Last updated: March 13, 2019
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Natural gas pricing construction: A comparative survey between India and Europe. There is a huge difference in the pricing mechanism for natural gas markets when we compare the two economic systems, i.e. India and Europe. The complexness and the heterogeneousness in the pricing construction will be studied by covering the assorted facets of the market ordinances in the pricing mechanism.

Background

STUDY OF GAS MARKETS OF THE TWO ECONOMIES

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Europe

Brief DESCRIPTION OF THE EUROPEAN CONTINENTAL GAS MARKETS

Natural gas ingestion in European Union member provinces is seen to be increasing. The ingestion was around 445 mtoe in 2008 and is expected to increase to about 625 mtoe in 2030, which is an addition in ingestion of around 43 % . There is broad addition in the portion of natural gas in the European primary energy demand which is around 23.9 % in 2005 to 29.9 in 2030, which if compared to the portion in 1990 was about 18 % . At the addition of 605 in the entire demand, most of the growing will come from power coevals. If we look at the residential and commercial sector the gas ingestion has steadily increased in line due to the enlargement in the substructure and the associated rise in the figure of gas users. Gas is considered to be the market leader in the energy sector, as it presently holds a market portion of about 35 % .

Gas presently accounts for 33 % of industrial concluding energy ingestion ( excepting industrial power Stationss ) and therefore is a major beginning of energy in this market excessively.

The development of the modern natural gas industry in the Western parts of Europe started with the find of the Groningen field in 1959. And with farther boring it proved to be a super-giant field. With such immense gas militias it was clear that its gas could non entirely be consumed in the Netherlands, but in order to valorize the gas militias of the field, portion of its production has to be exported Groningen became to be considered as the mention instance for all the other gas imports into Continental Europe and was the first big gas-export undertaking worldwide.

Western economic systems were given new drift to diversify their energy mix, after the first oil daze. Although there was a immense resistance by the United States in peculiar for European dependance on Soviet Union gas, the immense Siberian gas Fieldss were able to supply Europe with a non- OPEC beginning of energy. A via media was agreed whereby the dependance of Europeans on Soviet Union was restricted to 30 % , and the development of Norway ‘s Troll field would be promoted as a counterbalance to Russian influence.

THE LIBERALIZATION PROCESS: 1998 – 2009

The creative activity of European Union had the rule embedded that aimed at constructing a individual market for gas and electricity. Making the energy sector in Europe competitory and more efficient was viewed as portion of the response to turning concerns on the fight of European industries in globalising markets.

The first set of regulations for the EU energy markets were introduced in a Gas Directive which was laid two old ages subsequently of Electricity directive which was culminated in 1dcus990s due to the dialogues between the EU governments, the member provinces and the market. The new legal model on natural gas was aimed at opening the gas webs to 3rd parties. This was to be achieved through unbundling of the vertically incorporate historical gas operators, therefore leting competition for supplies and clients within the natural monopoly web. The European Commission encouraged the industrial re-organization within each state to be supervised by an independent regulative authorization, but this was non mandated.

The gap to competition, ab initio granted the pick of provider to large gas clients such as power workss and large industrial installations. There was already a push to speed up gas and electricity liberalisation even before the execution of the first Gas directive. The petition was made in the European Council, held in Lisbon in March 2000 that the Commission must set about farther stairss towards the completion of the internal energy market. The EU council at Barcelona in March 2002 decided on full market opening for industrial gas consumers in 2004 while entire market gap was intended for 2005. To implement these determinations it led to the launch for readying of a new statute law. And a twelvemonth subsequently, the 2nd Gas Directive was adopted. In January 2007 the 6th benchmarking study was issued which provided a general overview of the future energy policy of the EU. It envisaged a “ 3rd bundle ” of legislative proposals for the European gas and electricity markets. The principle of this 3rd bundle is the integrating of the energy and the environment aims of the EU through the usage of market based environmental and other steps.

