Natural Gas Prices and Calorific value

Print Friendly, PDF & Email

Ali Yahya Jirjees* MSc. Petroleum Engineering.H.D.Petro.Eng / Kirkuk -University


Natural Gas Price

Natural gas commands an important position in the global primary energy basket. Natural gas prices are mainly a function of market supply and demand. As with any commodity, the prices of natural gas are also determined by the demand–supply equilibrium. However, it would be interesting to understand the uniqueness of natural gas and the subsequent context with its pricing. Given its physical and chemical properties, natural gas witnesses significant logistical constraints and challenges, and hence, although a hydrocarbon, it is to be treated differently as compared to crude oil in all economic and business contexts. Unlike crude oil, natural gas is still wanting of a structured international market. The overriding mechanism for the international gas trade nevertheless remains oil indexation. The phenomenon of international natural gas trade and pricing is under evolution also because technology in infrastructure and logistics has enabled natural gas intra-regional movements.

Our article, focused on gas prices in importing economies, describes wholesale prices and retail prices, their evolution for the last one or two decades, the economic mechanisms of price formation. While an international market for oil has developed thanks to moderate storage and transportation charges, these costs are much higher in the case of natural gas, which involves that this energy is still traded inside continental markets. There are three regional gas markets around the world: North America (the United States, importing mainly from Canada and Mexico), Europe (importing mainly from Russia, Algeria and Norway) and Asia (Japan, Korea, Taiwan, China & India, importing mainly from Indonesia, Malaysia & Australia). A market for gas has also developed in South America, but it will not be covered by our paper.

At the early ages after the exploration of petroleum the accompanied gas was taken directly to flair after separation. After years and years of technology, the gas have a value because of the economic amount of gas produced with the crude oil.

Methodological note:

In order to facilitate comparisons, all prices (wholesale and retail) have been converted into a common unit: dollars per millions of British Thermal Units ($ / MBtu). Also, in order to flatten the usual volatility or seasonality in gas prices, we always use yearly average prices. Using market prices (which integrate inflation) is suitable for the present study. Indeed, the presence of inflation doesn’t impede the analysis of price determination or structure. Regarding price trends over time, inflation, with its distorting effect, can become more problematic. Real prices, deflated through constant values, usually offer a clearer vision of gas sector fundamentals (for example, constant prices are required in order to assess the evolution of the balance between reserves, production and consumption). Figure (1) highlight that the global natural gas landed price.

Figure (1): Global natural gas landed price.

Global Natural Gas Landed Prices

  • Spot LNG prices in January exceeded $10 per million Btu (MMBtu) in many countries and typically are priced in relation to crude oil via long-term contracts that are specific in volume and destination, which prevents reselling cargos.
  • Importantly, domestic U.S. natural gas prices have remained low even as U.S. exports of LNG quadrupled in 2017 to nearly 2 billion cubic feet per day. The U.S. Energy Information Administration expects natural gas prices at Henry Hub to remain below $3 per million BTU in 2018.
  • The roughly $8/MMBTU difference between domestic U.S. and international LNG prices provides an incentive to export even more LNG from the U.S., which in turn means greater U.S. investment, exports and economic opportunity are possible as natural gas markets continue to grow and globalize.
  • U.S. LNG import prices, unlike those in other regions, generally are priced via short-term contacts and include a reference to domestic natural gas prices. U.S. LNG import prices therefore are outliers globally due to the abundance and low cost of U.S. natural gas.
  • Why does the U.S. still import LNG? Once hundreds of millions of dollars are invested in building an onshore terminal to import, store and re-gasify LNG, there’s a strong economic incentive if not a contractual obligation to utilize the facilities. Many U.S. import terminals have converted to export terminals, and this trend may continue.

As the U.S. energy renaissance matures, it’s easy to forget how it felt 10 years ago when domestic natural gas prices were upwards of $13/MMBTU. Natural gas prices and price volatility have been relatively low ever since then – largely thanks to abundant domestic production from shale and other tight-rock formations.

