North American Natural Gas Market Research Articles

North American Natural Gas Markets Under LNG Demand Growth and Infrastructure Restrictions

Strong liquefied natural gas (LNG) demand growth, especially in Asia, could increasingly motivate gas infrastructure development in North America. Nevertheless, opposition to new gas infrastructure is formidable in some of the U.S. states and Canadian provinces that are well positioned to supply LNG to the Asian market. In this paper, we investigate the combined effects of LNG demand growth and export infrastructure restrictions on North American natural gas markets through 2050. To do so, we build a mixed complementarity model with endogenous capacity investments. It is parameterized using publicly available data sources. Our results show that even if new export terminals cannot be constructed on the West Coast, LNG exports largely shift to other regions rather than suffer an overall decline. Increasing external demand for LNG puts upward pressure on regional prices in North America, and directs production and pipeline flows toward the regions that export LNG.

Incorporating learning-by-doing into mixed complementarity equilibrium models

Market equilibrium models are often specified and solved as mixed complementarity problems (MCPs). These formulations combine the Karush–Kuhn–Tucker (KKT) optimality conditions of the optimization problems faced by multiple strategic players with market-clearing conditions, such that the solution to this system provides the Nash equilibrium prices and quantities. MCPs are widely applied to energy markets including those for electricity, oil, and natural gas. While researchers have made substantial progress on expanding the model features included in MCPs and on solving these problems, a limitation of existing MCPs is that they treat costs as exogenous input parameters. Therefore, MCPs have not been able to capture learning-by-doing (LBD), the empirically observed phenomenon whereby production costs tend to decline as a function of cumulative production experience. In this paper, we demonstrate the incorporation of LBD into a mixed complementarity equilibrium model. We consider two closely related, but nevertheless distinct, LBD formulations: one with discrete changes in cost from period to period, and another where cost declines continuously. Through theoretical analysis and numerical exploration, we establish the conditions under which these LBD formulations lead to convex optimization problems. Confirming convexity is important because it guarantees that their KKT conditions are sufficient for optimality. Then, we demonstrate the practical application of a mixed complementarity equilibrium model with LBD using the North American natural gas market as an example. When LBD is incorporated into the cost of liquefaction, North America exports more liquefied natural gas, which raises prices and reduces domestic consumption.

Incorporating Learning-by-Doing into Mixed Complementarity Equilibrium Models

Market equilibrium models are often specified and solved as mixed complementarity problems (MCPs). These formulations combine the Karush-Kuhn-Tucker (KKT) optimality conditions of the optimization problems faced by multiple strategic players with market-clearing conditions, such that the solution to this system provides the Nash equilibrium prices and quantities. MCPs are widely applied to energy markets including those for electricity, oil, and natural gas. While researchers have made substantial progress on expanding the model features included in MCPs and on solving these problems, a limitation of existing MCPs is that they treat costs as exogenous input parameters. Therefore, MCPs have not been able to capture learning-by-doing (LBD), the empirically observed phenomenon whereby production costs tend to decline as a function of cumulative production experience. In this paper, we demonstrate the incorporation of LBD into a mixed complementarity equilibrium model. We consider two closely related, but nevertheless distinct, LBD formulations: one with discrete changes in cost from period to period, and another where cost declines continuously. Through theoretical analysis and numerical exploration, we establish the conditions under which these LBD formulations lead to convex optimization problems. Confirming convexity is important because it guarantees that their KKT conditions are sufficient for optimality. Then, we demonstrate the practical application of a mixed complementarity equilibrium model with LBD using the North American natural gas market as an example. When LBD is incorporated into the cost of liquefaction, North America exports more liquefied natural gas, which raises prices and reduces domestic consumption.