The EU Commission proposed ambitious and far-ranging steps such as complete decomposition of the gas operators through ownership unbundling and farther establishments to back-up the creative activity of an integrated EU gas market ( European regulative bureau ) .

CURRENT Pricing SYSTEM IN EUROPE

Continental Europe relies progressively on gas imports. Minutess by and large regard big volumes extracted from elephantine Fieldss. Natural gas is imported through long-run contracts from Russia, Algeria, Norway, Nigeria or Libya. In Continental Europe, the pricing is based on the “ replacing value ” of gas, which corresponds to the value of alternate energies on the concluding gas markets inside the purchaser ‘s state. Historically, this construct of long-run contract with a monetary value based on replacing value was designed foremost for exports from the Dutch field of Groningen ( first big modesty find in Europe ) .

Furthermore, contracts include a reappraisal clause: monetary value is adapted on a regular basis in line with the development of the competitory state of affairs of gas in each of the residential, industrial and power sectors. In other words, the monetary value expression is re-calculated ( normally every three months ) in order to reflect motions in the portion of gas in power coevals, and alterations in the mix of the viing fuels, chiefly light fuel oil and heavy fuel oil but besides rough oil, coal, electricity or rising prices. The Energy Sector Inquiry through empirical observation confirms that the rates of

European long-run contracts are chiefly linked to oil and oil derived functions, harmonizing to a volume-weighted indexation. The indexation form varies by import beginning and besides varies harmonizing to the buyer ‘s part, with a large split between the UK and Continental Europe.

Despite significant steps aimed at making a individual competitory gas market ( remotion of finish clauses and take-or-pay duties, compulsory Third Party Access ) , long-run contracts still remain the dominant pattern for imports of natural gas, although with a fostered flexibleness. Owing to the new regulative environment there are several trading hubs for natural gas in Europe, but these are comparatively new compared to the Henry Hub in the United States. The practical trading hub, National Balancing Point ( NBP ) , located in the United Kingdom is considered to be the most mature market in Europe, while the two Continental trading hubs Zeebrugge and Title Transfer Facility ( TTF ) located in Belgium and the Netherlands, severally, are considered to be the dominant trading hubs in Continental Europe. Three natural gas trading hubs are emerging: the Point d’Echange de Gaz ( PEG ) Nord for the Gallic market, NetConnect Germany ( NCG ) and Gas pool ( GPL ) trading hubs for the German market.

In Continental Europe, LNG imports rely on traditional long-run contracts chiefly from Algeria, and besides from Nigeria or Trinidad. Price is pegged to crude oil or oil merchandises, but due to increasing competition from grapevine gas, the indexation form for LNG tends to follows the same construction as on-shore gas, with mentions to char, electricity. More by and large, the liberalisation procedure on the Continent is doing LNG pricing more competitory.

India

Brief HISTORY OF NATURAL GAS MARKET IN INDIA

Natural gas is a scarce resource in India and Govt. of India plays an of import function in its allotment. Historically, gas has been allocated in precedence to end-users such as fertiliser manufacturers and power workss. In 2007, the Govt. of India started working on a new Gas Use Policy. This was largely a effect of the difference between the Ambani brothers and the related issues on gas pricing and use, which created a really hot argument in India. In 2007, a monetary value was agreed between RIL and the authorities under the PSC so that RIL was to sell gas at USD 4.2/ Million British thermic units for the first five old ages of production.

This and the big spread between demand and available supplies prompted the authorities to develop a Gas Use Policy and to travel back to administrative control over monetary values ( Govt. of India introduced a monetary value expression for all finds under the first six NELP unit of ammunitions ) and over volumes to be allocated to end-consumers. Therefore, in 2008, the authorities introduced Natural Gas in India new guidelines called the Gas Use Policy, which efficaciously took away gas manufacturers ‘ rights to sell the gas they discover on the unfastened market. These guidelines would be applicable for the following five old ages and be reviewed afterwards. The recent opinion of the Supreme Court in May 2010 sing the difference between RIL ( Reliance Industries Ltd. ) and RNRL ( Reliance Natural Resources Ltd. ) reaffirms the function of the authorities in the allotment and pricing of gas. Presently, the regulations of the General Policy for the gas market imply that gas will be allocated harmonizing to industry-wise precedences set up by the authorities.

