.0
See British Petroleum (2016), p. 41

Table 3.2 Natural gas share in 2015 in primary energy consumption in selected regions and countries
Country Share of natural gas in primary energy consumption [%]
Trinidad & Tobago 91.4
Qatar 78.9
Bangladesh 78.6
Algeria 64.3
Russia 52.8
Total Middle East 49.9
Italy 36.5
UK 32.1
Total Europe & Eurasia 31.9
Total North America 31.5
US 31.3
Total Africa 28.0
OECD countries 26.5
Total World 23.8
Total South & Central America 22.5
European Union 22.2
Non-OECD countries 21.9
Germany 20.9
Brazil 12.6
Total Asia Pacific 11.5
China 5.9
South Africa 3.6
Sweden 1.5
See British Petroleum (2016), p. 41

with today´s technology, economically pro-

3.2 Reserves ducible. Of course, many definitions for resour-
ces and reserves exist in different countries1 but
Excursus
Though similar, reserves and resources are not
the same. In a nutshell, reserves are those 1
Compare with the Society of Petroleum Engineers
resources that are geologically well-known and, (SPE) (2005) which provides an overview based on
different definitions.
3.2 Reserves 13

Fig. 3.1 McKelvey Total Resources

diagram (Kleppe and Identified Undiscovered
Demonstrated hypotheƟcal (in undiscovered
McKelvey 1976, p. A2) Inferred
Measured Indicated known districts) districts)

Increasing degree of economic feasibility

Economic
RESERVES

Submarginal Paramarginal
Subeconomic
RESOURCES

Increasing degree of geological assurance

nearly all of them are based on the so-called

McKelvey box (see Fig. 3.1). Named after 3.3 Production
Vincent E. McKelvey, former director of the US
Geological Survey, this diagram classifies Worldwide natural gas production reached
reserves and resources according to the degree of 3538.6 bcm5 in 2015. Again, the largest share
geological certainty (horizontal axis) and the was produced in non-OECD countries with
degree of economic feasibility (vertical axis), i.e., 63.2% (OECD share: 36.8% and share of EU:
only those resources that are geologically 3.4%).6 Obviously, OECD and EU produce a
well-known and economic to produce are con- higher share than their share of worldwide re-
sidered as reserves. This implies that the same serves. Therefore, the R/P ratio7 is in the EU at
volume of natural gas in the ground might 10.8 years, in all OECD countries at 15.1 years,
change its status from resource to reserve and and in non-OECD countries at 74.5 years. The
vice versa. For example, by advances in drilling R/P ratio for the world is at 52.8 years. The
technology, shale-gas resources in North Amer- development of worldwide natural gas produc-
ica became reserves in the early 2000s. tion since 1970 is depicted in Fig. 3.2.
Global natural gas production has more than
At the end of 2015, the total proven reserves in tripled since 1970. The 25 largest natural gas
the world were estimated to be 186.9 tcm.2 The producing countries of 2015 are enumerated in
25 largest reserve-holding countries are descri- Table 3.4.
bed in Table 3.3. Whereas some countries show steep produc-
None of them is member of the European tion increases (e.g., US and Qatar), others are in
Union.3 In total, only 0.7% of the world reserves the declining production phase (e.g., the UK and
are located in the European Union. Due to the the Netherlands).
relatively large North American, Norwegian, and
Australian natural gas reserves, the OECD
countries together hold 10.5% of the world
reserves. The remaining is located in non-OECD
countries.4 5
In this section volumes will be quoted in [bcm] = [Gm3]
= [billion m3] in accordance with use in the industry.
6
See British Petroleum (2016), p. 22.
2
See British Petroleum (2016), p. 20. 7
The R/P ratio, the so-called reserves-to-production ratio,
3
The largest reserve holder within the EU is The is calculated by dividing the reserves by the annual
Netherlands ranked 26 on the list of largest production. Assuming constant production for the future
reserve-holding countries. and no further changes to reserves, the R/P ratio shows
4
See British Petroleum (2016), p. 20. the length of time (in years) that the reserves would last.
14 3 Market Data