And as U.S. consumers and manufacturers have continued to enjoy an extended era of low prices, U.S. communities have experienced growth that manifests in terms of gains in employment, wages and a reinvigoration of local housing, education and services – everything that comes with building major new capital projects and having solid employers help anchor the economy.

Gas price trends

The North American market for gas consists of the United States(Table 1), Canada and, to a lesser extent, Mexico. The US natural gas market is competitive, liquid and transparent, to such an extent that gas-to-gas competition now prevails. But this physical spot market is frequently volatile. Therefore, since 1989, agents manage price fluctuation risks with futures contracts on the New York Mercantile Exchange (NYMEX). Henry Hub, a major pipeline junction in Louisiana is the reference point of the North American pricing system; rates for other hubs are defined by difference from it. These quote gaps (called “basis differentials”) reflect the transportation costs required to bring the gas to Henry Hub, but also correspond to market conditions at different national hubs (ETC, 2007).

Although American gas prices are set by supply/demand equilibriums, independently from any reference to oil, they run parallel to petroleum trends in the long run. Indeed, due to inter-energy substitution effects at the end-use side, monthly gas prices range inside a corridor formed by a lower limit, heavy fuel rate, and an

upper limit, light fuel rate. Indeed, in case of a gas price spike, households switch to light fuel oil, large industries switch to heavy fuel oil and power plants switch to coal (Maisonnier, 2005).

Table (1) US gas prices ($/Mbut).

Table of US Gas Prices

Calorific value:

The calorific value for gas is the amount of heat energy released from burning 1 meter cubed of gas. The calorific value changes from gas to gas due to the composition of the gas. The calorific value for gas is measured in (KJ/m3) or BTU.

How Are Natural Gas Prices Determined?

The price that a buyer pays for natural gas depends upon many factors.The most important factors are:

  • The quantity of gas being purchased.
  • The amount of processing that has been done to prepare the gas for the buyer.
  • The distance of transportation required to deliver the gas to the buyer.

Factors Affecting Short Term Demand for Natural Gas

Demand for natural gas depends highly on the time of year, and changes from season to season. As expected, heating requirements are highest during the coldest months and lowest during the warmest months. Thus, natural gas demand experiences its most pronounced increase in the coldest months, but as the use of natural gas for the generation of electricity increases, the magnitude of the smaller summer peak in demand for natural gas is expected to become more pronounced.The Factores which Affecting Short Term Demand for Natural Gas as a follow:

  • Weather.
  • Fuel Switching.
  • Local Economy.
  • Politics.

Weather:

Natural gas demand typically peaks during the coldest months and tapers off during the warmest months. The weather during any particular season can affect this cyclical demand for natural gas. The colder the weather during the winter, the more pronounced will be the winter peak. (Conversely, a warm winter may result in a less noticeable winter peak). An extremely hot winter can result in even greater cooling demands, which in turn can result in increased summer demand for natural gas.

Fuel Switching:

Supply and demand in the marketplace determine the short term price for natural gas.In reverse the price of natural gas can, for certain consumers, affect its demand. For instance, during a period of extremely high natural gas prices, many electric generators may switch from using natural gas to using cheaper coal, thus decreasing the demand for natural gas.

Local Economy:

The Local economy in general can have a considerable effect on the demand for natural gas in the short term, particularly for industrial consumers. When the economy is expanding, output from industrial sectors is generally increasing at a similar rate. When the economy is in recession, output from industrial sectors drops. These fluctuations in industrial output accompanying economic upswings and downturns affects the amount of natural gas needed by these industrial users.

Politics:

Prices could fluctuate widely in a single night, in case a certain event take place. Such as: War and natural disaster.

Factors Affecting Long Term Demand for Natural Gas

  • Residential and Commercial Demand.(34 Bcf – 2%)

Electric Industry Restructuring:

states with low current electricity prices may see rate increases in the demand for natural gas.

Demographics and Population Centers:

It is expected that as this generation ages, their requirements for cooling in warm weather and heating in cooler weather will increase, thus driving demand for both electricity and natural gas.