DEVELOPMENT OF THE NATURAL GAS MARKETS IN INDIA

India is the universe ‘s 7th largest energy manufacturer, accounting for 2.49 % of the universe ‘s entire one-year energy production. It is the 5th largest energy consumer, accounting for approximately 3.45 % of entire energy ingestion in 2004, which has been increasing by an norm of 4.8 % per centum a twelvemonth since 1990.

The portion of commercial energy in entire primary energy ingestion increased from 59.7 % in 1980- 81 to 79.3 % in 2008-09.

India ‘s GDP has grown at more than 8-8.5 % during the last few old ages, and is expected to turn at least at 6.5-7 % in the coming few old ages. The growing has taken topographic point despite the immense shortage in energy substructure and substructure. Even today, half of the state ‘s population does non hold entree to electricity or any other signifier of commercial energy, and still utilize non-commercial fuels such as firewood, harvest residues end during bars as a primary beginning of energy for cooking in over two tierces of families. The future growing of the state would demand a move to big scale commercial energy signifiers. In peculiar, natural gas as a clean energy beginning holds the highest promise for the state.

World ‘s resources of natural gas, although finite, are tremendous. Estimates of its size continue to turn as a consequence of inventions in geographic expedition and extraction techniques. Natural gas resources are widely and bountifully distributed around the Earth. It is estimated that a important sum of natural gas remains to be discovered. Natural gas has emerged as the most preferable fuel due to its built-in environmentally benign nature, greater efficiency and cost effectivity.

The demand of natural gas has aggressively increased in the last two decennaries at the planetary degree. In India natural gas was foremost discovered off the West seashore in 1970s, and today, it constitutes 10 % of India ‘s entire energy ingestion. Over the last decennary it has gained importance as a beginning of energy and its portion is slated to increase to approximately 25 % of the entire energy basket by 2025-2030.

CURRENT Pricing SYSTEM IN INDIA

The natural gas pricing scenario in India is complex and heterogenous in nature. There are broad assortments of gas monetary value in the state. At present, there are loosely two pricing governments for gas in the state – gas priced under APM and non-APM or free market gas. The monetary value of APM gas is set by the Government. As respects non-APM/free market gas, this could besides be loosely divided into two classs, viz. , domestically produced gas from JV Fieldss and imported LNG. The pricing of JV gas is governed in footings of the PSC ( Production Sharing Contract ) commissariats. It is expected that significant gas production would get down from the gas Fieldss awarded by the Government under the New Exploration Licensing Policy ( NELP ) . As respects LNG, while the monetary value of LNG imported under term contracts is governed by the SPA ( Particular Purchase Agreement ) between the LNG marketer and the purchaser, the topographic point ladings are purchased on reciprocally agreeable commercial footings.

APM ( Administered Pricing Mechanism ) Gas Pricing

Pricing of Gas under Pre-NELP Production Sharing Contracts ( PSC )

Pricing of Gas with mention to NELP Provisions

Import Gas ( LNG ) Pricing

Motivation FOR THE RESEARCH:

As it is a known fact that there is a immense depletion in the oil militias if we compare the two clip periods, i.e. the clip when the oil was discovered and the today ‘s epoch, but the fact can non be ignored that demand for energy to assorted sections are on hiking. So in order to run into the increasing demand by clients oil has to be replaced by an alternate beginning. The find of immense militias of natural gas in last few decennaries has proved to be a replacing to oil demand to a big extent. But the demand- supply of natural gas mostly depends on the imports and exports from assorted states which mostly affects the pricing mechanism. So in order to understand the pricing mechanism of the natural gas a comparative survey is done between the domestic state, India and the one of the market leader, Europe.