Table 3.3 Largest Rank Country Reserves [tcm]

reserve-holding countries
1 Iran 34.0
2 Russia 32.3
3 Qatar 24.5
4 Turkmenistan 17.5
5 US 10.4
6 Saudi Arabia 8.3
7 UAE 6.1
8 Venezuela 5.6
9 Nigeria 5.1
10 Algeria 4.5
11 China 3.8
12 Iraq 3.7
13 Australia 3.5
14 Indonesia 2.8
15 Canada 2.0
16 Norway 1.9
17 Egypt 1.8
18 Kuwait 1.8
19 Libya 1.5
20 India 1.5
21 Malaysia 1.2
22 Azerbaijan 1.1
23 Uzbekistan 1.1
24 Kazakhstan 0.9
25 Oman 0.7
See British Petroleum (2016), p. 20

expected to increase in the near- and mid-term

3.4 Consumption
The 25 largest natural gas consuming countries
of 2015 are enumerated in Table 3.5.
Worldwide natural gas consumption reached
3468.6 bcm in 2015. The largest share was
consumed in non-OECD countries with 53.5%
(OECD share: 46.5% and share of EU: 11.5%).8
Obviously, OECD and EU consume at a higher
share than their share in worldwide reserves or
production.
While natural gas consumption in most
countries increased during the last years and is
8
See British Petroleum (2016), p. 23.
future, in Europe a decline was observed,9 and
most of the forecasts expect natural gas con-
sumption to stagnate or further decrease in the
future.
3.5 Trade and Prices
Tables 3.4 and 3.5 show that production and
consumption of natural gas in many cases do not
coincide geographically. (One notable exception
being the US, which, however, together with
9
See, e.g., the consumption for Italy, the UK, and
Germany in Table 3.5.
3.5 Trade and Prices 15

Fig. 3.2 Development of 4,000

worldwide natural gas
production since 1970
3,500
[See British Petroleum
(2016)]
3,000

ProducƟon [bcm/a]
2,500

2,000

1,500

1,000

500

0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Table 3.4 Largest natural gas producing countries since 1970
Rank Country Production [bcm]
1970 1980 1990 2000 2005 2010 2015
1 US 595.1 549.4 504.3 543.2 511.1 603.6 767.3
a a
2 Russia 179.1 393.8 590.0 528.5 580.1 588.9 573.3
3 Iran 3.7 4.8 26.2 59.6 102.3 152.4 192.5
4 Qatar 1.0 4.7 6.3 24.9 45.8 131.2 181.4
5 Canada 56.7 74.8 108.6 182.2 187.1 159.9 163.5
6 China 3.0 14.7 15.8 28.1 51.0 99.1 138.0
7 Norway – 25.1 25.5 49.8 85.8 107.3 117.2
8 Saudi Arabia 1.6 9.7 33.5 49.8 71.2 87.7 106.4
9 Algeria 2.5 14.7 49.4 87.8 88.2 80.4 83.0
10 Indonesia 1.2 18.5 43.9 69.6 75.1 85.7 75.0
11 Turkmenistan b b 79.5 42.5 57.0 42.4 72.4
12 Malaysia – 2.5 17.2 46.6 63.8 60.9 68.2
13 Australia 1.7 11.1 19.7 32.1 39.2 52.6 67.1
14 Uzbekistan b b 36.9 51.1 54.0 54.4 57.7
15 UAE 0.8 7.5 20.1 38.4 47.8 51.3 55.8
16 Mexico 11.2 25.7 27.1 38.3 52.2 57.6 53.2
17 Nigeria 0.1 1.7 4.0 11.8 25.0 37.3 50.1
18 Egypt 0.1 2.2 8.1 21.0 42.5 61.3 45.6
19 Netherlands 26.7 76.4 61.0 58.0 62.5 70.5 43.0
20 Pakistan 3.5 7.2 12.2 21.5 39.1 42.3 41.9
21 Thailand – – 6.5 20.2 23.7 36.2 39.8
(continued)
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was the matter, just as she reached the bottom.

"What ails the child?" said Mother, rather sharply. "The man
would wait no longer, and now the poor woman must go
without her cloak."

"I am very sorry!" answered Amice, meekly. "I was trying to

emulate the example of that blessed young Saint, Sister
Catherine was reading of yesterday; who, when he went up-
stairs, always paused to say a prayer on every step."

I saw Mother's eyes twinkle, and the corners of her mouth

twitch.

"Well, well, I wont scold you, child, but remember the next
time you are sent on an errand that your business is to do
the errand, and try rather to follow the example of St.
Anthony, and be in two places at once."

