Analysis of the operation and contract management in downstream natural gas markets

Abstract

During the last years, natural gas has been acquiring importance in the world energy mix. As the cleanest fossil fuel, it is a good alternative to tackle with the climate change without realizing huge investments. Moreover, recent developments in shale gas extraction technology have greatly reduced gas prices boosting the gasification process. Traditionally, gas business activities have been classified in the upstream and downstream segments. The latter segment groups those activities mainly related to the production, while the transportation and consumption are included in the former segment. In this thesis, we have provided a comprehensive view of the downstream gas system and, in particular, of entry-exit systems, which are currently being implemented in Europe. First, we have focused on analyzing the behavior of a key player, which is involved in almost every business activity: the shipper, which simultaneously acts as a purchaser, a supplier and a third party in the context of liberalized gas markets. Moreover, the shipper also interacts with other shippers. All these business relations determine the market results. In order to capture the market performance properly, we have proposed a fundamental model and, in particular, a mixed-integer programming (MIP) model, in which we have characterized the shippers¿ behavior when they must contract for capacity to utilize the gas facilities and when they participate in secondary capacity markets and OTC balancing markets. Second, we have examined the influence of gas supply contracts, which are agreed on between producers and shippers, on market prices. After describing the fundamentals of the supply contracts, the model has been extended with the aim of optimizing their management. As we are considering open gas markets within a globalizing market, international trade has also been included and, particularly, overseas trade which basically happens thanks to the development of LNG technology. Furthermore, we have proposed an approach, which reduces drastically the execution time, from several hours to half hour, by taking advantage of the gas market characteristics. Third, we have applied the previously developed model to a real system, the Iberian gas system, in order to examine the market performance after the incorporation of a virtual hub; i.e., of an organized market into an entry-exit system framework. We have evaluated, by using the proposed indicators of the European Gas Target Model which seeks the constitution of the internal gas market, different alternatives: from not establishing a hub, that is, the current situation, to establishing a single virtual hub. Moreover, we have analyzed the shippers¿ behavior by exploring other specific market results, such as prices, market shares, or profits. Finally, the single virtual hub has allowed us to obtain a price-supply curve of a real system. After this thorough analysis of the downstream gas system, we have shed light on a topic that is nowadays not only of interest, but also of concern to regulatory authorities: the integration between the gas and electric power systems. Recently, natural gas has been acquiring importance as input fuel for electricity generation due to the development of the combined-cycle gas turbine technology which has proven to be a flexible technology to support the integration of intermittent and uncertain renewable energy sources. As a matter of fact, we have examined the required coordination between long-term decisions, which usually occur in the gas system because capacity has to be contracted well in advance, and short-term decisions, which mainly take place in electric power systems as a consequence of renewable power generation uncertainty.