North American natural gas market and infrastructure developments under different mechanisms of renewable policy coordination

Renewable Portfolio Standards (RPS) accelerate renewables deployment but their impact on fuel-fired plants remains ambiguous. North American natural gas consumption has been growing due to its decreasing cost in North America, policy initiatives, and its relatively low CO2 emissions rate compared to coal. In this paper, we study the implications for the natural gas sector of more stringent RPS under different coordination schemes in an integrated North American natural gas market. The scenarios assume that Renewable Energy Certificates generated in each region are traded 1) among all countries, 2) only within each country, and 3) only within model regions. We implement the three policies in four different energy and electricity models to generate projections of future natural gas consumption. Subsequently, we feed regional or country-level consumption changes of each model in each scenario to the North American Natural Gas Model. We find that lower RPS coordination among regions results in increased U.S. natural gas exports to Canada, increased U.S. natural gas prices, and decreased net U.S. natural gas exports to Mexico in the long term. Moreover, international coordination of RPS in the electricity sector leads to smaller price discrepancies in the U.S. natural gas market when compared to the reference scenario.

Visibility graph network analysis of natural gas price: The case of North American market

Abstract Fluctuations in prices of natural gas significantly affect global economy. Therefore, the research on the characteristics of natural gas price fluctuations, turning points and its influencing cycle on the subsequent price series is of great significance. Global natural gas trade concentrates on three regional markets: the North American market, the European market and the Asia-Pacific market, with North America having the most developed natural gas financial market. In addition, perfect legal supervision and coordinated regulations make the North American market more open and more competitive. This paper focuses on the North American natural gas market specifically. The Henry Hub natural gas spot price time series is converted to a visibility graph network which provides a new direction for macro analysis of time series, and several indicators are investigated: degree and degree distribution, the average shortest path length and community structure. The internal mechanisms underlying price fluctuations are explored through the indicators. The results show that the natural gas prices visibility graph network (NGP-VGN) is of small-world and scale-free properties simultaneously. After random rearrangement of original price time series, the degree distribution of network becomes exponential distribution, different from the original ones. This means that, the original price time series is of long-range negative correlation fractal characteristic. In addition, nodes with large degree correspond to significant geopolitical or economic events. Communities correspond to time cycles in visibility graph network. The cycles of time series and the impact scope of hubs can be found by community structure partition.

In Market Review, FERC Believes Prices Stay Down, Increasing Usage

Fundamental changes in the North American natural gas market substantially drove down US natural gas spot prices in 2015 (Exhibit 1). Production and storage reached record levels, while demand rose modestly, tempered by the El Niño warm weather during the 2015–16 winter. Natural gas demand increases came from the addition of new gas‐fired generation and increasing utilization rates at existing gas‐fired plants. Despite a warmer‐than‐average summer, nonwinter prices fell to their lowest levels in 20 years, which in turn led to lower wholesale electricity prices, as gas‐fired generation set the price in many power markets.

The behaviour mechanism analysis of regional natural gas prices: A multi-scale perspective

This paper analyses the behaviour mechanisms of natural gas prices in North American, Asian and European markets from a multi-scale perspective using the Ensemble Empirical Mode Decomposition and the cross-correlation method. The analytical framework directly measures contributions of the multi-scale components to natural gas price fluctuations and further investigates the dynamic relationships between influential factors (such as crude oil prices, weather and natural gas inventories) and each of multi-scale components of regional natural gas prices. The results show: (1) Emergency events and the short-term disequilibrium between market supply and demand have significant impacts on natural gas prices in North America, while in Japan and Europe, trend terms play a leading role in natural gas price fluctuations. (2) Unlike other markets, the North American natural gas market and the international crude oil market have significant interaction mechanisms. Temperature changes in the winter, rather than in the summer, can cause Henry Hub spot prices to fluctuate. (3) Oil prices play the leading role in affecting Asian and European natural gas prices, having advance effects of one to three months and one to six months, respectively.

