Oil indexed gas price formula
Last week she accused US technology giant Google of abusing its dominant position in the internet search market. This week she has laid charges against Russian gas producer Gazprom over its sales practices in eastern Europe. The EC Commission carried out dawn raids on a number of gas companies in September and opened an investigation a year later, in September On Wednesday, April 22, it filed a formal statement of objections against Gazprom over its gas sales to eastern Europe.
Gas Price Review Arbitrations: Changing the Indexation Formula
The European gas market has gone through a substantial transformation. For several decades, this market was dominated by long-term contracts, derived from formula-based pricing. Market transformations resulted in the expansion of trading hubs and hub related pricing. The conventional wisdom is that gas hubs accurately reflect the balance of supply and demand in the whole European market, and the linkage between oil-indexed and hub prices has lost its rationale and does not reflect market fundamentals.
Gazprom Export research casts doubt upon this conventional wisdom. In that sense, hub prices are in fact derivatives of long-term contracts , which set the baseline trend for their development. Supply and demand only mutate their changes see Blue Fuel, October Vol. Our recent study provides another argument to back up the conclusion that oil-indexation is still the dominant model of pricing in Europe.
The correlation is the highest, at 0. For NBP, the same analysis gives us a correlation of 0. It is precisely this 6 month lag that is most commonly used by major European suppliers in their long-term contracts. Results obtained from the use of moving averages means that forward prices on the hubs are determined by the market participants in the background of the oil-indexed long-term contracts, effectuated, first of all, by Gazprom.
More importantly, oil-indexed contract prices are regarded by parties as a benchmark for the entire gas market. In the absence of global price for gas, oil-indexed proxy represents a convenient mechanism for price setting.
Many gas buyers and sellers are interested in preserving the current pricing principles because they make gas markets more transparent and predictable.
Home Analysis.
The linkage to the oil price is achieved by not including a fixed price in the gas contracts but a formula by which the gas price is calculated. Dutch oil-indexation pricing formula still holds. By way hybrid pricing system based on the coexistence of oil-indexed contracts and gas-indexed hub prices.
While the majority of European gas contracts have shifted from oil to gas price indexation, there is still a large prevalence of long term LNG contracts indexed to crude. We look at the impact on LNG contract and market pricing dynamics. The oil market is reeling from two parallel shocks. Demand expectations have been slashed as a result of measures to prevent the spread of Covid
Gas prices across the world are at an all-time low because of the global economic slowdown, development of alternate supply sources of the blue fuel and growth of the LNG market. However, not all consumers will see the price drop immediately.
We offer customized products and services - ask for a non-binding quote here. We work out a commodity charge for you in an individually defined period reference period in a transparent manner. The commodity charge is derived from the published price quotations for gas products.
Oil price plunge & the LNG market
Since the s, the gas price has been fixed according to the oil products rate. The French authorities have regulated gas price to minimize the impact of that linkage. Now that the French market for the supply of gas has been liberalized, there are alternative suppliers free to offer you their gas products at their own prices. Natural gas is an energy source for which other sources can be substituted. In order to develop its use, European producers and importers agreed in the s to index its price on that of oil, and so ensure that the price of gas would not rise above that of its competitor fuels. The oil products used in the indexation formula are domestic heating oil and heavy fuel oil.
Gazprom, oil-link vs spot gas prices, and storage
The linkage to the oil price is achieved by not including a fixed price in the gas contracts but a formula by which the gas price is calculated using the oil price. The reason for the time offset is that the price is only periodically adapted to the oil price. Thus, the price escalation clause is applied. Figure 1 illustrates the pricing: We want to determine the gas price from January. To calculate we take the average of 6 months. The time-lag determines that we do not include the prices for October to December. Consequently, we take the average from April to September. The calculated price is valid until March inclusive. In April the price is calculated from July to December. Prices from January to March are excluded due to the time-lag and so on.
The European gas market has gone through a substantial transformation.
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Natural gas pricing: how does it work?
The basis on which natural gas is sold and priced varies dramatically between global markets. As natural gas becomes an increasingly important source of energy, understanding of gas pricing concepts is crucial for energy producers, consumers, and regulators. Though natural gas and oil share many characteristics both are hydrocarbons, both are found and produced using similar methods and equipment, and both are often produced simultaneously they contrast in the way they are sold and priced. Oil is sold by volume or weight, typically barrels or tons. By contrast, natural gas is sold by unit of energy. Natural gas, when produced from the reservoir, contains majority methane plus various other hydrocarbons and, undesirably, some impurities. Natural gas liquids NGLs , a term that includes ethane, propane, butane, and condensates, are composed of longer chains of carbon molecules than methane, and thus, per unit volume, they burn hotter than methane. Because they burn hotter, NGLs have a higher energy content than methane and even small quantities of NGLs in a natural gas flow can have a large impact on the overall energy contained in the natural gas. By contrast, impurities such as carbon dioxide, hydrogen sulphide and nitrogen are largely non-combustible. The presence of these compounds has the overall effect of reducing the energy content of the natural gas flow. If sufficient quantities of NGLs exist in the natural gas, it is often more economic for the field operator to remove the NGLs from the natural gas flow for direct sale. NGLs are desired by global markets to produce various petrochemical products, to be blended with crude oil to make more valuable products, and can also be combusted directly. Readers would be familiar with using Liquefied Petroleum Gas LPGs , which is a subsector of NGL containing propane and butane, for domestic cooking gas as well as transport fuel in many countries.