I saw Amice was mortified. When we went away together

she was silent a little, and I could see she was trying to
keep back her tears. Presently she said:

"Rosamond, I think it is very hard to follow the example of

the Saints. There are so many of them, and they are so
very different."

"Perhaps it would be well to pick out one, and keep him for
a model," said I.

"But how?" asked Amice. "Now, this same saint, for

instance. When he was only five years old, he wanted a
friar's habit, and he cried till he got it."

"He would have cried a long time if he had my mother to

deal with!" said I. "Or rather, I think his crying would have
been cut short rather suddenly."
"Just so!" said Amice. "We were taught to obey our parents
in all things. Then, again, when he was eight years old, he
saw his mother in a red dress, and reproved her severely,
telling her that the color would drag her down to the flames
of hell. Now I think (and I can't help thinking), that Sister
Catherine's way of snubbing and putting down poor Sister
Bridget (though she does say silly things, to be sure), is
worse than wearing a red gown: but suppose I should
reprove her, what do you think would happen?"

"I can guess!" said I, and we both laughed; but Amice

looked very sober again, directly.

"So you see, Rosamond, I don't know what to do, because

whatever Saint you choose for a model, you seem to run
against somebody. And that makes me say I wish there
were not so many."

"If we knew all about our Lady, or one of the Holy

Apostles," said I, doubtfully; "or suppose you should take
St. Clare, or St. Agnes."

"Well, St. Clare did not obey her parents either; she ran
away from her father's house at midnight, and went to St.
Frances!"

"Yes, but that was because she had such a high vocation," I
answered, "and her parents opposed her. I suppose that is
different. Anyhow, Amice, we can do as we are told, and
that is always a comfort. Perhaps it is the safest way for
girls like us."

"If we had our Lord's life, that would be the best of all,"
continued Amice, not paying much attention to my words:
"but then, of course, we never could hope to follow that,
when we cannot even reach the example of Saint Francis
and Saint Clare. Anyhow, I wish I could read it for once—all
of it."

"Why, Amice, how can you say such a thing?" said I, rather
sharply, I am afraid. "Don't you know what Father Fabian
said in his sermon—that it was the reading of the Scriptures
by unlearned men which made all the heresies and schisms
which have come up in Germany and the Low Countries?"

Amice looked so distressed that I was sorry for my words

directly.

"I am sure I don't want to be a heretic, or anything else

that is wrong!" said she, with tears in her eyes. "I would
like to please everybody, but somehow I am always going
wrong and making mistakes, as I did to-day. I keep seeing
that poor woman going over the moors in the cold wind,
without any cloak, and yet I meant no harm."

"I am sure you never mean to be anything but the dearest

girl in the world," said I, kissing her. "As to what happened
to-day, I wouldn't think of it any more."

"I don't see that I can do anything about it now, only to

make it an occasion of humility," says Amice.

"I don't think you can do anything better with it than to let
it alone and think about something else," says I, and so the
matter ended.
 CHAPTER III.

Feast of St. Agnes, April 20.

A YEAR ago at this time I was at home, busily preparing

flowers and wreaths for my sister's bridal, under dear
mother's eye. I knew Alice wanted violets, and Dick and I
went to search for them in the coombe, where the banks
being shady, the violets do longest linger. When we had
filled our baskets with the flowers, which we found in
abundance, both white and blue, we sat down a little on the
moss to listen to the singing of the birds and the lapse of
the water. These gentle sounds, albeit most sweet and
tender, did somewhat dispose us to silence, if not
melancholy. Presently Richard said:

"I wonder where we shall be a year from now, Rosamond?

You know this same spring used to be a favorite haunt of
the Fair Dame of Stanton, my ancestress. They say she
used to see in the bosom of the water, as in a mirror, all
that was to come to pass."
"I can tell pretty well where we shall be a year from now,
without any of the Fair Dame's art," said I. "You know she
was said to be a heretic, if not worse."

"Yes, but I don't believe it!" answered Dick, valiantly. "I

believe she was a good woman, and a good wife. But since
you know so well, tell me where we shall be?"

"You will be in France with my Lord your uncle," said I, "or

else attending him at Court, winning your spurs by brave
deeds, or dancing with fair dames and damsels; and I shall
be at the convent, working of cut-work copes and altar-
cloths in silk and gold; or helping Mother Gertrude dry
herbs, and distil cordials, and make comfits: or studying the
lives of the Saints; or—"

"Be wasting your time and youth on some nonsense or

other," interrupted Richard, who never could bear to hear of
my being a nun. "It is a shame!"

