Discussion about Global natural gas production and trading scenario. Interregional and intraregional modes of transportation of natural gas.

1. Global Natural Gas
Production and Trading
Nishant Mehta

2. Content
• History
• Global Production and consumption
• Future outlook
• Pricing
• Natural gas contracts
• Transportation- Pipeline
• Pipeline- Tariffs, Transit systems
• LNG- InCoterms, Cargo

3. Historical perspective
• Natural gas is nothing new. In fact, most of the
natural gas that is brought out from under the
ground is millions and millions of years old.
• lightning strikes would ignite natural gas that was
escaping from under the earth’s crust. This would
create a fire coming from the earth, and were the
root of myth and superstition. One of the most
famous of these flames was found in ancient
Greece, on Mount Parnassus around 1000 B.C. A
goat herdsman came across what looked like a
‘burning spring’

4. • About 500 B.C. that the Chinese discovered the
potential to use these fires to their advantage.
Finding places where gas was seeping to the
surface, the Chinese formed crude pipelines out of
bamboo shoots to transport the gas, where it was
used to boil sea water, separating the salt and
making it palatable.
• In 1821, the first well specifically intended to obtain
natural gas was dug in Fredonia, New York by
William Hart. After noticing gas bubbles rising to
the surface of a creek, Hart dug a 27-foot well to try
and obtain a larger flow of gas to the surface. Hart
is regarded by many as the ‘father of natural gas’ in
America.

5. • For most of the 1800s, natural gas was used
almost exclusively as a fuel for lamps. Because
there were no pipelines to bring gas into
individual homes, most of the gas went to light
city streets. After the 1890s, however, many
cities began converting their street lamps to
electricity. Gas producers began looking for
new markets for their product.
• In 1885, Robert Bunsen invented a burner that
mixed air with natural gas. The “Bunsen
burner” showed how gas could be used to
provide heat for cooking and warming buildings.

6. Natural Gas today
• It took the construction of pipelines to bring natural gas
to new markets. Although one of the first lengthy
pipelines was built in 1891 – it was 120 miles long and
carried gas from fields in central Indiana to Chicago –
there were very few pipelines built until after World War
II in the 1940s.
• Improvements in metals, welding techniques and pipe
making during the War made pipeline construction more
economically attractive. After World War II, the nation
began building its pipeline network. Throughout the
1950s and 1960s, thousands of miles of pipeline were
constructed throughout the United States. Today, the
U.S. pipeline network, laid end-to-end, would stretch to
the moon and back twice.

7. Supply and Production
• From a global perspective, proved reserves of natur
al gas have continually increased over the last sever
al decades, while natural gas production as a perce
ntage of reserves has generally decreased

8. Gas Reserves by countries

9. Distribution of proved gas reserves: 1996, 2006 and 2016
Percentage

10. Gas reserves-to-production (R/P) ratios
Years

11. Natural gas Production (Per day)

12. Gas production/consumption by region
Billion cubic metres
Consumption by regionProduction by region

13. Natural Gas Consumption (per day)

14. Gas consumption per capita 2016
Tonnes oil equivalent

15. Future outlook for
Natural Gas

16. Future Outlook

23. Gas Pricing Systems

24. Hub Based Systems
• Supply and demand set at liquid Hubs. In north
America, the most important price marker is henry
Hub (Louisiana), with a spot and futures market
trading on the New York Mercantile Exchange
(NYMEX). In Europe, the most important hub is
national balancing Point (NBP) in the United
Kingdom, Which is virtual trading point for the
international exchange (ICE). It contains both a spot
and futures market, although prices fall sharply
after the first few months of future delivery.

25. Gas prices
$/mmBtu

26. Oil-Linked Systems
• Most of the gas traded in Europe and Asia and
specifically long term LNG contracts fall in this
category
• Gas contracts formulas vary in a number of ways
based on the following factors.
• Indexation
• Slope/Coefficients of the Indexation
• Presence of S-Curves
• Lag and averaging mechanisms

27. Regulated Systems
• In many parts of the world prices are regulated
• In this case the government sets wellhead,
transportation and end-user prices

28. Subsidized
• In most countries in the middle east and North
Africa, Gas prices barely suffice to cover production
cost
• In Latin America, The former Soviet Union and in
much of Africa, gas prices are similarly set with no
linkage to Oil or costs

29. Natural Gas Contracts
(1)Spot Purchase contracts
(2)Multi-months contracts
(3)Long Term warranty contracts

30. (1) Short term spot contracts
• Spot price: “The price for a one-time open market transaction for
immediate delivery of a specific quantity of product at
a specific location where the commodity is purchased
‘on the spot’ at current market rates”
• Immediate sale/purchase of the commodity (30 days in natural gas)
• Gas reservoirs best fitting the short-term revenue source:
1. Reservoir in which the producer is under-produced
2. New reservoir that can be connected within a short period of time
3. Reservoir that must produce every day (associated gas).
• Natural gas spot trading began on a large national scale during 1983.
• Spot prices have become seasonal, peaking sharply during the winter
demand period, and again during summer periods of peak electricity
generation, caused by demand for air conditioning.
• Risky for buyer as natural disasters and global politics can spark huge
price fluctuations or volatility.

