Long-term Contracts in the Natural Gas Sector: An ......Long-term Contracts in the Natural Gas...
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Long-term Contracts in the Natural
Gas Sector: An International Survey
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29 May 2015
BELEC
Anne Neumann, Sophia Ruester, and Christian von Hirschhausen
With research assistance by Julia Rechlitz and Astrid Cullmann
DIW Berlin (German Institute for Economic Research)
And Berlin University of Technology, Workgroup for Infrastructure Policy (WIP)
- 2 - Kennedy-School, Lunchtime Seminar Energy Policy
05 November, 2012 Christian von Hirschhausen
Agenda
1) Intro: Natural Gas as a Key to the Energy Transformation (in
Europe)?
2) A Long-Term Issue of Long-Term Contracts (LTCs)
3) Data and Simple Estimations
4) A Closer Look
5) Conclusions
- 3 -
Natural Gas in the World - Consumption
Source: Own depiction based on IEA (2013)
Increasing global demand for natural gas.
- 4 - Prof. Dr. Christian von Hirschhausen
January 2013
Share of Gas in Electricity Production in the EU scenarios
Source: EU Energy Roadmap
0%
5%
10%
15%
20%
25%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Reference Scenario Diversified Supply Technologies High RES Scenario
- 5 - Prof. Dr. Christian von Hirschhausen
January 2013
The Fuel of the Future? Egging, Holz, Richter (2012)
- 6 - Berlin Lunchtime Seminar “Natural Gas”
15 May 2012
Agenda
1) Intro: Natural Gas as a Key to the Energy Transformation (in
Europe)?
2) A Long-Term Issue of Long-Term Contracts (LTCs)
3) Data and Simple Estimations
4) A Closer Look
5) Conclusions
- 7 -
onshore
offshore
Processing Im
port
s
Export
s
Inje
ction
Withdra
wal or
Production Transmission Distribution
Compressor
stations
Small consumers
(residential,
commercial)
Industrial
consumers
Electricity
Generation
The Industry
Storage
Source: Own depiction
- 8 -
Take-or-Pay Contracts
Producer Importer
Contract
Deliveries according to
negotiated price
Price risk
Payment of ex ante
defined quantity
Quantitiy risk
- Take-or-pay quantitiy
- price fixing to substitutes
- Swing-option
- price adjustment clause
Quasirents, Hold-up problem
- 9 -
Globalization of Natural Gas Markets – Just a „Dream“?
- 10 -
Structural Changes in the Industry
Mature industry
- Significant cost reductions in transport, in particular LNG
- Decreasing asset specificity of infrastructure investments
Regulatory framework
- Development of spot markets and short-term trade
- Market entry
- Flexible pricing mechanisms
Simplified value added chain:
Production Transport Trade Distribution Sales
Reduced reliance on long-term contracts.
- 11 -
Literature
• Long-term contracts as solution to „hold-up“ problem without vertical integration
(Klein, Crawford, and Alchian, 1978, Williamson, 1979)
• Asset specificity, uncertainty, opportunistic behavior, bounded rationality
(Williamson, 1975, 1985)
• Joskow (1987): contract duration in North American coal mining industry
• Masten and Crocker (1985), Crocker and Masten (1988): inverse relation of
contracted volumes and contract duration in US natural gas industry; Mulherin
(1986), Hubbard and Weiner (1986), Doane and Spulber (1994): impact of
sector specific regulation on long-term contracts in US natural gas industry
• Neumann and von Hirschhausen (2004, 2008)
• More recently: Polo and Scarpa (2013), Hartley (2015)
Hypothesis: shortening contract duration due to changes in
market structures, à la Joskow
- 12 -
Agenda
1) Intro: Natural Gas as a Key to the Energy Transformation (in
Europe)?
2) A Long-Term Issue of Long-Term Contracts (LTCs)
3) Data and Simple Estimations
4) A Closer Look
5) Conclusions
- 13 -
Decreasing Contract Duration over Time?
