Lec. 11: Gas markets Flashcards
Describe the fossil gas value chain.
Fossil gas value chain
- Exploration and depletion
2a. International transmission pipeline
2b. Liquefaction + LNG shipping + Regasification
2c. FLNG (Floating Liquefied Natural Gas) + LNG shipping + Regasification
- FNLG extract, process and liquefy natural gas directly at offshore fields
- Storages
- National transmission and distribution
- Consume: power generation, industrial, commercial, residential, petrochemical feedstock etc.
True or false?
Fossil gas as a bridge?
There is a substantial debate about the role of fossil gas in the Energy Transition.
- Can we avoid fossil gas being used for geopolitical purposes by producers?
- Can we use fossil gas as a bridge from coal to a future fossil-free system? (It should have lower emissions than coal and gas plants can run flexibly to balance VRE; but can we avoid fossil gas and move straight to storage and flexibility?)
- Does methane leakage in production and distribution outweigh the climate benefits? (Methane is a potent greenhouse gas, and substantial leakage can make it as bad as coal, but leakage can also be detected and regulated.)
- Can we retrofit fossil gas infrastructure for hydrogen?
- How do we replace feedstock uses of fossil gas?
True!
True or false?
Gas crisis 2021-2023
The reason is of course reduced supply from Russia as well as additional factors (demand bounceback after pandemic, maintenance, shutdown of Groningen field, etc.).
True!
What is missing?
Gaseous fuels introduction
- Fossil gas, also known as natural gas (to distinguish it from coal-derived gas), consists primarily of “…”.
–> “…” - high-calorific natural gas (∼ 87 − 99% CH4 content → “…”)
–> “…” - low-calorific natural gas (∼ 80 − 87% CH4 content, rest nitrogen and carbon dioxide, used to be produced in North Germany & Netherlands, phased out) - “…” - mainly propane and butane, byproduct of oil refinery process
- “…” - byproduct of coke plants (mix of CH4, H2, CO, CO2, N2)
- “…” - used as chemical feedstock, could be used in transport / iron reduction / heating / backup for electricity, could also be produced without CO2 emissions
“methane (CH4)”
“H gas”; “higher heat value”
“L gas”;
“Liquefied petroleum gas (LPG) (Autogas in DE)”
“Town/coal/coking gas”
“Hydrogen”
What is the difference between conventional and unconventional natural gas?
Conventional natural gas
- Extracted from gas reservoirs using traditional drilling (vertical wells).
- Includes associated gas, which is released during oil extraction (can be flared or utilized).
Unconventional natural gas
- Requires special techniques to extract
- Shale Gas – Found >1000m deep, extracted via fracking.
- Coal Bed Methane – Trapped in coal seams (300–1000m deep).
- Methane Hydrates – Frozen gas deposits on the ocean seabed.
Physics of Gas Pipelines
How do you calculate the throughput Q?
Q = root((P_1^2 - P_2^2)/(l / d^2))
- Throughput: Q
- Pressure start point: P_1
- Pressure end point: P_2
- Length of pipeline section: l
- Diameter: d
(More complicated formulae can account for height differences and pipe roughness.)
What is missing?
- Pipeline capacity is the “…”.
- Pipeline pressures can be up to 80 bar, with a diameter of up to 1400 mm (e.g. OPAL pipeline) and covering a distance of up to 6000 km.
- “…” along the pipeline compensate for pressure losses (0.1 bar per 10 km) due to frictional losses/changing elevation and are placed at intervals of 80-400 km.
–> “…” use energy from natural gas, consuming around 10% of gas over 5000 km. - Single 80 bar pipeline can transport up to 3 mcm/h (or 26 bcm/a) at speeds up to 40 km/h.
“maximum thoughput”
“Compressor stations”
“Compressors”
Describe the main characteristics of the economics of gas pipelines
Economics of Gas Pipelines
- Long-distance gas transport is not necessarily a natural monopoly - can have pipe-to-pipe competition (i.e. parallel pipes) or pipe-in-pipe competition (where companies co-own pipeline).
- Have strong economies of scale (when doubling capacity, costs rise only 66%).
- Hold-Up Problem: After realizing a pipeline project, the investor finds themself in a strategically weak position based on the irreversible nature of the investment (sunk cost). The pipeline operator’s profit depends on the goodwill of the contract partner located at the end (beginning) of the pipeline.
Describe double monopoly problem and double marginalisation using the example from the lecture.
Double monopoly problem
- Double monopoly
–> Non-cooperative game: monopolistic gas producer/pipeline operator + monopolistic gas importer do not cooperate - Given
–> Inverse demand function p_retail(Q) = a - b * Q - Player 1: Monopolistic gas producer/pipeline operator
–> Knows inverse demand function p_retail(Q)
–> Known optimal Q* the importer will choose
–> Profit maximization
max_p_imp PI_prod+trans (p_imp)
= p_imp * Q* - c(K) * Q*
- Player 2: Monopolistic gas importer
–> Knows inverse demand function p_retail(Q)
–> Sees p_imp as given price
–> Profit maximization
max_Q PI_import (Q) = p_retail * Q - p_imp * Q
(Insert inverse demand function p_retail(Q), than solve)
- Both players do not cooperate
–> Double monopoly
–> Double marginalisation - Starting point solution
–> Solve profit maximization of importer - Solution
–> Nash equilibrium: No player can gain additional benefits by deviating from equilibrium
–> Double marginalisation: social welfare lower compared to single monopoly (cooperative game)
–> Infrastructure investments K_non_coop < K_coop
Describe single monopoly problem using the example from the lecture.