31. • Begins in middle of the month, gas marketers, sellers, and
buyers communicate regarding possible gas purchase/sales
transactions that will take place during the following month.
• Marketers tentatively arrange to purchase gas supplies from
producers, other marketers, or from other sources.
• Approximately ten days before the end of the month, parties
who will secure transportation services from one or more
pipeline(s) submit written preliminary nominations for
transportation capacity to pipelines, identifying gas volumes,
receipt and delivery points, and other key physical and
transactional information.
• Once they have received preliminary nominations for
transportation services as above, pipeline capacity staff
review their nominations and provide feedback to shippers
as to capacity limitations, bottlenecks, and/or similar issues.
Spot Market Transaction Cycle

32. Spot Market Transaction Cycle
cont.
• During the last full week before the end of the month
("bid week"), buyers, sellers, and marketers again
communicate with one another regarding gas volumes
and prices to be agreed upon in thousands of individual
transactions scheduled to flow during the following
month.
• Shippers notify pipelines in writing as to final
nominations and gas routing, based on feedback
received from preliminary nominations and on needs
developed subsequently in market negotiations
• As the month ends, the business enters a "cleanup"
phase in which the final transactions are completed for
the new month, and final transportation arrangements
are made.

33. (2) Fixed—Term Interruptible Multi—
Month Contracts
• Early in the development of the spot market, transactions typically were
conducted on a limited-term "interruptible" basis.
• If a buyer desired to purchase a quantity of gas and the seller had gas
available for sale, a deal would be struck at a mutually agreed upon price
for a given volume taken by the purchaser during a given month.
• Because quantity was interruptible, neither party considered itself legally
obligated to purchase or sell any specific quantity of gas.
• Rather than enter into a new agreement every month, the limited term
interruptible arrangement evolved over time to cover multiple months.
• The seller might indicate periodically that it had a package of gas available
for sale.
• The buyer would nominate a volume it desired purchasing, if any, and the
price at which it was willing to pay.
• The basic difference from the spot market is that the purchaser and/or
producer can decline any sale or purchase prior to sale consummation.

34. (3) Longer-Term or Warranty Sales
in Gas Contracts
• Warranty contracts characteristically call for the
producer to guarantee that it will make available for
sale a fixed quantity of gas each month.
• It generally is for a primary term of five years or
longer.
• Greater risks associated with such contracts; more
time has to be spent on negotiating and drafting.
• With pipeline open access becoming more universal,
producer-marketers are beginning to shift their
emphasis from spot sales to term contracting.

35. Depletion contract
• A nominated gas field dedicated to the Buyer
• Contract quantities based on economically
recoverable reserves
• No obligation on Seller to secure additional
reserves to meet supply obligation

36. Supply contract
• Seller commits to deliver a specific quantity of gas
over a period
• Obligation on Seller to secure additional reserves if
initial source of supply is inadequate

37. Take or Pay contract
• Obligation on Buyer to take and pay for, or pay for if not
taken, a minimum quantity of gas within a specified period
of time
• Guarantees the volumes that the Buyer will pay for and
provides Seller with secured revenue stream
• It is the ToPQ Commitment that secures the financing for
the Seller’s project
• Expressed as a percentage of the ACQ (Annual Contract
Quantity) subject to adjustments:
• Non delivered quantities (shortfall)
• Force majeure
• Maintenance

38. Natural Gas Transportation
(1) Natural Gas pipelines
(2) LNG transportation

39. Source: Includes data from FGE MENAgas service, GIIGNL, IHS Waterborne, PIRA Energy Group, Wood Mackenzie.
Major gas trade movements 2016
Trade flows worldwide (billion cubic metres)
Pipeline-737bcm
LNG 346 Bcm

40. Pipeline Transportation

41. Pipeline Volumes

42. Types of Pipeline Transit System
• In general, four kinds of transit system can be distinguished:
• 1) Point to point transit, without connection to and condition from
transiting country.

43. 2) Transit country is also buyer but operated
by separate entity and not the transit country
• TAG (Trans Austria Gas Pipeline) and WAG (Westernport – Altona –
Geelong Pipeline)
• MEGAL (Mittel-Europäische-Gasleitung), TENP(Trans Europa Naturgas
Pipeline)

44. 3) Integrated in to domestic system of transit
country, network owned by transit country
• Ukrainian and Belgian systems

45. Integration in to Highly meshed national grid

46. Tariff
• A tariff is a fee paid by the customers to a pipeline operator for the
use of the pipelines. It covers the costs of investment and financing,
operating and maintaining the pipe and includes an element of profit
for the operator. These costs may include such items as local taxes
levied on commercial entities. A government charge is a tax levied by
a transit country essentially as a fee for the right of way through that
country’s territory and as compensation for taxes not levied and for
service rendered by the country (e.g. protection of pipeline). It is not
related to costs of transport itself.
• The difference between the two types of payment is that a tariff is
charged based on real costs, whilst a government charge is a tax the
size of which is based on political judgments and negotiations.

