price dynamics in europe and the north american …...de vany, arthur and david walls (1993):...
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1
Price Dynamics in Europe and the North American Natural Gas Market – Towards Convergence?
Prof. Dr. Christian von HirschhausenChair of Energy Economics (EE2) Dresden University
of Technology, and DIW BerlinBased on joint research with Guillaume L’Hégaret, Anne Neumann, and
Boriss Siliverstovs, in the Research Program on
„The Globalization of Natural Gas Markets“
Flame 2005Amsterdam, 24 February 2005
2
Background: DIW/EE2 Project “The Globalization of Natural Gas Markets” (2004-2007)
- Jointly between with Dresden University of Technology, Chair of Energy Economics, and DIW Berlin (German Institute for Economic Research)
- Main objectives:
- Assessing empirical evidence on gas market internationalization
- Econometric analysis of energy price developments
- Institutional economic modeling on governance structures
- Computational model of the European natural gas market
- http://www.tu-dresden.de/wwbwleeg/projekte/gg/gg.html
3
Agenda
1. The Issue: Convergence of Natural Gas Prices
2. The Transatlantic Link: European and U.S. Natural Gas Prices
3. Convergence of European Natural Gas Spot Prices?
4. Future of Oil Price Indexation
5. Conclusion
4
Inter-Regional Natural Gas Trade Flows are Growing Exponentially(2002 and 2030, in bcm)
152
1
184136
66 63
Source: IEA, 2004
5
Theory: Cointegration and Convergence
Cointegration:- xt, a N-dimensional process, is co-integrated if each component of the process is I(1) but
there exists v, a N-dimensional vector, such that v‘xt is I(0) Johansen Test
Law of one price:- LOP is equivalent to having every relative price in the system constant in the long term
α ~ transportation costs, quality, risk premium, etc.β ~ relationship between the prices
β = 0 no market integrationβ = 1 LOP holds; markets are fully integrated;
proportionate pricesConvergence
- A dynamic structural change, time-varying coefficient models Kalman Filter
β(t) ~ relationship between the pricesβ = 0 no market integrationβ = 1 LOP holds; markets are fully integratedβ 1 increasing market integration over time
lnp1 = α + β*lnp2 +et
lnp1t = α + β(t)*lnp2t + et
6
Agenda
1. The Issue: Convergence of Natural Gas Prices
2. The Transatlantic Link: European and U.S. Natural Gas Prices
3. Convergence of European Natural Gas Spot Prices?
4. Future of Oil Price Indexation
5. Conclusion
7
Prices Used for International Cointegration Analysis
Henry Hub
Pipe USA
LNG USA
Pipe Europe
LNG Europe LNG Japan
Brent
Source: IEA, 2004
8
Cointegration of International Gas PricesEuropean/Japanese prices (logged) are cointegrated...
0 .4
0 .6
0 .8
1 .0
1 .2
1 .4
1 .6
1 .8
2 .0
9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3
LNG E uropeP ipe E urope
B ren tLNG Japan
9
… and so are American LNG, American Pipeline and Henry Hub prices (logged), at least since 1999
0 .0
0 .4
0 .8
1 .2
1 .6
2 .0
2 .4
9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3
LNG U S A P ipe US A H enry H ub
10
But: no cointegration Between European andNorth American Natural Gas Prices?
0 .0
0 .4
0 .8
1 .2
1 .6
2 .0
2 .4
94 95 96 97 98 99 00 01 02 03
P ipe E urope Henry Hub LNG E urope
11
2nd Approach: Convergence of Trans-Atlantic Gas Prices?(daily data, USD/MBTU)
0
2
4
6
8
10
12
1996 1997 1998 1999 2000 2001 2002 2003 2004
Henry Hub NBP
12
„Sign“ of Convergence of Trans-Atlantic Gas Prices:Increasing β Coefficient!
-0.8
-0.4
0.0
0.4
0.8
1.2
1996 1997 1998 1999 2000 2001 2002 2003 2004
13
Trans-Atlantic Trade in Natural Gas: Results
- No cointegration between European and North American natural gas pricesuntil recently
- But: „something“ is happening (increasing convergence)
- Future European natural gas prices may no longer be determined in Moscowor Oslo, but also at Henry Hub
14
Agenda
1. The Issue: Convergence of Natural Gas Prices
2. The Transatlantic Link: European and U.S. Natural Gas Prices
3. Convergence of European Natural Gas Spot Prices?3.1 NBP-Zeebrugge
3.2 Zeebrugge-Bunde
3.3 Future Interconnectors
4. Future of Oil Price Indexation
5. Conclusion
15
Future Gas Hubs in Europe (?)(Cornot-Gandolphe, 2003, 106)
Zeebrugge
NBP
Bunde/Oude
16
3.1 NBP – ZeebruggeThe Interconnector: Flow Direction and Price Differentials
Forward Flow(UK => Continent)
Reverse Flow(Continent=> UK)
Source: IUK Ltd.
