Read Aloud the Text Content

This audio was created by Woord's Text to Speech service by content creators from all around the world.

Text Content or SSML code:

The final market for the gas may be domestic, which is likely to have prices regulated by the government, or abroad. Fiscal policies and terms need to address all of these possibilities as the gas industry in any country may encompass the whole spectrum of gas utilisation projects and ownership combinations. The owners of each link in the chain incur significant costs and expect to recover these costs, plus a share of the economic rent generated. Economic rent is defined as the product sale price less the costs of production, transportation and distribution, including a minimum return on capital employed, over the full cycle (i.e. lifetime) of a project. Each link also has to balance the inherent risks involved with the potential rewards. While the ultimate price may fluctuate, affecting all links of the chain, upstream producers encounter the most risks, including geological (exploration), reservoir and technology risks and will usually seek a proportionally higher share of the rewards as a result. Depending on their attitude to market risks, the owners of any of the links in the chain may try and either protect or expose their operation to prevailing Figure 6.4 Natural gas value chain. Note Number of links in each chain depends on the project (e.g. gas may be sold directly to consumer after processing). Natural gas 167 market prices. Risk-averse owners may charge a fixed fee (e.g. feedgas price, pipeline or plant processing tariff ) while risk takers will seek as much of the final price as possible. Normally, the more risk-averse owners will accept a lower share of the overall economic rent generated in exchange for ‘downside’ protection. Where the owners of each link are different, pricing agreements between links should be transparent and ‘arm’s length’, although the complex, global relationships between buyers and sellers has raised the question of whether any transaction is truly ‘arm’s length’; this issue is discussed elsewhere in this volume. Where the owners of different links are the same and there is clearly no arm’s length sale, then transfer and reference prices need to be established for fiscal purposes. These should reflect the different risks being assumed by the different links and prevailing market conditions. The alternative is to create a unique fiscal regime for the entire ‘integrated’ project. In countries where gas industry infrastructure is not well developed and/or the gas project is particularly large, gas producers will often seek to have an economic interest in the full chain and participate in the ownership of the pipelines, processing facilities and transportation. They may even seek to buy the gas themselves for re-sale in another country. The main driver for this is normally control of the entire project, but it can also be driven by a desire to ensure that the company participates in any link of the chain which is generating the most economic rent. Most integrated projects are LNG export schemes but integrated domestic projects also exist, notably independent power projects (IPP), where gas producers own and operate the power generation plant and sell electricity into the local market. If the ownership of links in the chain is different, it is regarded as ‘segmented’. The upstream links tend to include production and transport of the gas to the processing plant. Variations include producers which sell the gas at the wellhead and gas fields which include gas processing in the production facilities. Midstream links tend to include the initial and secondary processing and transportation to the end user. Gas producers will sell their production either to a pipeline owner or processing plant, which then sells on to the next link, until reaching the end user. (See Figure 6.5 for examples of segmented and integrated LNG projects.) In a segmented chain, negotiated agreements will usually dictate the market price and level of economic rent achieved in each link. North America, the UK and a small number of emerging markets in other consuming countries have established ‘spot’ markets where significant volumes are openly bought and sold and prices fluctuate on a daily basis. Elsewhere, natural gas is commonly sold under long-term contracts, with producers and midstream suppliers committing to supply certain volumes to buyers over a 20–year period for a price which will often be indexed to movements in competing energy products, such as fuel oil or coal. Most sales contracts will include clauses designed to protect both the buyer (from upstream risks) and the seller (from market risks). Producers will commit to supplying a base volume in any period, often with a ‘swing’ factor, enabling the buyer to take significantly more in periods of high demand. In return, the