47. Types of tariff methodologies
• There are essentially four types of tariff methodologies currently in
use to allocate the overall costs to the shippers.
1) postal;
2) distance-based;
3) point-to-point; and
4) entry/exit.

48. Postal tariffs
• Postal tariffs use a single fixed fee for the transport of any
volume of gas within the area covered by the tariff.
• Advantages:
• They are simple, transparent and are relatively easy for the
new entrants for use.
• Disadvantages:
• They are discriminatory between consumers in different
parts of large systems, given that different amounts of
investment have been required to serve different
consumers.
• They are used domestically in al the non-EU countries except
Russia)

49. Distance-based tariffs
• Under distance-based tariffs, a shipper is required to pay a charge
based on the distance between designated entry and exit points.
• Expressed as $ / m3/h/100 km/year.
• Capacity charge would have to be paid regardless of utilization.
• Where the load factor is high like in most long distance
transportation (transit) systems serving long-term contracts, the
unit used is $/1000m3/100 km.
• Distance-based tariffs have the advantage of being rather simple,
transparent and cost reflective in an apparent way for one
directional flows
• However they are criticized for not being cost reflective in cases
where there is no linear route between entry and exit of gas
• In Europe, this system was used, however, recently they have
been replaced by point to point transit system. However, outside
Europe, distance based tariff system are widely used.

50. Point-to-point tariffs
• In this tariff system, a specific tariff is quoted for every
entry/exit pair within the system.
• This systems are however, highly criticized, because of bring
opaque. They become highly complicated, when there are
multiple entry and exit points in the same pipeline.
• The method is also subject to criticism because of the
portfolio effect and because it fails to provide any clear
signals about capacity constraints at specific points in the
system.

51. Entry Exit Tariffs
• In this tariff system, a separate tariff is quoted for each entry and exit
point. This can be seen as a specific form of point-to-point system.
• Under the entry/exit tariff system, the booking is done separately for
each entry and exit point.
• Entry/exit tarification almost inevitably requires detailed physical and
financial modelling of system flows which can become rather
complex and difficult to understand.
• This system is considerably fair.
• However, in general, a single tariff methodology is no applied, instead
a suitable combination of any two, any three of all of the tariff
methods are put into application.

52. LNG Transportation

53. LNG volumes

54. InCoterms
• FOB (=Free on Board), i.e. the gas is deemed “delivered” at the
loading point (the ship) and the buyer becomes responsible for the
shipping.
• DAP (=Delivered at Place) i.e. the gas is deemed “delivered” at the
delivery point.
• The seller remains responsible for the goods until they are delivered
to the destination. However these costs are passed on the buyer.
Sometimes the literature refers to DES which is the old and now
defunct incoterm.
• CIF (=Cost, Insurance, Freight) is similar to DES in that the seller must
arrange the freight, but the difference is that the title is transferred at
point of loading.
• CFR (=Cost and Freight) and is similar to CIF in that the seller must
arrange the freight, but the difference is that the buyer must insure
the cargo.

55. LNG Cargo pricing

56. Net Forward Pricing
• FOB- Hub Price+ liquefaction Cost + Loading cost
• CIF - Hub Price+ liquefaction Cost + Loading cost + Insurance + Freight
• CFR - Hub Price+ liquefaction Cost + Loading cost + Freight
• DAP - Hub Price+ liquefaction Cost + Loading cost + (Insurance)* +
Freight + Unloading

57. Oil Price linked LNG
• Asian LNG contracts are linked to the crude oil price index. Japan, the
world's largest LNG importer, uses contracts with a formula linked to
the Japanese Customs Cleared Price for crude oil and referred to as
JCC (Japanese Crude Cocktail). With few exceptions, a similar
structure is used in other Asian markets such as South Korea, China,
and Taiwan. The LNG pricing formula for oil-linked LNG contracts is as
follows:
• P= C + βX+ S
P is the LNG price ($/MMBtu)
C is the base price ($/MMBtu)
β is the price slope
X is the Oil Price index (JCC in Japan)
S is the Shipment Charges

58. • Asian oil-linked contracts consist of "S-Curves" within the contract
structures, and within the S-Curve, LNG buyers prefer a flatter slope
at high oil prices while project developers prefer a flatter slope at low
oil price environments to ensure that project economic commitments
are met.
• Typically in an S-Curve-based, oil-linked contract, the price slope is
applied around the $40-to-$100 oil price range, and beyond this
range LNG buyers pay a fixed fee in very high and very low oil price
environments

59. LNG Cargo Ships
• independent Type 'B' (typical LNG tank)
• Membrane (typical LNG tank)

60. Type B

61. Type B prismatic

62. Membrane Tanks (Membrane - 0.7 to 1.5 mm
thick)

63. GTT 96

64. GTT Mkiii

65. Thank you!