Single monopoly problem
- Single monopoly
–> Cooperative game: monopolistic gas producer/pipeline operator + monopolistic gas importer cooperate and become a single vertically integrated single monopoly - Given
–> Inverse demand function p_retail(Q) = a - b * Q - Single monopoly
–> Profit maximization problem
max Q PI_coop(Q) = (p_retail - c(K))*Q
(Insert inverse demand function p_retail(Q), than solve)
Compare perfect competition, single monopoly and double monopoly with each other and visualize the social welfare in each case.
What does double marginalisation mean?
Compare slide 29
- Double marginalisation
–> Social welfare lower compared to single monopoly case (cooperative game)
True or false?
History of Liquified Natural Gas (LNG)
LNG really took off since 2000 due to remarkable cost reductions (larger and larger tankers).
LNG imports to Europe from the Middle East, North Africa and Asia are rising fast.
True!
True or false?
For transportation distances larger than approximately 1800 km LNG ships are cheaper than offshore pipelines.
For transportation distances larger than approximately 2200 km LNG ships are cheaper than onshore pipelines.
True!
True or false?
Liquified natural gas has a ∼600 times smaller volume compared to its gaseous state.
True!
What is the impact of LNG on the global gas markets?
Impact of LNG on the global gas markets
- LNG trade leads to integration of regional gas markets
- LNG supply chain is more flexible
- LNG helps to develop more remote gas fields
- Diversification helps mitigate the holdup problem
–> Holdup problem: After realizing a pipeline project, the investor finds themself in a strategically weak position based on the irreversible nature of the investment (sunk cost). The pipeline operator’s profit depends on the goodwill of the contract partner located at the end (beginning) of the pipeline.
Name and explain two types of underground gas storages.
Underground gas storages
Porous rock storage
- Uses existing geological underground formations (e.g. depleted oil and gas fields, aquifers)
- Relatively inexpensive (but higher investment costs for aquifers)
- Large storage volume, but more cushion gas required
- Low injection and withdrawal rate
Cavern storage
- Artificial hollows carved out in underground rock or salt formations
- Higher investment
- Less cushion gas required
- Higher withdrawal rate; fast switching between injection and withdrawal mode
- Provide short-term flexibility
Name and explain two types of aboveground gas storages.
LNG storage
- Insulated tanks at LNG terminals
- No cushion gas needed
- High injection/withdrawal rates
Gas tanks
- Low or high pressure
- Not economical for high volumes
- Local storage
Line pack
- Gas stored inside pipeline through increased pressure
- Used to balance daily demand fluctuations
True or false?
Value of gas storage
- Storage buffers supply and (daily & seasonally fluctuating) demand
- Value of storage is determined by the cost of alternative sources of flexibility (transportation and capacity charges): production swings, take-or-pay, interruptible contracts, spot market
- System value from ability to inject a certain amount of gas in summer and withdraw it in winter
- Compensated by price during withdrawal minus price during injection, i.e. arbitrage with seasonal spread (difference in seasonal price)
- Ability to utilise the storage volume more than once (inject and withdraw gas) during the season to profit from short-term price volatility
True!
What is missing?
Take-or-Pay-Clause in Long Term Contracts
- A long-term contract (LTC) must specify both volume and price. Both are associated with “…”.
- For a take-or-pay contract, the volume risk is taken by “..”. “…”.
- The price risk is taken by the “…”, who “…” according to the heating oil price (common up to 2010s) or to spot market prices (more common today).
“risks”
“the importer” ; “If they use less than the contracted minimum take, they have to pay for it anyway”
“exporter” ; “may index the price”
Explain the gas network access models.
Gas network access models
Point-to-point system (used in Germany until 2006)
- Gas traders book specific transportation route from an entry to an exit point
- Entry and exit fees are distance-based
- Entry and exit capacities cannot be separated from each other and from the gas (commodity) transaction
- Somewhat in-transparent, high costs
Entry-exit system (used in Germany since 2006)
- Gas traders do not book specific transportation route from an entry to an exit point
–> No need to specify transportation path or distance
–> Each exit point can be supplied from any entry point - Entry and exit fees are not distance-related fee and are set independently from each other
- Entry and exit capacities are be separated from each other and from the gas (commodity)
- Enables wholegas gas trading on virtual trading point (virtual hub)
–> Separation of physical and commercial flows - All network operators in a network zone cooperate and set tariffs on a cost-reflective basis.
True or false?
- Cost of the Kernnetz is estimate to be €19.8 billion, length around 9,700 km, of which 60% is repurposed gas pipelines.
- Network operators get 6.69% guaranteed return on equity.
- Since it is unclear how much supply or demand there will be, the network charges could be very high at the beginning (high costs divided by small demand), so the network charges will be capped (level is not clear).
- Money needed above the network charges will be paid out of a separate government-run account.
- If there is money left in the account in 2055, government will cover 76%, network operators 24%.
True!
