The emergence of markets in the natural gas industry

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.Environmental Economics&Policies,Water and Industry,Economic Theory&Research,Markets and Market Access,Oil&Gas,Water and Industry,Oil Refining&Gas Industry,Markets and Market Access,Access to Markets,Oil&Gas