"It was my mother's doing, and I will not hear a word

against it!" said I. "Besides, I don't know why I shouldn't be
happy there as well as anywhere else. A great many nuns
are happy, and beside that, Dick, to be happy is not the
business of life."

Dick received this remark with the grunt which he always

bestows on my wise speeches, and we were silent for a
time. Then Dick said passionately, all at once—pointing to a
chaffinch, a dear little fowl, which sat on a twig singing his
very heart out, "Sweetheart! Sweetheart!" over and over
again:

"Rosamond, nothing shall make me think that yonder bird

does not serve God just as acceptably while he is flitting
about gathering food for his young ones, and singing in the
free air of heaven, as if he were shut behind the bars of a
cage, singing the same song over and over, after the old
bird-catcher's whistle."

"The bird is only a bird," I answered, "and, as Master

Ellenwood often tells us, comparisons are no arguments.
Besides, Dick, I have to go, so where is the use of repining?
My mother has promised for me, and I have promised her
again this very day (and so I had); so where is the use of
an argument?"

"It's a shame!" said Dick, passionately; adding, "If you

cared for me as I do for you, you wouldn't talk so coolly of
its being an end."

Whereat there was nothing to do but to rise and return to

the house.

I don't know why I have written this down, only it is a part

of my life. There can be no harm in it, because Richard and
I can never be anything to each other—not even brother
and sister—because a good religious knows no ties of
natural affection. No doubt the coombe is full this very day
of violets and primroses, and all other sweet flowers, and
the spring is welling up and running over its basin all among
the moss and fern, and the brook liverwort; and I dare say
the very same chaffinch is singing there this minute. There
are violets in our convent garden as well, but they are
planted in a straight bed, and Mother Gabrielle uses the
flowers to make her sirups, and the leaves are gathered for
our sallets. There is a spring, too, but not one bit like that in
the coombe. That boils up out of a deep and wide cleft in
the rock, filling its basin full and running over the stones in
twenty little vagrant streams. Great ferns grow over and
shade it, and leaves drop into it in the autumn, and birds
and wild-wood creatures come to drink of its waters. This
pours in a steady orderly stream from a pipe which sticks
straight out from the wall, and runs down a straight course,
paved and edged with cut stone, into the stew-pond where
we keep our fish.

Still our convent garden is a sweet and pretty place, full of

orderly knots and beds of flowers and herbs, chiefly such as
are good to distil cordials, or to help out our messes on fast
days—rue, and mints, and hyssops, and angelica, and
caraway, and burnet—with abundance of roses, and
poppies, and white lilies, and a long bed of sweet flowers
for the bees.

We have a fine stock of beehives. Then we have plum and

pear and apple trees, and a bed of strawberries. At the end
of the garden are two most ancient elm trees, and under
them a very small, and very, very old chapel of our Lady of
Sorrows. Dear Mother says it is by far the oldest part of the
convent. It is very small, as I said, built of huge stones,
with low heavy arches. Over the altar stands the image of
our Lady, rudely carved in some dark wood. It is a very holy
image, and used to work miracles in old times. I wish it
would again. I should dearly love to see a miracle.

At the back of this chapel, and joining it, so as to be under

the same roof, is another building, very low and massive,
with no windows, but one very narrow slit, close under the
eaves. A heavy iron-studded door opens into it from the
chapel itself. Mother Gertrude told me one day that it
contained the staircase leading to a burial vault under the
chapel, now never used, and that it had not been opened
for years and years.

The Sisters are not fond of this shrine, holy as it is, and I
think they are afraid of it. Indeed I know Sister Bridget told
me that if an unfaithful nun were to watch there over night,
she would be found dead on the floor in the morning—if
indeed a ghost or demon did not arise from the vault and
drag her down to a living death below.

"I should not think a ghost would dare to come into the
sacred place!" said Amice.

"Evil spirits have power over the unfaithful, wherever they

are—remember that, child!" said Sister Bridget, solemnly.

"And over the faithful too, sometimes," said Amice, who is

as usual reading the lives of Saints. "I am sure St. Frances
was dreadfully disturbed by them."