North American Natural Gas Model Impact of Cross-Border Trade with Mexico

Natural gas as a source of energy has attracted a lot of interest as its emissions rate and price are lower than other fossil fuel energy sources. In the U.S., natural gas-fired power generation has been rising, as coal has declined as a share of the fuel mix. Likewise, Mexico recently launched its energy reform with focus on greatly expanding use of natural gas over other fossil fuels, primarily in the energy sector, by opening the market to private investors. These recent economic and policy changes, along with increasing gas production in the U.S. (shale gas boom) are likely to drive the natural gas market in North America in a new direction. For instance, the Annual Energy Outlook 2015 describes the U.S. for the first time as a net exporter of natural gas (via pipelines and LNG) by 2017. In order to study the current North American gas market with its new regulations like the Mexican energy reform, this paper presents the North American Natural Gas Market Model (NANGAM). We propose a long-term partial-equilibrium model of the United States, Mexican, and Canadian gas markets. NANGAM considers more granular details regarding market regions and pipelines in Mexico than other existing models, allows for endogenous infrastructure expansion, and is built in five year time-steps up to 2040, considering three seasons (low, high, and peak demand) for each time-step. NANGAM is calibrated using up-to-date data, which reflects current gas market trends, such as the increasing U.S. shale gas production. Using NANGAM, we assess the implications of the Mexican energy reform using a set of ad-hoc future scenarios. Results from the model show that, in the case of disappointing development of natural gas production in Mexico, the census region US7 (Texas and adjacent states) is the most affected, reaching an increase of natural gas production of up to 12% by 2040 compared to baseline projections.

06/00585 A large-scale linear complementarity model of the North American natural gas market: Gabriel, S. A. et al. Energy Economics, 2005, 27, (4), 639–665.

06/00585 A large-scale linear complementarity model of the North American natural gas market: Gabriel, S. A. et al. Energy Economics, 2005, 27, (4), 639–665.

A large-scale linear complementarity model of the North American natural gas market

The North American natural gas market has seen significant changes recently due to deregulation and restructuring. For example, third party marketers can contract for transportation and purchase of gas to sell to end-users. While the intent was a more competitive market, the potential for market power exists. We analyze this market using a linear complementarity equilibrium model including producers, storage and peak gas operators, third party marketers and four end-use sectors. The marketers are depicted as Nash–Cournot players determining supply to meet end-use consumption, all other players are in perfect competition. Results based on National Petroleum Council scenarios are presented.

Price Dispersion in a Model with Middlemen and Oligopolistic Market Makers: A Theory and an Application to the North American Natural Gas Market

We develop a microstructure model of a market for a homogeneous good in which trade amongst heterogeneous consumers and producers is intermediated by middlemen and oligopolistic market makers (gatekeepers). Market makers post bid and ask prices which are freely observable. Middlemen stand ready to trade at bid and ask prices they quote on a private basis to consumers or producers who identify these intermediaries via a costly search process. We model competition between market makers as a two-stage game: capacity setting in the first stage and bid and ask price setting in the second stage. We characterize the equilibrium market structure of intermediaries and the distribution of prices in equilibrium. Our main focus is the effect on prices that emerges following a change in the market structure of intermediation, specifically through the exit of a market maker. Exit of a market maker initially results in a shift of trade from market makers as a whole to middlemen resulting in an increase in price dispersion. Following transition to the new market structure with fewer market makers, price dispersion returns to its pre-exit level when total trade passing through the remaining market makers is roughly equal to the pre-exit level. We present an empirical study of price dispersion in the North American natural gas market for the period before and following the exit of Enron, a major market maker in late 2001. The empirical evidence supports the main propositions of our theory: price dispersion jumped 4-fold immediately following Enron's exit but returned to its pre-exit level within roughly 2 months following the exit date.

Measuring the influence of Canadian carbon stabilization programs on natural gas exports to the United States via a ‘bottom-up’ intertemporal spatial price equilibrium model

In this paper, we present the results of a study of the impact of Canadian carbon stabilization programs on exports of natural gas to the United States. This work was based on a study conducted for the US Environmental Protection Agency. The Gas Systems Analysis model (GSAM), developed by ICF Consulting for the US Department of Energy, was used to gauge the overall impact of the stabilization programs on the North American natural gas market. GSAM is an intertemporal, spatial price equilibrium (SPE) type model of the North American natural gas system. Salient features of this model include characterization of over 17 000 gas production reservoirs with explicit reservoir-level geologic and economic information used to build up the supply side of the market. On the demand side, four sectors — residential, commercial, industrial and electric power generation — are characterized in the model. Lastly, both above and below ground storage facilities as well as a comprehensive pipeline network are used with the supply and demand side characterizations to arrive at estimates of market equilibrium prices and quantities and flows.

