Table Of ContentAndrej Pustišek · Michael Karasz
Natural Gas:
A Commercial
Perspective
Natural Gas: A Commercial Perspective
š
Andrej Pusti ek Michael Karasz
(cid:129)
Natural Gas:
A Commercial
Perspective
123
Andrej Pustišek Michael Karasz
University of AppliedSciences, Stuttgart TheEnergy House GmbH
Karlsruhe Institute of Technology (KIT), Leipzig
Karlsruhe Germany
2Pi-Energy GmbH, Stuttgart
Germany
ISBN978-3-319-53248-6 ISBN978-3-319-53249-3 (eBook)
DOI 10.1007/978-3-319-53249-3
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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
naturalgasandenergy companies, interalia,inarbitrationproceedings, and
lectures international courses on natural gas. He studied Geophysics and
EconomyinVienna,CologneandMünster.HeholdsaPh.D.inGeophysics
and a Ph.D. in Economy. In 1990, he started in international natural gas
purchasingofWintershall,Kassel,Germany.Asof1993heheadeddifferent
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 involvementin thenaturalgas businessstarted inthe 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 &
EasternEuropewithE.ON,EEX,RWE,andBayerngas.Inthesepositionshe
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 naturalgas 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:crudeoil(WTI)versusnaturalgas(HenryHub)
pricescompared[WTIspotprice (US$/bbl);natural
gas at Henry Hub spot price (US$/mmBtu). Daily
datafrom1March2008until30June2016(trading
days). Data provided by ‘Montel
Nachrichtenservice’(www.montel.de).Forafurther
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)pricescompared[Brentspotprice(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
datafrom1March2008until30June2016(trading
days). Data provided by ‘Montel
Nachrichtenservice’ (www.montel.de)] . . . . . . . . . . . 20
xi