"Power to disturb, but not to destroy them, child. But

prayers offered at that shrine have great efficacy for the
deliverance of souls from purgatory," said old Mother Mary
Monica, who is the oldest person in the house, and very
fond of the company of us young ones. "If any one had a
friend in purgatory, and should watch all night in prayer
before that image, it would go far to deliver him."

"Do you really think so, Mother?" I asked.

"Think so, child! I know it for a truth. The blessed Saint

Ethelburga herself tried it, and was assured by a vision and
a miracle that her prayers were granted. Eh dear, I could
tell you many stories of miracles, my daughters. They used
to be plenty in my young days. Why, I was converted by a
miracle myself."

"Tell us about it, dear Mother, will you?" said Amice and I
both together; and Amice added, "See, here is a nice seat,
and the warm sun is good for your pains, you know."

So she sat down, the good old soul, and Amice and I on
stones at her feet, and she told us the tale. I will set it
down just as I remember it.
"You must know, my children, that I was a giddy young girl
in attendance on the Queen—not the Queen that now is, but
Queen Elizabeth, wife of Henry the Seventh, this King's
father—when I went with my mistress to make a retreat at
the convent of the poor Clares, in London—"

"The same that Sister Catherine is always praising," said I.

"Yes, the very same; but don't you put me out. Where was
I?"

"Where you went with the Queen to make a retreat, dear

Mother."

"O yes. Well, I had been a giddy girl, as I told you, but I
had been somewhat sobered of late, because my cousin
Jack, whom my father always meant I should wed, had
been on the wrong side in the late troubles, and was in
hiding at that time. Now, I liked Jack right well, and was
minded to marry none other; but I was a King's ward, my
father being dead, and I having a good fortune. So I had a
many suitors, and I knew the King was favorable to a
knight, Sir Edward Peckham, of Somerset, who had come to
him with help just at the right time. Now, I wanted nobody
but Jack; but of all my suitors there was none that I
misliked so much as Sir Edward Peckham!"

"Why?" asked I, much interested.

"Because I could not abide him, child. That was reason

enough. Well, things being even in this shape, I was glad
enough when my mistress made her retreat in the convent
of the Poor Clares, and chose me to attend on her, out of all
her train. That was a strict order, children. Matins at one
o'clock in the morning—not overnight, as we have them
here—no food till dinner at eleven, and no flesh meat even
on feast days—almost perpetual silence! Well, it was always
and ever my way to fall in with whatever was going on, let
it be what it might; so I fasted and prayed with the best,
and kept all the hours, till I was so tired I could hardly
stand. In the midst of it all came a messenger to my
mistress from the King, bidding her return to the Court in
three days and bring me with her, for the King was minded
that my marriage should no longer be put off.

"Children, I was like one distracted, and I was all but ready
to cast myself away, body and soul. The Mother Superior
marked my grief, and I was won to tell her the whole. She
was an austere woman—not one bit like our Mother—but
she was very kind to me in my trouble—"

"I am sure our dear Mother Superior is a saint, if ever there

was one," said I.

"That she is, that she is, child; but there may be a
difference in saints, you know. Well, Mother Superior pitied
my grief, and soothed me, and when I was quieted like, she
councilled me to watch all night before a shrine in which
were some very holy relics—specially part of the veil of St.
Clare, our blessed founder."

"'Perhaps the Saint may take pity on you and show you the
way out of your present troubles,' said she. 'Fast this day
from all food, my daughter, and this night I will myself
conduct you to the shrine where you are to watch.'"

"Well, children, I did fast and say my rosary all the rest of
the day, till I was ready to drop; and at nine at night the
Mother Superior led me to a little chapel off the church,
where was the shrine of St. Clare. It was all dark—only
looking toward the church I could just see the glimmer of
the ever-burning lamp, before the Holy Sacrament of the
Altar. Here she left me, and here I was to kneel till daylight,
saying my prayers and the seven psalms."

"I don't see how you could kneel so long," said Amice.

"I might lie prone a part of the time, if I would," replied

Mother Mary Monica, "and so indeed I did. I don't know
what time it was—somewhere before Matins, and I know
not whether overcome with fatigue I had not dozed a little,
when I was waked by a bright light. I raised myself on my
knees, and looking toward the altar, I saw the figure of St.
Clare surrounded by a clear but mild radiance, and holding
out to me in her hand a nun's veil, while a voice of heavenly
sweetness, said to me these words: 'Here, my child, is thy
only refuge.' The light faded away, and I sunk down—in a
swoon this time, for when some of the Sisters came to seek
me at prime, they found me pale and lifeless, while—mark,
my daughters—on my head was laid that most sacred relic,
the veil of St. Clare—yes, on this unworthy head the
blessed veil was laid."