Year Contract signed
Con
tract D
ura
tio
n
- 14 -
Data Documentation Long-Term Supply Contracts (DD-LTCs):
An Overview
0
5
10
15
20
25
30
0
20
40
60
80
100
120
140
160
1963-1972 1973-1982 1983-1992 1993-2002 2003-2013
Pipeline LNG Durchschnittliche Laufzeit (Pipeline) Durchschnittliche Laufzeit (LNG)
- 15 -
DD-LTCs: by Start-up Delivery Year and Type
70
57
99
200
Pipeline - Start of deliveries before 2000
Pipeline - Start of deliveries 2000 or later
LNG - Start of deliveries before 2000
LNG - Start of deliveries 2000 or later
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Long-Term Supply Contracts
- 17 -
Estimation Equation
CD = F (Total Volume, DummyLNG, Dummy2000, DummyExp_Asia,
DummyExp_Europe, DummyExp_Africa,…,
DummyImp_Europe, …,
DummyExp, DummyComp, DummyPubl, DummyExt)
- 18 -
Data on Long-term Import Contracts OLD VERSION (updating Hirschhausen and Neumann, 2008, RIO)
Variable Description Mean Min Max Std.Dev.
CD Contract Duration 18.84 2 39 6.51
TVol Total contracted volume (bcm) 52.03 0.32 360 75.08
Project Contract signed to dedicated project D=1: 206 observations
Entrant Contract signed by new market player D=1: 96 observations
D00 Contract signed since 2000 D=1: 229 observations
Reneg. Extended/renegotiated contract D=1: 51 observations
C_Europe Deliveries for European market D=1: 220 observations
C_Asia Deliveries for Asian market D=1: 191 observations
P_Oceania Production Oceania D=1: 138 observations
P_Africa Production in Africa D=1: 77 observations
P_Eurasia Production in Eurasia (Russia) D=1: 48 observations
P_Europe Production in Europe D=1: 88 observations
P_ME Production in Middle East D=1: 58 observations
Observations 454
-
- - +
- 19 -
Estimation Results OLS OLD VERSION
Reported are estimated coefficients and p-values.
***, **,* indicate significance at 1%, 5%, and 10% level
Variable Variable
C 17.92***
(0.000) EU_post2000
-3.86*** (0.000)
TVOL 0.03*** (0.000)
C_Asia -1.56* (0.086)
Project 2.23*** (0.000)
Entrant -2.11***
(0.002) R2 0.314
Renegotiation -4.35***
(0.000) Adjusted R2 0.297
P_Africa 0.85
(0.427)
P_Eurasia 0.85
(0.465)
P_Europe 0.78
(0.462)
P_ME 2.01*
(0.067)
P_Oceania 3.40
(0.705)
Contr
act part
ners
E
xport
regio
ns
Imp
ort
regio
ns
-> positive relation of asset specificity
and contract duration
-> changes in European institutional
framework ‚successful‘
- 20 -
Variable Description Mean Min Max Std.Dev.
CD Contract Duration 20.00 5 42 6.61
Yearly Volume Yearly contracted volume (bcm) 2.47 0.03 30 3.17
Dummy 2000 Contract signed since 2000 D=1: 235 observations
Dummy LNG Contract with LNG D=1 :299 observations
Dummy
EX_Europe
Production in Europe D=1: 75 observations
Dummy EX_Asia Production in Asia D=1: 96 observations
Dummy
EX_Oceania
Production Oceania D=1: 61 observations
Dummy EX_Africa Production in Africa D=1: 79 observations
Dummy
EX_Russia
Production in Russia D=1: 45 observations
Dummy
IM_Europe
Consumption in Europe D=1: 188 observations
Dummy IM_Asia Consumption in Asia D=1: 201 observations
Observations 426
Data on Long-term Import Contracts UPDATE
- 21 -
Variable Estimate
Intercept 20.49***
Yearly Volume 0.46***
Dummy LNG 0.44
Dummy 2000 -4.72***
Dummy Export Asia -2.97**
Dummy Export Europe -1.05
Dummy Export Africa -1.25
Dummy Export Oceania -1.66
Dummy Export Russia 0.26
Dummy Import Asia 1.67
Dummy Import Europe -0.26
Estimation Results OLS UPDATE
Reported are estimated coefficients and p-values.