Is There an East-West Split in North American Natural Gas Markets?

This paper presents evidence concerning shared stochastic trends in North American natural gas (spot) markets, using monthly data for the period that natural gas has been traded on organized exchanges (from June, 1990 to January, 1996). In doing so, it uses the Engle and Granger (1987) approach for estimating bivariate cointegrating relationships as well as Johansen's (1988) maximum likelihood approach for estimating cointegrating relationships in multivariate vector autoregressive models. The results indicate that the east-west split does not exist.

Evaluation of Forward Sales And Options Created Through Natural Gas Storage

Abstract As the North American natural gas market becomes further integrated, Canadian natural gas will increasingly be sold under contracts. with indexed, as opposed to fixed, prices. Analytical methods used in other commodity exchange markets will become useful in quantifying and managing price risk, but will require some adaptation to handle the specific transportation and marketing environment of natural gas. Seasonality of demand, and the related transportation constraints, along with the price and availability of gas storage services, will likely have some unique implications for an integrated continental market in natural gas. In such an environment, there may be occasional opportunities for producers and marketers to use gas storage and financial market instruments in price risk management or arbitrage. In this paper, we will examine expected returns from a natural gas storage/withdrawal. scheme and the implications of market volatility price of risk, the local cost of storage, and observations regarding the convenience yield (a difference between the current spot market price and futures market price for future periods). This work will include analysis of gas storage proposals of specific duration as well as evaluation of potential put options created when the storage duration is not fixed. Introduction Natural gas storage activity has historically been predominantly limited to large market players such as utility consumers, as a means of managing peak demand periods. However, the use of storage is becoming more common among gas producers, marketers, and consumers as facilities are being developed and utility storage services unbundled. Often the need for storage facilities is related to physical requirements driven by production and transportation constraints. However, there may be occasional opportunities to consider the use of storage in price arbitrage or as a means of managing price risk by creating physical forward sales and options. While natural gas spot prices continue to exhibit some seasonality and considerable volatility, there appear to be obvious incentives for gas sellers to consider procuring storage services. At the same time, as various continental trading hubs and price indices evolve, futures markets and various financial instruments will be used to reveal price and manage risk in the market place. It is conceivable that most gas in North America will eventually be traded in a similar manner as crude oil-with a continental index (or indices) such as NYMEX, linked to various delivery points and trading hubs throughout the continent (Morton, 1994). The purpose of this paper is to evaluate gas storage services as a means of creating physical forward sales and options and comparing this to paper instruments which might accomplish the same. This will involve determining the value for fixed-term and optional storage scenarios and to examine the parameters (price forecast, volatility, price of risk, storage cost) which affect futures prices and the related options. The first two cases evaluated herein will examine the value of gas storage for a known duration to take advantage of an anticipated seasonal and/or secular price increase, using financial instruments (futures and options) to lock in selling prices for the stored gas.

North American Natural Gas Markets: Summary of an Energy Modeling Forum Study

This paper summarizes the research by the Ninth Energy Modeling Forum (EMF) working group which focused on the evolution of the North American natural gas market through 2010 _ The group analyzed four standardized scenarios: upper and lower oil price paths, the low U.S. natural gas resource base, and high U.S. natural gas demand. The group sought to develop insights about the gas market’s development under these scenarios by using economic models and additional analyses. Some of the most critical factors highlighted in the study, that will affect the usage and price of gas in the future, are the nature of the gas-oil substitution in the industrial and utility boiler market, which will depend on relative burnertip residual fuel oil to gas prices, the incremental costs of finding and producing additional gas supplies in the U.S. and Canada, and the amount of potential gas imports.

Deregulation and North American Natural Gas Markets: Perspective of a US Pipeliner

A cliché that seems appropriate to any energy overview these days: ‘in times like these, it helps to remember that there have always been times like these’.