We both looked at the good Mother in a kind of awe.

"Well, I told the good Sisters and my mistress what I had

seen. There could be no doubt after that in my mind,
especially as two or three days after I had certain news of
Jack's death. The King would not hear of my profession at
first, but the Prior of the Franciscans took my part, and his
Majesty would not have liked setting the whole of the Gray
Friars against him; so he gave way, and even paid over my
portion, which must have gone hard, for his blessed Majesty
was fond of money; and Sir Edward went home riding
alone, with a flea in his ear, instead of a bride by his side.
Marry him, indeed, with his thin legs and his long lean jaws!
So that is the way I was converted, my children, and got
my own way, by the help of the Blessed St. Clare, to whom
I have always had a particular devotion ever since. And who
knows what miracles might be vouchsafed to you, if you
were to watch all night before the shrine of our Lady?"

We had no time for any more talk just then, but ever since I
have been turning over in my mind what Mother Mary
Monica said. It does seem dreadful to me—the thought of
watching all night and alone in that dreary place without a
light. To be sure, the moon is at the full, and would shine
directly into the great window, but then those dreadful
vaults, and Sister Bridget's story do so run in my head.
Every time the wind shook the ivy or whistled in the
loopholes of the stones, I should fancy it a rustle among the
graves below, or the grating of that heavy door on its
hinges. And then, so cold and damp.

Wretch that I am, to weigh these things one moment in the

balance against my dear mother's soul! I feel sure that she
could not have died in mortal sin, but to pass without the
sacraments, without one moment's warning! Oh, it is
dreadful! And then her marrying instead of taking the veil.
That I think troubles dear Mother Superior worse than
anything. Yes, I am quite resolved. I will watch this very
night before the shrine in the garden chapel; but I will tell
nobody of my resolve, save Amice and Mother Gertrude. I
don't want the whole flock exclaiming, pitying or praising
me, or hinting at my setting up for a saint, as some of them
do.

[Of course, being now enlightened by Holy Scripture, I do

not believe that my dear mother was benefitted by my
watching, nor indeed that she needed such benefit; but I
will ever maintain that the exertion to overcome my own
fears (which were very terrible), for my mother's sake, was
of great service to me. 'Twas a true act of self-sacrifice,
though done in ignorance, and that not to pile up a stock of
merit for myself, but to do good to another.]

CHAPTER IV.

Feast of St. Catherine, April 29.

THIS is the first time I have been able to write since my

watching at our Lady's shrine, at which time I took such a
chill and rheum as have kept me laid up ever since. Mother
Gertrude was much opposed thereto, but could say nothing
against it, seeing that Mother Superior had given her
consent.

"If she wants to send the child after her mother, she has
taken the next way to do it," I heard her mutter to herself.

"Why, dear Mother, should you have such fears for me," I
asked. "I have lately confessed (and so I had the day
before), and I am sure I am not false to my vows, because
I have never taken any. Why, then, should the demon have
power over me?"

"I was not thinking of the demon, child, but of the damp,"
answered Mother Gertrude, in her matter-of-fact way.
"However I say no more. I know how to be obedient, after
all these years. And nobody can deny but it is a good
daughter's heart which moves thee, my child, and so God
and all the Saints bless thee."

Amice would have shared my watch, only it was needful one

should go alone; but she promised to watch in her cell. She
went with me to the chapel door, as did Mother Gertrude,
and we said some prayers together. Then, as the hour of
nine tolled, they kissed me and went their way, leaving me
to my solitary watch and ward.

Oh, what a lone and long night it was! I did not mind it so
much before midnight, for the moon shone fair into the
great east window, and two nightingales, in the garden
outside, answered each other most melodiously from side to
side. My mother ever loved the nightingale above all other
birds, because she said its song reminded her of her young
days in the midland of England. They are rare visitors with
us. But, as I said, dear mother ever loved this bird's song,
and now their voices seemed to come as a message from
herself, in approval of what I was doing. I knelt on the cold
stones, before our Lady's shrine, saying my rosary, and
repeating of Psalms, and the first two hours did not seem so
very long. But the birds stopped singing. The moon moved
on her course, so that the chapel was left almost in
darkness. The south-west wind rose and brought with it all
kinds of dismal sounds, now moaning and sobbing at the
casement, and shaking it as if to gain an entrance; now, as
it seemed, whispering in the vaults under my feet, as if the
ghosts might be holding a consultation as to the best way of
surprising me. Anon, the great heavy door of which I have
before spoken, did a little jar on its hinges, and from behind
it came, as it seemed, the rustling of wings, and then a
thrilling cry as of a soul in pain.