***, **,* indicate significance at 0.1%, 1%, and 5% level
Co
ntr
act
pa
ram
ete
rs
Exp
ort
re
gio
ns
Import
reg
ion
s
- 22 -
Agenda
1) Intro: Natural Gas as a Key to the Energy Transformation (in
Europe)?
2) A Long-Term Issue of Long-Term Contracts (LTCs)
3) Data and Simple Estimations
4) A Closer Look
5) Conclusions
- 23 -
Supply in Japan
Years
Duration of Contracts
Country Number of
Contracts
Australia 48
Brunei 9
Indonesia 30
Malaysia 19
Oman 4
Papua New Guinea 2
Qatar 9
Russia 10
USA 10
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Supply in Europe
Duration of Contracts
Years
Country Number of
Contracts
Algeria 33
Egypt 3
Libya 7
Malaysia 1
Nigeria 16
Oman 4
Qatar 11
Russia 27
Trinidad & Tobago 5
USA 2
Yemen 2
Europe 74
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Agenda
1) Intro: Natural Gas as a Key to the Energy Transformation (in
Europe)?
2) A Long-Term Issue of Long-Term Contracts (LTCs)
3) Data and Simple Estimations
4) A Closer Look
5) Conclusions … and one Idea
- 26 -
Decreasing Contract Duration over Time?
Year Contract signed
Con
tract D
ura
tio
n
- 27 -
Natural Gas Transmission Network:
Europe and the U.S. …
Source: Natural Gas Information (IEA, 2011)
Long-term Contracts in the Natural
Gas Sector: An International Survey
Add picture on
dark green area
(see slide 9 for
an example)
29 May 2015
BELEC
Anne Neumann, Sophia Ruester, and Christian von Hirschhausen
With research assistance by Julia Rechlitz and Astrid Cullmann
DIW Berlin (German Institute for Economic Research)
And Berlin University of Technology, Workgroup for Infrastructure Policy (WIP)
- 29 -
- 30 -
U.S. Natural Gas Infrastructure
Source: Natural Gas Information (IEA, 2011)
- 31 -
Technology of Pipeline Natural Gas Transportation
Natural gas transmission:
- High pressure (> 1 up to 80 bar)
- Diameter: 100 to 1400 mm
- Pipeline length up to some 1,000 km
- Transportation based on a pressure
gradient
Entry point Delivery point Delivery point End consumers
Natural gas distribution:
- High pressure, then curbing to
low pressure at delivery points
- Distribution to end consumers
- 32 -
Conclusion
• Alles ganz wichtig
• Empirisch: potential for improvement
- Anwendung anderer Methoden
• Use the data and feel free to contribute to our dataset
- 33 -
Data Documentation Long-Term Supply Contracts (DD-LTCs):
The Data
0
5
10
15
20
25
30
35
40
45
1960 1970 1980 1990 2000 2010 2020
Co
ntr
ac
t d
ura
tio
n (
ye
ars
)
Start of deliveries
Pipeline
LNG
- 34 -
References
Cretì, A., Villeneuve, B., 2004. Long term contracts and take-or-pay clauses in national gas markets. Energy Studies Review
13 (1), 75–94.
Crocker, K.J., Masten, S.E., 1985. Efficient adaptation in long-term contracts: take-or-pay provisions for natural gas. American
Economic Review 75, 1083–1093.
Hartley, P.R. (2015): The future of long-term LNG contracts. The Energy Journal, forthcoming.
Hubbard, G., Weiner, R., 1986. Regulation and long-term contracting in US natural gas markets. Journal of Industrial
Economics 35, 71–79.
Polo, M. and Scarpa, C. (2013) Liberalizing the gas industry: Take-or-pay contracts, retail competition and wholesale trade,
International Journal of Industrial Organization 31, 64–82.
- 35 -
Decreasing Contract Duration over Time?
- 36 -
DD-LTCs: by Start-up Delivery Year
6 17 18
89
22 17
5-9 years 10-14 years 15-19 years 20-24 years 25-29 years > 30 years
Start-up deliveries before 2000
40 33
46
105
30
3
5-9 years 10-14 years 15-19 years 20-24 years 25-29 years > 30 years
Start-up deliveries 2000 or later