-12,0
-10,0
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,008
. Mrz
00
15. M
ai 0
0
26. J
ul 0
0
24. S
ep 0
0
23. N
ov 0
0
01. F
eb 0
1
02. A
pr 0
1
11. J
un 0
1
10. A
ug 0
1
09. O
kt 0
1
10. D
ez 0
1
08. F
eb 0
2
09. A
pr 0
2
08. J
un 0
2
07. A
ug 0
2
06. O
kt 0
2
05. D
ez 0
2
06. F
eb 0
3
07. A
pr 0
3
06. J
un 0
3
05. A
ug 0
3
04. O
kt 0
3
05. D
ez 0
3
06. F
eb 0
4
20. A
pr 0
4
15. J
ul 0
4
08. O
kt 0
4
05. J
an 0
5
Volume Traded (bcm)
-15,0
-10,0
-5,0
0,0
5,0
10,0
15,0
20,0
25,0Price Differential
(Eur/Mwh)
Price Differential Volume Traded
17
The Data: NBP and Zeebrugge Daily Day Ahead Prices (bid)
-0
-4
-8
-12
-16
-20
-24
2000 2001 2002 2003 2004 2005
-Z-e-e-b-r-u-g-g-e--(-E-u-r-/-M-w-h-) -N-B-P--(-E-u-r-/-M-w-h-)
18
NBP – Zeebrugge: Very Strong Convergenceβ-Coefficient of the Kalman Filter
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2000 2001 2002 2003 2004
19
... Except for Shut-Down Periodsβ-Coefficient of the Kalman Filter
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2000 2001 2002 2003 2004
20
3.2 But What About Zeebrugge and Bunde?Daily Day Ahead Prices (bid)
4
8
12
16
20
24
2002 2003 2003 2004 2004 2005
Ze e b ru g g e (E u r/M w h ) B u n d e (E u r/M w h )
21
Zeebrugge - Bunde: No Real Convergenceβ-Coefficient of the Kalman Filter
.0
.1
.2
.3
.4
.5
2002 2003 2003 2004 2004 2005
22
Potential Reasons for the Absence of Convergence
- Transport capacity constraints
- Inefficient use of pipeline capacity
- Lack of liquidity (mainly at Bunde/Oude)
23
3.3 Future Role of Interconnectors:BBL Bacton - Den Helder
Source: OIES, Jonathan Stern; Presentation SEPAB Meeting, DTI, 14 Dec. 2004
To be expected:
- Stronger coupling of Bunde/Oude, TTF, and Zeebrugge
- Increasing convergence withNBP
- NBP as benchmark for all NW-European spot market prices
- Market power of companiesholding interconnectorcapacities?
24
Agenda
1. The Issue: Convergence of Natural Gas Prices
2. The Transatlantic Link: European and U.S. Natural Gas Prices
3. Convergence of European Natural Gas Spot Prices?
4. Future of Oil Price Indexation
5. Conclusion
25
Decoupling of Oil and Gas Prices in the US
0
5
10
15
20
25
30
35
40
45
50
Okt 92
Apr 93
Okt 93
Apr 94
Okt 94
Apr 95
Okt 95
Apr 96
Okt 96
Apr 97
Okt 97
Apr 98
Okt 98
Apr 99
Okt 99
Apr 00
Okt 00
Apr 01
Okt 01
Apr 02
Okt 02
Apr 03
Okt 03
Apr 04
Henry Hub LSFO US HSFO US WTIUS$/bbl
Source: IEA, Energy Prices and Taxes, several issues
Short-term decoupling (cf. also Serletis and Rangle-Ruiz, 2004)
Comovements of prices with oil prices still putting a price cap on natural gas
Increasing competition/substitutability between LSFO/HSFO and natural gas
26
Decoupling in Continental Europe?
