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Globalisation of natural gas markets--effects on prices and trade patterns.

Article Excerpt
1. INTRODUCTION

The natural gas markets in different regions are gradually becoming more integrated. This globalisation process is due to several reasons. First, the costs of transport (especially LNG--Liquefied Natural Gas) have fallen significantly over the last 1-2 decades (except for the last few years), and constitute a much lower share of the wholesale price of gas than 15-20 years ago (Brito and Hartley, 2007). Second, gas reserves in the main consuming areas are gradually reduced compared with annual consumption, (1) which implies an upward pressure on domestic prices and increased imports of gas. With a larger share of gas reserves located in a few geographical locations such as Russia and the Middle East, intercontinental trade becomes more profitable. Third, an increase in the share of spot trade means that short-term price differences between regions may be more easily exploited by re-routing the gas (especially LNG), cf. IEA (2006). (2)

In this paper we look into future scenarios for a globalised natural gas market. Using a detailed numerical partial equilibrium model of the international gas, oil and coal markets, we explore how regional gas prices and trade patterns may develop until 2030 under different scenarios about future market conditions. Not surprisingly, we find that intercontinental trade will grow considerably over the next decades, reducing the upward pressure on gas prices in import regions such as Europe and North America. This result depends crucially, however, on the absence of constraints in the expansion of the gas industry in the Middle East. If the growth in gas production from this region is suppressed, we may see quite higher prices from 2020 onwards, and less intercontinental trade.

Our numerical analysis builds on the assumption that the international gas markets are liberalised and integrated. This is in contrast with the results in Siliverstovs et al. (2005), who find no sign of price integration between the North American market and the European/Japanese markets in the period 1994-2003. Their findings may reflect that the gas markets in continental Europe and North-East Asia are not yet fully liberalised. On the other hand, the gas markets in North America and the UK have been liberalised for more than a decade, with prices linked to liquid spot markets, and Neumann (2007) finds increasing convergence of spot prices in the US and the UK based on data for 1999-2007. Moreover, the EU has adopted two directives on gas liberalisation over the last decade (EU, 1998, 2003), although the speed of implementation has been quite slow in several key countries (Haase, 2008). With rapid growth in international spot trade, gas suppliers may find it easier to sell their gas in new markets, especially in the short term. Jensen (2004) claims that a moderate level of spot trade may be sufficient to balance the regional markets. Thus, we believe that the international gas markets are heading towards a globalised market, although with region-specific prices.

Whereas gas consumption in OECD regions has grown slowly over the last decade, consumption outside OECD and the former Soviet Union has increased by more than 5 per cent annually since mid 1990's (BP, 2008). In China, gas consumption more than tripled from 1997 to 2007. A similar picture is seen on the supply side, where gas production in the OECD has been rather constant since the turn of the century. On the other hand, production both in the Middle East and in Africa has more or less doubled over the last decade. Although intercontinental trade has been modest so far, some arbitrage trading has occurred in the Atlantic Basin, and the Middle East has to some extent become a swing supplier to both South and East Asia and the Atlantic Basin. So far, most of the LNG from the Middle East has been shipped eastwards, to India, Japan and South Korea, and only about 15 per cent to the Atlantic Basin (BP, 2008).

Besides the studies presented in EMF (2007) (and in this special issue), there have been few previous numerical analyses of globalised natural gas markets. One exception is Rosendahl and Sagen (2009), who examine the effects of transport cost reductions on gas prices in different regions (using the same model as in this paper). They show that gas prices in some import regions may increase when transport costs decline, e.g., because of different choice of transport mode or because of different transport distances between trading regions. Numerical analyses of the European gas market are found in Golombek et al. (1998), Boots et al. (2004) and Egging and Gabriel (2006), whereas MacAvoy and Moshkin (2000) and Gabriel et...