Foundations of Natural Gas Price Formation: Misunderstandings Jeopardizing the Future of the Industry

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Natural gas pricing should be as critically important to the general public as it is to industry specialists. Pricing is the basis of balancing the interests of European and Asian consumers of power and electricity with those of the limited number of potential suppliers of natural gas. Given that natural gas is a foundational transition fuel source that will not be supplanted by renewals for many, many years, the consequences of market failure from incorrect pricing mechanisms could result in the industry missing the new investment cycle. In addressing the critical balancing role of natural gas pricing, Foundations of Natural Gas Price Formation presents an in-depth analysis of the fundamentals of natural gas price formation and outlines the distinctive characteristics of natural gas that make it a unique commodity by examining the specific factors underpinning gas pricing that result in a hybrid pricing system special to natural gas. The book argues that the patrons of spot pricing through gas hubs are promoting an incorrect understanding of gas markets that will lead to market failure and to potential critical supply shortages in the near future. Foundations of Natural Gas Price Formation defends the system of oil-indexed pricing as an accurate, market-based mechanism that has stood the test of time.

Reviews

Starting from the long-term contracts that have been the basis of the natural gas industry since its foundation, but which are now out of favor in Europe, the author delves deeply into the complex interactions of factors in price formation that are often ignored in the rush to move away from long-term contracts and exposes the risks in moving too far in this direction. A must-read point of view of gas exporters to better understand the place gas can play in our energy transition. Dr. Thierry Bros, Professor, Sciences Po, Paris, France.

The author does an excellent job explaining the validity and role of oil-linked prices in regional markets and their advantage in reducing price volatility and in supporting investment in a sustainable supply chain for natural gas. Dr. Rouben Indjikiyan, Professor of Energy Economics, Webster University, Geneva

Sergei Komlev has written the definitive book on the past, present, and future of the natural gas industry in Europe and Eurasia. For more than forty years a collection of market practices served the industry well: long-term contracts, oil indexation, and take-or-pay clauses. These practices balanced well the interests of both producers and consumers. Yet in recent years almost all these practices have been abandoned and unwound. Will we regret the emergence of a new set of arrangements that fail to balance interests in productive ways What comes next Komlev provides an essential guide to the implications of such profound transformations in the natural gas industry. Rawi E. Abdelal, Herbert F. Johnson Professor of International Management, Harvard Business School, USA

The author provides a fresh look at the underlying basis for the long-term contracts and oil-indexation that have been the cornerstone of the natural gas universe. He pays special attention to factors in natural gas pricing that have been ignored or minimized, leading to an incomplete understanding of gas pricing that is missing highly important details. Ali Hached, Senior Adviser to the CEO of Sonatrach, Algerian National Oil Company. Former Executive Vice President of Sonatrach, in charge of Hydrocarbons Marketing (1994-2006) and Member of the Executive Committee and the Board (1987-2006)

This book presents a unique set of views and concepts with original and unorthodox conclusions, sometimes provocative, that will broaden the readers understanding both of the known unknowns and unknown knowns in natural gas contracting and pricing. A must-read for serious young professionals in the international gas and energy industry.Andrei Konoplyanik, Professor and former Deputy Secretary General, Energy Charter Secretariat, Brussels, Belgium.

Author Bio

Sergei Komlev, head of Contract Structuring and Price Formation Directorate at Gazprom Export, is a well-recognized name in the European natural gas industry and a frequent participant in international gas conferences.

Daniel Satinsky, attorney, author and independent scholar, has collaborated with Sergei Komlev for more than 25 years in presenting his ideas to English-speaking audiences.