  • Industrial Demand.(427 BCF – 29.1%).

Economics of the Industrial Sector:

Industrial companies have been merging at a relatively fast pace; a market scenario in which cutting costs and increasing efficiency becomes paramount.(Ex. Steam generators).

 Electricity Restructuring:

The price and availability of electricity in the industrial sector will play a role in determining the demand for natural gas.

Environment Emissions Regulation:

Natural gas represents a cleaner burning alternative to coal and petroleum use in the industrial sector and the imposition of stringent regulations may serve to increase the demand for natural gas in the industrial sectors.

  • Electric Generation Demand.( 815 BCF – 55.6% )

Natural gas is expected to fulfill the requirements for electric generation for a variety of reasons, including:

Flexibility and Capital Investment:

Natural gas electric generation plants can range in size from large-scale generation plants down to very small-scale micro turbines.)

Environmental Concerns:

burning coal for the generation of electricity is extremely polluting. Natural gas, however, is the cleanest burning fossil fuel, and emits very few pollutants into the atmosphere.

Efficiency: Modern natural gas fired combined cycle generation units can approach 60 percent efficiency, whereas traditional boiler units are usually only around 34 percent efficient, regardless of fuel source.

Operational Flexibility: Natural gas fired electric generation systems used to meet short term peak electricity demands have the advantage of being very operationally flexible.

Figure (2) Egypt consumption of natural gas during 2008-2009.

Egypt-consumption-of-natural-gas-during-2008-2009

Natural Gas consumption

Energy Information Administration (EIA) expects that natural gas consumption will average 70.0 Bcf/d in both 2013 and 2014. Expected winter temperatures in 2013 and 2014 will lead to the Increase of Natural gas consumption in residential and commercial space heating. The increase in natural gas prices will decrease its use in generating electricity.

Consumption per capita 2012.

Figure (3) Consumption per capita 2012.

Gas Price:

Gas price formation varies deeply between regional markets, depending on several structural factors (regulation, contracting practises, existence of a spot market, liquidity, share of imports. Empirically, the degree of market opening (which corresponds to the seniority in the liberalization process) seems to be the primary determinant of pricing patterns. From 1990 until 2013, Natural gas averaged 4.0 USD/MMBtu. Records Maximum of 15.4 USD/MMBtu in December of 2005.Records Minimum of 1.1 USD/MMBtu in January of 1992.Last but not least, the gas price shows a drop to 1.8 USD/MMBTU at the last 12 months.

Wholesale gas price trends

The average east coast’s wholesale gas price has shown an increasing trend from 2015 to 2016, with Victoria almost doubling and peaking in 2016 at $10.67/GJ. Since then the east coast wholesale gas pricing has shown a consistent downward trend in 2017 in all states. Victoria is experiencing the highest wholesale gas prices on the east coast in 2017 and Gladstone is the lowest. This is a reversal from 2015 when Victoria was experiencing the lowest gas prices on the east coast and Gladstone was experiencing the second highest gas prices (second only to North West Queensland). Table 1 below shows the divergent trends of wholesale gas prices in Australia.

The analysis of this trend indicates the high gas prices experienced in Queensland up until 2015 have migrated south to all states south of Queensland. The most affected states in terms of price escalation are Victoria and Tasmania. Where up to 2015 and 2016, cheaper gas was migrating north to Queensland from Victoria, it is more the case in 2017, the gas supply dynamic seems to have matured and gas price escalation has moderated somewhat from the peaks of 2016 (consistent with the spot market trend). This appears partly due to the commencement of relatively stable operations of the LNG plants compared to the hyper activity and disruptive uncertainty leading up to the commissioning and start up operations of three major gas consumers in Gladstone. Other key factors affecting price are further discussed in this report. Western Australia’s industrial consumer gas prices, on the other hand, have declined over 30% since 2015 and wholesale gas can be secured for under $5/GJ in 2017. The Northern Territory has a very thin wholesale gas market therefore gas price trends are not analysed in this report but an overview of the supply and demand for gas is discussed.