0
5
10
15
20
25
30
35
40
45
50
Okt 98
Dez 98
Feb 99
Apr 99
Jun 9
9Aug
99Okt
99Dez 9
9Feb
00Apr
00Ju
n 00
Aug 00
Okt 00
Dez 00
Feb 01
Apr 01
Jun 0
1Aug
01Okt
01Dez 0
1Feb
02Apr
02Ju
n 02
Aug 02
Okt 02
Dez 02
Feb 03
Apr 03
Jun 0
3Aug
03Okt
03Dez 0
3Feb
04Apr
04Ju
n 04
Aug 04
NBP LSFO Europe HSFO Europe Brent
Source: IEA, Energy Prices and Taxes, several issues
27
Factors Weakening the Oil Price Indexation
- Non-oil indexed contracts (Statoil, Centrica, etc.)
- Increasing share of spot and short-term trade (towards 20%)
- Different underlying market structures and trends; e.g. stronger demandgrowth for natural gas, potentially leading to higher gas prices
==> Towards de-coupling, but in which direction?- European Commission (DG Tren, 2004) forecasts lower gas prices in the de-linking
scenario (2030: oil at 29.9 (2000) $/bbl., natural gas at 22.5 $/boe)- But: should European gas prices be determined at the Henry hub, higher gas prices than
oil prices may be expected
28
Agenda
1. The Issue: Convergence of Natural Gas Prices
2. The Transatlantic Link: European and U.S. Natural Gas Prices
3. Convergence of European Natural Gas Spot Prices?
4. Future of Oil Price Indexation
5. Conclusion
29
5. Conclusion
- Globalization of natural gas markets is likely to lead to price convergence, future European gas prices may be set at the Henry Hub
- The first Interconnector has lead to full convergence between the prices at NBP and Zeebrugge
- Price arbitration on the continent does not seem to work well thus far; butfuture European natural gas prices will become more „interconnected“between the UK and the continent
- Judging from overseas experience, the oil price indexation of natural gas prices will not wither, but become much less strong than is currently the case
30
Price Dynamics in Europe and the North American Natural Gas Market – Towards Convergence?
Prof. Dr. Christian von [email protected]
Chair of Energy Economics (EE2) Dresden University of Technology, and DIW Berlin
Based on joint research with Guillaume L’Hégaret, Anne Neumann, and Boriss Siliverstovs, in the Research Program on
„The Globalization of Natural Gas Markets“
Flame 2005
Amsterdam, 24 February 2005
31
References
Asche, Frank, Petter Osmundsen, and Ragnar Tveteras (2001): Market Integration for Natural Gas in Europe. International Journal of Global Energy Issues, Vol. 16, No. 4, 300-312.Asche, Frank, Petter Osmundsen, and Ragnar Tveteras (2002): European Market Integration for Gas ? Volume Flexibility andPolitical Risk. Energy Economics, Vol. 24, 249-265.BP (2004): Statistical Review of World Energy, June 2004.De Vany, Arthur and David Walls (1993): Pipeline Access and Market Integration in the Natural Gas Industry: Evidence fromCointegration Tests. The Energy Journal, Vol. 14, No. 4, 1-19.De Vany, Arthur and David Walls (1993): The Emerging New Order in Natural Gas – Market versus Regulation. QuerumBooks, Westport.Deutsche Bank (2003): LNG: going… going… Gone Global. Global Equity Research.Engle, Robert F. and Clive W.J. Granger (1987): Cointegration and Error Correction: Repreentation, Estimation and Testing. Econometrica, Vol. 55, 251-276.European Commission (2001): Green Paper – Towards a European Strategy for the Security of Energy Supply. Luxembourg, Commission Document COM(2000)769final.Hartley, Peter R., and Dagobert L. Brito (2001): New Energy Technologies in the Natural Gas Sectors. Houston, Texas, The James A. Baker III Institute for Public Policy.Hendry, D. and K. Juselius (1999): Explaining Cointegation Analysis: Part II. Oxford, Nuffield College, Lecture Notes.Hotelling, H. (1933): Analysis of a complex of statistical variables into principal components. Journal of Educational Psychology, Vol. 24, 417-441, 498-520.International Energy Agency (several issues): Energy Prices and Taxes. Quarterly Statistics. Paris, OECD.International Energy Agency (2004): World Energy Outlook. Paris, OECD.Johansen, S. (1988): Statistical Analyis of Cointegration Vectors. Journal of Economic Dynamics and Control, Vol. 12, 231-254.King, Martin and Milan Cuc (1996): Price Convergence in North American Natural Gas Spot Markets. The Energy Journal, Vol. 17, No.2, 17-42.Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y., (1992), Testing the Null Hypothesis of Stationarity Against theAlternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?, Journal of Econometrics, 54, 159–178. Serletis, Apostoles (1997): Is there an East-West Split in North American Natural Gas Markets? The Energy Journal Vol. 1, 47-62.Serletis, Apostoles and J. Herbert (1999): The Message in North American Energy Prices. Energy Economics Vol. 21, 471-483.Serletis, Apostoles, and Ricardo Rangle-Ruiz (2004): Testing for Common Features in North American Energy Markets. Energy Economics, Vol. 26, 401-414.Siliverstovs, Boriss, Anne Neumann, Guillaume L’Hegaret, and Christian von Hirschhausen (2004): International Market Integration for Natural Gas? A Cointegration Analysis of Gas Prices in Europe, North America and Japan. MIT CEEPR Discussion Paper 04-002 (January 2004).
