Transcript The Standard Oil Trust - Bureau of Economic Geology

PMRE/BUET & UH IELE WORKSHOP
Overview of Energy Value Chains
Dhaka, Bangladesh. January 9-12, 2005
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
1
What is a “Value Chain?”
• The process of linking specific functions
from input through output to delivery,
enhancing the economic value of the final
product
• Concepts – “business system,” “industry
system,” “commodity,” “commoditization”
• The issue for energy – building value chains
around dynamic commodity markets that
require fixed infrastructure for liquidity
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
2
Generic Value Chain
“Overhead”
Source: Porter, 1985
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3
How Thinking Has Changed, I
Source: Porter, 1985
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
4
How
Thinking
Has
Changed, II
Source: McKinsey &
Company
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
5
Overhead?
Or Assets?
Source: McKinsey &
Company
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
6
Applications to Energy
•
•
•
•
•
•
Basis risk
Supply-demand balances and price volatility
Risk management
Vertical integration
Pricing and price transfers
Implications for social welfare, public interest
– role of regulation and commercial
frameworks
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
7
Derivation of Basis Risk
Production
Transportation
Distribution
End Use
“Basis”
• Differential between cash/spot and nearest futures price
as a result of time, product forms, quality, location
“Basis risk”:
• Uncertainty as to whether differential will widen or
narrow
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8
The Overall Challenge:
Balancing the Market
Mean reversion is a reality if marketclearing participants exist
DEMAND
LOW
SUPPLY
Prices
HIGH
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9
Price Volatility and Risk are the Trade Offs
for Competition: Gas/Power Example with Open
Access
Commodity price risk flows
E&P
Pipelines
LDCs
End Users
Power
Capacity price risk flows
Risk accepting entities
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
10
Comparison with Other Industries
Source: McKinsey & Company
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
11
Vertical
Integration:
Who Is
Better Off?
Source: McKinsey &
Company
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
12
Vertical Disintegration
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
13
A Test of Strategies: Competition vs.
Public Interest
Source: McKinsey & Company
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
14
Vertical Re-integration
Who’s left??
Source: McKinsey & Company
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
15
A U.S. Illustration ca. 1999 (U.S. EIA)
1999 Data (U.S. EIA, Annual
Energy Review)
Transport+Treatment
$2.26
IN – RAC
(16 mmb/d)
Domestic $17.82
Import
$17.23
Composite $17.46
CRUDE OIL VALUE CHAIN
Transportation
(pipeline, tanker,
truck, rail)
6 mmb/d
U.S. Avg.
DFPP
$15.56/bl
Oil and gas field
production
24 tcf
Wellhead
$2.07/mcf
Marketed production 20 tcf
Dry Gas 19 tcf
Net Imports 4 tcf
Gathering,
processing
MARGIN (BL)
Motor Gasoline $9.53
Jet Fuel
$5.12
No. 2 Distillate $5.04
Residual FO
($3.44)
Composite
$7.89
Refining (to petroleum
products: gasolines, jet
fuels, diesel, fuel oils,
etc.)
Wholesale and
retail marketing
End users: individuals,
businesses, governments,
institutions
Petrochemicals
(feedstocks for
intermediate products)
Wholesale
marketing
Conversion to final
products (fertilizers,
plastics, etc.)
$1.04 (to City Gate)
City Gate $3.11
Natural gas pipeline
transportation
Natural gas
distribution
$3.49
$0.97
Natural gas liquids
transportation
(pipeline, truck,
tanker)
NATURAL GAS VALUE
CHAIN
LNG
Field-to-liquefaction 10-20%
(Percentages reflect approx.
share of total LNG value chain
cost; $/MMBtu amounts
assume 2,500-mile voyage)
OUT (BL) (17 mmb/d)
ON HIGHWAY (BL)
Motor Gasoline $32.80 (8 mmb/d) Motor Gasoline $47.04
Jet Fuel
$22.59
No. 2 Distillate $24.15
Residual FO
$15.79
Liquefaction
(liquefied natural
gas or LNG)
25-35%
$1.00/MMBtu
Wholesale and retail
marketing and distribution
Propane* sold to resellers:
$0.78/gallon (refinery)
Propane sold to end-users:
$1.27/gallon
LNG tanker
shipment to
markets
15-25%
$0.40/MMBtu
* About 2mmb/d of propane produced at refineries, about
538,000 b/d at gas plants; about 1 mmb/d LPG sold for end use.