I felt my blood grow cold, and my flesh creep, and my head

swim. But 'tis not the custom of our house for the women
more than the men to give way to fear, and I was
determined I would not be overcome. I said stoutly to
myself, "That sobbing and whispering is of the wind—those
wings are the wings of bats or owls, which have found
refuge in the old tower—that is the cry of the little white
owl, which I have heard a hundred times at home—that low
roar is the rote of the surf which we ever hear at night
when the wind is south-west."

So I reasoned with myself, and then to calm myself still

farther, I began to repeat the Psalms, of which I know the
greater part by heart, thanks to Master Ellenwood,
beginning with the Psalm, "Beati, quorum." And here a
strange thing happened to me, for no sooner had I repeated
the words, "Whoso putteth his trust in the Lord, mercy
embraceth him on every side," than there came over me
such a wonderful sweetness and confidence as I am not
able to describe. I seemed to feel that I was in the very
house of God, where no harm could come to me, nor any
evil thing hurt me. And 'twas not only for myself that I felt
this assurance, but for my dear mother also. "If ever
woman did put her trust in God, I am sure she did so," I
said to myself, "and therefore, wherever she is, I have His
own word for believing her to be embraced in the arms of
His mercy."

And with that I went to prayer again, for my father and

brother, and for Alice and her husband, and her young
babe, and then for poor Dick. And (I know not if right or
wrong) I used no form of words, but did pour out my soul
almost as freely as if I had been talking alone with mother
in her closet, when kneeling beside her, with my arms on
her lap, she used graciously to encourage me to pour out all
my thoughts and fancies.

If that had been all, there had been no great harm done,
mayhap; but from praying for Dick, I fell to thinking of him,
and recalling all our passages together, from the early days
when my father used to set me behind him on the old pony,
and when we used to build forts and castles on the sand of
the shore, to our last sad parting, almost a year ago.

'Twas very wrong to indulge such thoughts in such a sacred

place, and that I knew, and did constantly strive to bring
my mind into a better frame. But the more I tried the more
I wandered, and at last I believe I dropped asleep. I could
not have slept long, when I was waked by the most horrid
screams and cries—now like those of a young child, now like
a woman in fits, now like the ravings of a madman, all
seemingly in the chapel itself. I fell prostrate on my face, at
the same moment that something rushed by me with a
great noise, closely pursued by something else, which
brushed me as it passed.

Now, though terribly scared, I yet felt my spirit rise as I

discovered that the thing had a material existence; and
though the cold sweat stood on my forehead, and my heart
seemed all but to stop beating, I raised myself once more
on my knees and looked around. My eyes had by this time
grown used to the dim light, and I could see, crouched on
the very step of the altar, a dark creature, which looked at
me with green fiery eyes. Then it came to me, and I all but
laughed aloud.

"Puss, Puss!" said I.

"Mieeo!" answered a friendly voice, and poor old Tom, our
convent cat, came to me, rubbing his head, and purring in
quite an ecstasy of joyful surprise.

I saw in a moment how it was. Tom is a regular Lollard of a

cat, and cares no more for the Church than the cowhouse—
indeed Sister Catherine once found him sitting on the high
altar, and would have slain him, had not Mother Superior
interfered. He had been entertaining a select party of his
own friends in the Lady Chapel, and some cause of dispute
arising, he had chased them all out, and remained master
of the field.

I took the old fellow in my arms, and caressed him, and he

bumped his head against my face, making his prettiest
noises. Then I rose and walked to and fro to warm myself a
little, for it was very chill, and tried once more to bring my
thoughts in order by repeating my favorite Psalm, though
not with as much comfort: as before, because of the sin I
had committed by thinking of Dick when I should have been
praying. However, at the words, "I said I will confess my
sins unto the Lord," I found consolation, for I thought, "then
I need not wait to confess to Father Fabian, but can make
my confession now, in this place."

