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The emergence of markets in the natural gas industry

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  • Juris, Andrej

Abstract

As countries have deregulated prices and lowered entry barriers in the natural gas industry, many new participants have emerged, promoting competition in the newly created markets. The increased competition has benefited everyone through more efficient pricing and greater choice among natural gas contracts. Four distinctstructural models have emerged in the industry's restructuring. The traditional model (a vertically integrated industry) has been increasingly replaced by models that decentralize the industry along horizontal and vertical lines. With increasing decentralization, regulation of the industry focuses on the pipeline transportation and distribution, the industry segments with natural monopoly characteristics. Regulation aims to protect both end users and participants in the deregulated segments from the market power of companies operating in the monopolistic segments. As a result of deregulation, two major markets emerge: the natural gas market (which facilitates the trading of natural gas as a commodity) and the transportation market (which enables market participants to trade the services needed to ship natural gas through pipelines). Competition and open entry are crucial for these two markets to function efficiently. The transportation market is affected by the market power of pipeline companies, but resale of transportation contracts brings competition to this market and facilitates the efficient allocation of contracts. Intermediaries and spot markets promote efficient pricing and minimize transaction costs. Markets have become more complex with deregulation, and trading mechanisms are needed to ensure the simultaneous clearing of natural gas and transportation markets at minimum cost to the industry. Two main trading models guide transactions: the bilateral trading model (which relies on decentralized bilateral negotiated between market participants) and the poolco model (which relies on a centralized entity to coordinate transactions). Properly applied, both models lead to the same outcome. The bilateral trading model has dominated because of its simplicity of implementation, but the poolco model has great potential once problems of sharing and processing information are addressed.

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  • Juris, Andrej, 1998. "The emergence of markets in the natural gas industry," Policy Research Working Paper Series 1895, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1895
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    References listed on IDEAS

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    1. Braeutigam, Ronald R., 1989. "Optimal policies for natural monopolies," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 23, pages 1289-1346, Elsevier.
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    Cited by:

    1. Constanza Fosco Perea Muñoz & Eduardo Saavedra, "undated". "Estructura de la Industria y Relaciones Patrimoniales del Gas Natural en Chile," ILADES-UAH Working Papers inv147, Universidad Alberto Hurtado/School of Economics and Business.
    2. Constanza Fosco Perea Muñoz & Eduardo Saavedra, "undated". "Mercados de Gas Natual: Análisis Comparado de la Experiencia Internacional," ILADES-UAH Working Papers inv150, Universidad Alberto Hurtado/School of Economics and Business.
    3. repec:idb:brikps:310 is not listed on IDEAS
    4. Mathias, Melissa Cristina & Szklo, Alexandre, 2007. "Lessons learned from Brazilian natural gas industry reform," Energy Policy, Elsevier, vol. 35(12), pages 6478-6490, December.
    5. Basañes, C. Federico & Artana, Daniel & Navajas, Fernando & Urbiztondo, Santiago & Saavedra, Eduardo & Soto, Raimundo & Benavides, Juan & Fainboim Yaker, Israel & Legisa, Juan A. & Ordover, Janusz A. , 2002. "Second-Generation Reforms in Infrastructure Services," IDB Publications (Books), Inter-American Development Bank, number 310, November.
    6. C. Federico Basañes & Daniel Artana & Fernando Navajas & Santiago Urbiztondo & Eduardo Saavedra & Raimundo Soto & Juan Benavides & Israel Fainboim Yaker & Juan A. Legisa & Janusz A. Ordover & Robert D, 2002. "Second-Generation Reforms in Infrastructure Services," IDB Publications (Books), Inter-American Development Bank, number 46178 edited by C. Federico Basañes & Robert D. Willig, February.
    7. Dempe, Stephan & Kalashnikov, Vyacheslav V. & Pérez-Valdés, Gerardo A. & Kalashnykova, Nataliya I., 2011. "Natural gas bilevel cash-out problem: Convergence of a penalty function method," European Journal of Operational Research, Elsevier, vol. 215(3), pages 532-538, December.
    8. Suleman, Shafic, 2020. "Natural Gas Industry Restructuring for Value Optimisation: A Case Study of Ghana," MPRA Paper 99155, University Library of Munich, Germany.
    9. Mangirdas Morkunas & Gintaras Cernius & Gintare Giriuniene, 2019. "Assessing Business Risks of Natural Gas Trading Companies: Evidence from GET Baltic," Energies, MDPI, vol. 12(14), pages 1-14, July.

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