IDEAS home Printed from https://ideas.repec.org/p/cam/camdae/1542.html
   My bibliography  Save this paper

Markets and long-term contracts: The case of Russian gas supplies to Europe

Author

Listed:
  • Chi-Kong Chyong

Abstract

Abstract Different hydrocarbon producer sales strategies have widely divergent implications for the value of Gazprom’s gas exports to Europe. In particular, hydrocarbon producers have commonly pursued two alternative sales strategies: (i) pure commodity production (border sales) and (ii) integrated supply, trading and marketing (ISTM). The impact of these two strategies on Gazprom’s export profits are examined under three sets of scenarios: (a) the possible entry of low-cost producers, (b) oil price dynamics and (c) the future of LTCs (pricing and volume structure). We also analysed how Statoil shifted its sales strategy in light of structural changes in European gas markets and conclude that the company began employing an ISTM strategy when the market in North-west Europe became liquid. Thus, when a market is mature, with an increasing number of buyers, the best sales strategy for a large hydrocarbon producer should be based on flexibility and increasing its use of market trading to maximise the value of its commodity. We conclude that an optimal export strategy for Gazprom should involve both a substantial and increasing portion of uncommitted volumes that can be traded in markets (gas hubs) and, if needed, some form of bilateral forward contract with a minimum take-or-pay level to secure infrastructure finance.

Suggested Citation

  • Chi-Kong Chyong, 2015. "Markets and long-term contracts: The case of Russian gas supplies to Europe," Cambridge Working Papers in Economics 1542, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1542
    Note: kc335
    as

    Download full text from publisher

    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1542.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Christian Growitsch & Harald Hecking & Timo Panke, 2014. "Supply Disruptions and Regional Price Effects in a Spatial Oligopoly—An Application to the Global Gas Market," Review of International Economics, Wiley Blackwell, vol. 22(5), pages 944-975, November.
    2. Goldberg, Victor P & Erickson, John R, 1987. "Quantity and Price Adjustment in Long-term Contracts: A Case Study of Petroleum Coke," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 369-398, October.
    3. Peter R. Hartley, 2015. "The Future of Long-term LNG Contracts," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    4. Holz, Franziska & von Hirschhausen, Christian & Kemfert, Claudia, 2008. "A strategic model of European gas supply (GASMOD)," Energy Economics, Elsevier, vol. 30(3), pages 766-788, May.
    5. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    6. Joskow, Paul L, 1985. "Vertical Integration and Long-term Contracts: The Case of Coal-burning Electric Generating Plants," Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(1), pages 33-80, Spring.
    7. Mulherin, J Harold, 1986. "Complexity in Long-term Contracts: An Analysis of Natural Gas Contractual Provisions," Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 105-117, Spring.
    8. Greaker, Mads & Lund Sagen, Eirik, 2008. "Explaining experience curves for new energy technologies: A case study of liquefied natural gas," Energy Economics, Elsevier, vol. 30(6), pages 2899-2911, November.
    9. Chyong, Chi Kong & Hobbs, Benjamin F., 2014. "Strategic Eurasian natural gas market model for energy security and policy analysis: Formulation and application to South Stream," Energy Economics, Elsevier, vol. 44(C), pages 198-211.
    10. Dagobert L. Brito & Peter R. Hartley, 2007. "Expectations and the Evolving World Gas Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-24.
    11. Gijsbert Zwart & Machiel Mulder, 2006. "NATGAS: a model of the European natural gas market," CPB Memorandum 144, CPB Netherlands Bureau for Economic Policy Analysis.
    12. Ibrahim Abada & Steven Gabriel & Vincent Briat & Olivier Massol, 2013. "A Generalized Nash–Cournot Model for the Northwestern European Natural Gas Markets with a Fuel Substitution Demand Function: The GaMMES Model," Networks and Spatial Economics, Springer, vol. 13(1), pages 1-42, March.
    13. Lise, Wietze & Hobbs, Benjamin F., 2008. "Future evolution of the liberalised European gas market: Simulation results with a dynamic model," Energy, Elsevier, vol. 33(7), pages 989-1004.
    14. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-123, May.
    15. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    16. Doane, Michael J & Spulber, Daniel F, 1994. "Open Access and the Evolution of the U.S. Spot Market for Natural Gas," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 477-517, October.
    17. SMEERS, Yves, 2008. "Gas models and three difficult objectives," CORE Discussion Papers 2008009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    18. Anne Neumann & Sophia Rüster & Christian von Hirschhausen, 2015. "Long-Term Contracts in the Natural Gas Industry: Literature Survey and Data on 426 Contracts (1965-2014)," Data Documentation 77, DIW Berlin, German Institute for Economic Research.
    19. Keith J. Crocker & Scott E. Masten, 1988. "Mitigating Contractual Hazards: Unilateral Options and Contract Length," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 327-343, Autumn.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Long-term contracts; vertical integration; market trading; gas; Gazprom; Statoil; gas pricing; equilibrium energy modelling;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • P28 - Economic Systems - - Socialist Systems and Transition Economies - - - Natural Resources; Environment
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cam:camdae:1542. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jake Dyer). General contact details of provider: http://www.econ.cam.ac.uk/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.