Table (2): Wholesale gas price (excluding transmission costs) trend 2015 to 2017 by region ($2017)

Residential gas price 2017 sorted by price

Delivered gas prices large industrial consumers

The gas trends for large industrial consumers are defined to include the cost of transport of the wholesale gas to the respective consumer types. For large industrial consumers (greater than 1PJ/a), the gas prices are the wholesale gas price with the additional cost of gas transport incorporated. Generally, this type of gas consumer secures its own gas supply direct from producers with or without transport and may manage any short-term supply or demand imbalance from the trading hubs or short term trading markets. In 2017, delivered gas prices to large industrial consumers range from the highest of $12.21/GJ (including transport) in Tasmania to the lowest on the east coast of $8.15/GJ (including transport) in Gladstone (ironically, the epicentre of the major price influencing LNG developments) to the west coast of $6.97/GJ (including transport) delivered to Perth.

Delivered gas prices – residential consumers

The retail offers, be they standing or market offers, in all major jurisdictions with residential natural gas supply tariffs have been used to understand the component costs. The components of residential gas prices are built up from wholesale gas costs, transport costs (including transmission and distribution), environmental costs (if applicable) and the retail cost components. Note the calculation methodology is specified in Appendix B. In 2017, residential gas prices (per unit) are highest in Queensland and lowest in Victoria. This is 5 despite the highest wholesale gas prices in Victoria. The high wholesale gas price is countered by the consumer critical mass in Victoria which has the largest residential consumer base, the largest state residential consumption and a relatively high gas distribution system energy density (GJ delivery per km of network). Table 2 below summarises the extremities of the residential gas prices in Australia.

Table (3): Residential gas price 2017 sorted by price.

Residential gas price 2017 sorted by price

Analysis of the component trends from 2015 to 2017 of each region shows a national average increase in residential gas price of 2% over that period. ACT, NSW and SA have declined over the same period while the other states’ residential gas prices have increased since 2015. The bigger movements in components are in the distribution and wholesale gas cost components which are buffered by the retailer component which in turn moderates the risk of price changes to the end consumer.

Case Study

Natural Gas in China Consumption and Production

  • China’s natural gas consumption has been increasing rapidly and attained 69.5 bcm in 2007.
  • Since 2004, the annual growth rate accelerated to more than 20%
  • The government encouraged fuel switching from coal and oil to natural gas in order to reduce air pollution.

Consumption: Moreover, high oil prices forced residential and industrial consumers to shift their fuel and feedstock from oil and LPG to natural gas since the energy equivalent price of natural gas was cheaper than that for oil and LPG at that time. The residential sector is the fastest growing sector in terms of gas demand, and its share in total natural gas consumption increased from 19.0% in 2000 to 25.9% in 2007. Industrial gas consumption increased dramatically from 10.8 bcm in 2000 to 30.6 bcm in 2007, representing a 44.7% share in total consumption in 2007. Although natural gas consumption in the power sector is steadily increasing, it represented only an 11.6% share in total gas consumption in 2007.

Natural gas consumption in china (Volume(bcm) and share(%) by sector,2000-07)

Figure(4):  Natural gas consumption in china (Volume(bcm) and share(%) by sector,2000-07).

Production:

China’s natural gas production grew at an annual average growth rate of 15% from 2000 to 2007, amounting to 69.2 bcm in 2007. The major producing gas fields are located in the Sichuan Basin (output of 17 bcm in 2007), the Ordos Basin (15.5 bcm) and the Tarim Basin (12 bcm).

References:

  • Dean Foreman (2018). “NATURAL GAS ABUNDANCE GENERATES EXPORT OPPORTUNITIES”.February 28, 2018.
  • MAISONNIER, G., “The ties between natural gas and oil prices,” Panorama 2006, Natural gas: what growth, for what markets, as regards high oil prices?, Rueil-Malmaison, IFP, 2006,
  • Analysis: Liquefied Natural Gas, Dawn a Global Market”, Petroleum Economist, March 2007.