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BACK UP
33
Monthly Data (125 obs.)Summary Statistics (1993-11 to 2004-03)
4.66 2.48
1.40 0.62
8.49 2.14
1.42 0.35
1.51 0.43
3.08 1.03
Henry Hub Level Log
2.09 2.08
0.35 0.03
4.10 1.41
1.80 0.59
0.60 0.21
2.84 1.02
LNG Europe Level Log
3.93 2.84
1.29 0.80
6.41 1.86
1.77 0.57
0.98 0.28
3.09 1.09
LNG USA Level Log
6.03 2.76
1.69 0.78
9.45 2.25
1.34 0.29
1.49 0.44
2.84 0.94
Pipe USA Level Log
1.70 1.82
0.06 -0.14
5.12 1.63
2.74 1.01
0.69 0.18
2.84 1.35
LNG Japan Level Log
2.67 2.66
0.52 0.02
4.37 1.47
1.68 0.52
0.63 0.22
2.85 1.02
Pipe Europe Level Log
2.15 2.29
0.33 -0.15
6.02 1.79
1.79 0.59
1.05 0.29
3.76 1.29
Brent Level Log
Kurt.Skew.MaxMinStd. Dev.MeanVariable
34
Results PCA (using covariance matrix)First factorial plane
-0,60
-0,40
-0,20
0,00
0,20
0,40
0,60
0,80
-1,00 -0,80 -0,60 -0,40 -0,20 0,00
First principal component
Second principalcomponent
Brent
Pipe Europe
LNG Europe
LNG Japan
LNG US
Pipe US
Henry Hub
35
Unit Root TestsAll variables are I(1)
0.05-10.65***-6.19***1.01***-1.52-1.33Pipe USA
0.13-10.64***-4.24***0.63**-0.89-1.23Pipe Europe
0.05-14.97***-6.04***1.02**-2.05-1.21LNG USA
-5.49***
-3.01***
-3.76***
-5.80***
ADF
-1.43
-2.06
-1.70
-1.49
ADF
0.05-9.46***0.90***-1.90Henry Hub
0.07-9.20***0.75***-1.28LNG Japan
0.07-11.27***0.75***-1.26LNG Europe
0.07-10.53***0.64**-1.58Brent
KPSSPP KPSSPP
First Difference of Log LevelsLog LevelsMarket
Tests for prices in level use a constant but not a time trend. Tests for first differences areperformed with neither intercept nor linear trend. One / two / three asterisks indicatesignificance at the 10% / 5% / 1 % level, respectively.
36
Bivariate Johansen Test ResultsSupport for the “regional divide”
Ho: r=01
β2
LOP3
LOP*4
LNG Japan
BrentLNG Europe
Pipe USAHenry Hub
45.33*** 1,-1.03 (0.04) 0.5714.56***
Pipe USA
Pipe Europe
LNG Japan
Brent
LNG Europe
15.78
14.27
13.76
17.79
21.11** 1,-1.45 (0.17) 6.12** none
24.11*** 1,-0.84 (0.08) 2.32 13.84***
26.50*** 1,-1.11 (0.15) 0.480.72
7.49
62.84*** 1,-0.66 (0.02) 45.75*** none
54.97*** 1,-1.15 (0.59) 6.53** none
12.72
43.82*** 1,-1.31 (0.06) 17.69*** none
13.29
13.22
1 Trace test statistics of the null hypothesis of no cointegration2 Unrestricted estimate of cointegrating vector β normalizedat the row variable (standard error)3 Likelihood ratio test statistic of LOP β=(1,-1)‘4 Likelihood ratio test statistic of null hypothesis thatcointegrating vector β=(1,-1)‘ has zero mean
37
NBP – Zeebrugge: Deduced Price Differential
-8
-4
0
4
8
1 2
1 6
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4
Eur/Mwh