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The author is a Senior Economist in the Middle Eastern Department of the IMF. He would like to thank, without implicating, Zubair Iqbal, Ulrich Bartsch and Blair Rourke, all of the IMF, and Shane Streiffel of the World Bank, for helpful comments on earlier drafts. Any surviving errors and omissions are his.
As a by-product, associated gas is usually gathered and processed (where the facilities exist) or re-injected to maintain reservoir pressure, or otherwise flared.
There are usually price revision clauses in the SPAs, but these tend to relate more to developments in the particular end-user (buyer) market than to global developments.
It is true, however, that gas reserves in North America and Europe (where the bulk of the fuel is consumed) is now on the decline, but this has more to do with the fact that exploration and development is yet to be carried to its full potential in some cases.
There are other smaller suppliers, including Libya and Nigeria.
Virtually all of the North American gas trade is through pipeline but, since 1998, a small trade in LNG has taken root (exports from the US to Mexico), mostly related to the increase in manufacturing facilities located on the Mexican side of the border (see Todaro, 2001, for a discussion of the United States gas trade).
India, South Korea, Taiwan and Singapore are also becoming important importers for gas.
See Petroleum Economist, May 2001.
The EU’s gas directive made it mandatory that at least 20 percent of each member country’s gas market be opened to competition, effective August 10, 2000 (see Petroleum Economist, May 2000). Access to the local pipeline network is a pre-requisite for this to function effectively.
Long-term contracts are seen to be capable of playing a comparable role, as long as contracts can be enforced.
Other sources, such as the US Energy Information Administration, put it higher, at over 3 percent.
There are other variants of this arrangement, including an agreement to dedicate all or most of the proceeds of the gas sales to repaying the debt through an escrow account.
The projects are expected to involve investments of about US$100 billion over a period of twenty years. The discussions on the fiscal regime are still in progress, but the outcome would, presumably, provide for an adequate profit margin for the IOCs through tariff liberalization or some compensatory arrangement.
The spot gas trade in North America is relatively more advanced and more liquid, owing to the larger number of participants and greater degree of market liberalization.
In principle, the user cost and rent could be collapsed into one item, simply referred to as economic rent, but we keep them separate because they represent different things.
At present, a lot of SPA negotiations tend to be opaque, with the terms of agreement often regarded as trade secrets by the parties.
See the special issue of the Energy Journal on the Kyoto Protocol (1999) edited by Weyant and Hill for a detailed discussion of the Protocol and related issues; and Mitchell (2000), for a more concise treatment of the key elements.
Long term variables, such as autonomous energy efficiency improvement, demographic trends, etc., are not included in the equations.
The outcome of the negotiations typically follows the two-party bargaining model with a non-unique outcome. The exact equilibrium depends on the relative bargaining strengths of the parties, including the ability to hold out and deploy bluffs and counter-bluffs. The fact that some of the key determining factors (see Box 1) are subjective in nature, and information about their state is usually incomplete, provides even more scope for such bargaining. For a concise exposition of the two-party bargaining model, see, for example, Layard and Walters (1978).
See Siddayao (1997) for a detailed discussion of cost considerations as applicable to natural gas pricing.
In general, price regulation could achieve the same effect of driving down the price in the direction of the supply cost although at a slower pace than that based on the market.
It is often the case that the upstream gas producer would also purchase a fleet of tankers as part of the overall project investment; however, there are instances where this function is left to a third party. This latter situation clearly requires that a contract be signed between the tanker company on the one hand, and either the gas producer or purchaser on the other.