Aim

The subject undertaken is really broad and complex. There are several issues related to the subject which are in the hot argument every now and so. But this survey is conducted to cover and concentrate on certain aims which are stated below:

Prospect of natural gas pricing construction in India

Identifying natural gas militias in India

SCOPE OF RESEARCH:

The type of research that would be used for the survey is descriptive in nature, which is besides called statistical research. Although the informations description is factual, accurate and systematic, the research can non depict what caused a state of affairs. The description is used forA frequences, averagesA and other statistical computations.

RESEARCH METHODOLOGY

THEORITICAL FRAMEWORK

The survey would include the bing theories which are closely related to the subject of consideration. This will cover the informations from past research and surveies and articles from relevant diaries, books, newspapers, etc.

Mentions would be provided for farther elucidations and surveies.

Beginnings OF DATA:

All the informations collected is secondary in nature. The information is collected through assorted beginnings like books, newspapers, organisational records and informations collected through qualitative methodological analysiss or qualitative research. The good sum of articles and diaries by different writers are besides studied. The information from different web sites and links on the cyberspace is collected.

The information collected would farther be explained and enhanced with appropriate graphs and charts wheresoever required.

REVIEW OF LITERATURE:

“ A dynamic simulation of market power in the liberalized European natural gas market ” an abstract by Wietze Lise and Benjamin F. Hobbs published in diary named The Energy diary ( 2009, pages 119-136 ) states that the recent additions in the universe monetary value of oil have led to higher gas monetary values in Europe, perchance taking to greater chances for exerting market power. The consequence of different gas manufacturer schemes upon monetary value degrees in the liberalised European gas market over the period 2005-2030 is analysed utilizing a dynamic gas market theoretical account that accounts for demand, supply, and investings in grapevine conveyance, LNG, and storage. The multi-period theoretical account preparation allows geographic expedition of the kineticss of market power as transit and storage capacities are augmented and interact with demand growing. The combined effects of spacial constellation of the supply web and provider location upon strength of competition in 10 different parts in Europe are considered. Differences in monetary values are due to the interaction of ( 1 ) built-in ability of manufacturers to exert market power ( determined by production capacity and costs ) with the ( 2 ) handiness of the market ( determined by gas conveyance substructure ) .

“ European natural gas markets: Resource restraints and market powers ” an abstract by Gijsbert Zwart published in diary named The Energy diary ( 2009, pages 151-166 ) states that the European natural gas market is characterized by worsening autochthonal resources, peculiarly in the UK and the Netherlands, and a turning dependance on a little figure of big exporters who, as a effect, see their market power increasing. In this paper long-term scenarios for the European natural gas markets in a theoretical account, NATGAS, that explicitly includes both factors, resource restraints and manufacturers market power are analyzed. It has been analyzed that finite resources lead to mutualities of current production determinations and future chances. These determinations in bend depend on the potency for big manufacturers to put market monetary values above fringy costs. Further the impact of conditions on the planetary LNG market on market portions of grapevine gas providers, every bit good as on the velocity of depletion of autochthonal European resources are focused. The paper besides considers the fact that how shadow monetary values of resource restraints affect permutation forms in the assorted scenarios.