So I did, and then once more repeating my rosary, I sat

down on a rude bench which was there, to rest a few
moments. That was the last of my meditations and prayers,
for I fell fast asleep, with Puss in my lap, and slept till I was
waked by the sun shining into the great east window. I was
very sleepy, and could hardly make out where I was; but,
however, I said my prayers once more, and then Mother
Gertrude came to seek me, and make me go to bed.

Ever since then, my mind has been wonderfully calmed and

comforted about my mother. I seem to see her, embraced
by mercy on every side, and entered into her rest. So I do
not grudge my cold, though it has kept me in bed ten days,
during which time Mother Gertrude has fed me with possets
and sirups, and good things more than I can eat.

This morning I made a full confession to Father Fabian of

my wandering thoughts during my night watch, and the
rest. The good old man was very kind, and gave me light
penance. I asked him what I must do to prevent such
wanderings in future.

"I will consider of that," said he. "You are a Latin scholar,
and can write a good hand, they tell me."

I assured him that I could write fair and plain, and had a
good knowledge of Latin, so that I could read and write it
with ease.

"Ah, well!" said he. "We must find some way to turn these
gifts to account. Meantime, daughter, be busy in whatever
you find to do whereby you can help others; say your
psalms, and meditate on them, and never trouble thyself
about the devil."

'Twas an odd saying, methought, for a priest. I told Amice

all about my night watch, as I do tell her everything.

"Do you really think—" said she, and then she stopped.

"Well, do I really think what?" I asked, seeing she did not

continue.

"Do you think you have any ground for your confidence
about your mother, from that verse in the Psalm?"

I felt hurt for a minute, and I suppose my face showed it,

for Amice added, "Don't be displeased, Rosamond. I only
ask because it seems almost too good to be true. If you
should find what seemed to be a precious pearl, you would
wish to know whether it really was a pearl, or only an
imitation, wouldn't you?"

"To be sure," I answered, and then I considered a little.

"Yes, I do think I have ground for my confidence, though I

am not quite sure I can explain it. You know, Amice, the
Psalms are inspired—a part of the word of God, and
therefore, surely, their promises are to be taken as true.
The Psalm says, 'Whoso putteth his trust in the Lord, mercy
embraceth him on every side.' Now, I know my dear mother
did put her trust in the Lord, if woman ever did in this
world, and, therefore, I am at ease for her, though she died
without the Sacraments, which was not her fault."

"You used your night watch to good purpose, if you thought

out all this," said Amice.

"I did not think it out—it came to me," said I.

"Came to you—how?" asked Amice.

"I can't tell you," I answered, I am afraid, a little

impatiently. "I am not used to taking all my thoughts and
feelings to pieces, as you do. I only know that it seemed to
come to me from outside my own mind—to be breathed into
my heart, as somebody might whisper in my ear."

"It is very lovely," said Amice, with a sigh. "It is like some of
the visions of the Saints. I think, Rosamond, you will be a
Saint, like St. Clare or St. Catherine."

"I don't believe it," said I. "It is a great deal more in your
way than mine."
We were busy in the garden while we were talking,
gathering rosemary and violets for Mother Gertrude to
distil. Amice had her lap full of rosemary, and she sat down
and began pulling it into little bits.

"Rosamond," said she, presently, looking about her, and

speaking in a low tone, "do you really like the notion of
being a nun?"

"To tell you the truth, I never ask myself whether I like it or
not," I answered her. "What is the use? I had no choice in
the matter myself. Here I am, and I must needs make the
best of it. There would be little profit in my asking myself
whether I really liked to be a woman instead of a man. I
like being here in the garden, pulling flowers for Mother
Gertrude, and I like taking care of the books, dusting them
and reading a bit here and there, and I like singing in the
church, and working for the poor folk, though I should like
still better to teach them to work for themselves."

"I suppose, of course, it is the highest life to which one can

obtain!" said Amice, thoughtfully. "And yet I suppose it
must have been meant that some people should marry and
bring up families."

"I suppose it must, since without some such arrangement,

the race of religious must come to an end before long," said
I.

"Of course!" continued Amice, in the same musing tone.

"You know St. Augustine had a mother, and so did St.
Frances!"

"Did you ever hear of any one who had not?" said I,
laughing. "But to return your question upon yourself, Amice,
how do you like the notion of being a nun?"