“ The lifting monetary value of Russian natural gas ” an article by Mark Mozur ( 2011 ) states that as Gazprom remains the dominant company in Russia in natural gas industry but may be due to several grounds like externally, down European demand for natural gas due to the economic recession of 2008-2009, together with a planetary supply glut brought on by a U.S. shale gas roar and increased LNG cargos to Europe weakened Gazprom ‘s market place, as the company chose to take a hit on its export volumes alternatively of renegotiate prices.A Including Turkey, from 2008-2009, Gazprom ‘s portion of entire European gasA importsA fell from 42.7 % to 37.9 % , an absolute dropoff of 23.6 billion three-dimensional metres ( bcm ) . There is besides a argument about natural gas supply contract basicss which includes long-run oil linked monetary values, and take-or-pay commissariats would escalate. And while analysing Russia it has besides been noticed thatA although Gazprom remains dominant, companies such as Novatek are turning quickly and are seeking advanced ways to market their gas. The article by Simon Pirani in 2011 has assessed Russia ‘s programs for domestic gas sector reform.A As projected by the authorities there is domestic gas monetary value addition of 15 % per twelvemonth, making European netback equality by 2015, and as known, A more specifically, the gas sector reform is based on the rule of “ equal profitableness ” of domestic gross revenues and exports, and some analysts put domestic monetary value additions as making 40 % of European Union ( EU ) degrees by 2014. The article besides focuses on Russia ‘s domestic gas theodolite tariffs.A Russia ‘s Unified Gas Supply System ( UGSS ) is owned and operated by Gazprom, which presently determines capacity entree and theodolite duties in an opaque mode in coaction with the Federal Tariff Service ( FTS ) .A As gas sector liberalisation continues and the possibility of independent manufacturers deriving important grapevine capacity entree becomes less distant, expecting degrees of theodolite duty payments could be informative in sing export scenarios.A That is, how likely is it, given programs for domestic gas sector reform and the subsequent consequence on theodolite duties, that independent manufacturers will derive a portion of Russian gas exports in the coming old ages. As Gazprom ‘s president says that by 2014 domestic gas gross revenues would be tantamount to gas exports in footings of net revenue.A In his words, this means that industrial consumers in Russia can anticipate monetary values that are 60 % of European degrees ( based on netback ) , which would be a 150 % addition over current monetary values. And it has besides been calculated that while European gas monetary values have fluctuated based on oil monetary value motions, Russian gas monetary values have moved upwards in stages.A In order to make 60 % of European degrees ( state, $ 400/mcm ) by 2014, Russian domestic monetary values would hold to increase by around 27 % per twelvemonth, compared to historical growing rates between 15-25 % .A This comes at a clip when any monetary value additions will hold political branchings, and when it has been publically stated that one-year additions will non transcend 15 % . It has besides been stated that due to gas monetary value liberalisation the Russian disposal is bit by bit traveling towards an independent regulator for the gas conveyance system. Gazprom has been ordered to divide its conveyance concern into a separate subordinate that can finally supply arms-length conveyance services to Gazprom and 3rd parties.A This move towards transparence in capacity allotment could take to greater efficiency in the Russian gas sector, and besides, via a nominally independent regulator, could enable the authorities to set policy to accomplish certain results, such as compulsory degrees of investing in the UGSS, or making inducements to independent gas manufacturers. Therefore, reform of the conveyance system is being observed at the same time with programs to liberalise gas monetary values and, taken together ; these developments will impact chances for independent gas manufacturers.

“ The European hubs for natural gas: integrating towards a individual country ” paper by Gianfreda, A. Grossi, L. Carlotto, A. ( 2012, pages 1-5 ) states that the regulators hope that competitory forces will be plenty to make efficiency, and hence we see their relentless policy concerns about market construction, resource adequateness and regional interconnectedness. Facilitating the latter, in peculiar, through greater web interconnectedness capacities, and the harmonisation of trading at assorted local hubs is traveling to be actively pursued in many parts of Europe with the purpose of bettering both market efficiency and system dependability. This paper seeks to progress our apprehension of the efficiency of European gas topographic point monetary values by looking at several regional markets. We pursue this through an analysis of topographic point monetary values collected on the undermentioned markets: NBP, TTF, Zeebrugge, PSV and Baumgarten. Hence, this paper is traveling to look into empirical belongingss of European Natural gas topographic point monetary values, which drives electricity monetary values across Europe. Furthermore here we propose to understand the province of integrating of these markets toward a individual European country as suggested by the European Commission and followed by ENTSO-G. Therefore using Granger ‘s causality trials and Vector Error Correction Models, we test the hypothesis of both short and long tally integrating procedure and seek to understand which the nature of interactions among such monetary values is across the European country.