End users:
Residential $6.60
Commercial $5.26
Industrial $3.04
Electric Utilities $2.56
Industrial $3.04
(Fuel and feedstock for
industrial processes,
including petrochemicals)
Conversion back to gas
phase for pipeline,
distribution, end use
5-15%
$0.40/MMBtu
Direct use (electric
power generation)
25-35%
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
16
Why Oil is Different
• It is a global, fungible commodity
– Dollar denomination reduces currency risk
• Transportation for both crude oil feedstock and
refined products (and chemicals) is highly
diversified
• End user products can be competitively priced in
open, liquid markets
• Global risk management system well developed,
deep, well financed, well understood
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
17
Global Oil Market Illustration
Physical Market
Term Market
Specific Market
Spot Deals
Tenders
Forward Deals
Tenders
Bilateral
Bilateral
Futures
Swaps & Other OTC
Formal Options
Source: Oil in Asia by Paul Horsnell
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
18
Natural Gas: the Case of a Complex
Value Chain
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
19
What is the natural gas business…
…and how should it be regulated?
• Is it a competitive, upstream-driven
business?
• Is it an economies of scale, monopoly
midstream-downstream business that
affects the public interest?
• How much of direct end use and
conversion is competitive?
• If the goal is to build the “natural gas
Where does
most profit,
value creation
take place?
factory,” then policy/regulatory
approaches need to facilitate value chain
development – “commercial frameworks.”
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
20
Building the Natural Gas Factory
UPSTREAM
MIDSTREAM
DOWNSTREAM
Exploration and
Production (E&P)
Processing
Storage
Pipeline Transportation
LNG
Liquefaction
Shipping
Re-gasification
Distribution and
End Use
Residential
Commercial
Industrial
Power
Generation
Transmission
Distribution to End Use
International Investor Goals
Commercialize stranded natural gas production, by:
•Increasing diversity of midstream options
•Gaining access to downstream participation where supported
by markets (“power the world with gas”)
•Export
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
21
Worldwide Natural Gas Business System
Dynamics: Framework Issues
Benefits of
Competitive
Supply
E&P (LNG)
Profit driven; ROR decision based on
expected prices; monetize stranded reserves
Power Gen
Profit driven; ROR decision based on
expected prices; fuel competition for
generation
Pipelines
Transmission
Regulated asset optimization; market rates?
LDCs
Regulated asset optimization; proximity to
final customers (gas, power); market rates?
End Users
End use based on expected prices; access
to competitive supply
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
22
Achieving Competitive Supply
Pricing Supply
COMPETITIVE SALES
Commodity
•Wellhead producers
•Third party wholesalers
for gas
Pricing Transport, Distribution Capacity
RESERVATION (DEMAND)
Fixed cost of investment
•Return on equity, taxes, long term debt,
A&G, DA, O&M
COMMODITY (USAGE)
Variable cost of operation
•O&M
CONGESTION MANAGEMENT
“Mean reversion” is a reality if market-clearing participants exist,
but is often not captured in capacity pricing
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
23
Achieving Competitive Supply
Pricing Supply
COMPETITIVE SALES
•Wellhead producers
•Third party wholesalers
The challenges:
•Entry of new suppliers
•Managing common pools
•Developing liquidity to establish
location
•Protecting market transparency
•Dealing with third party
wholesalers that are affiliated
with regulated infrastructure
•Access for new supplies
•Balancing short term cycles and
long term capital requirements
for resource development
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
24
Regulated Infrastructure as the
Conduit for Supply Competition
Pricing Transportation,
Distribution
RESERVATION (DEMAND)
Fixed cost of investment
•Return on equity
•Taxes
•Long term debt
•A&G, DA, O&M
COMMODITY (USAGE)
Variable cost of operation
•O&M
The challenges:
•Rate-making transitions
•Setting maximum allowable
rates with market transparency
•Pricing new capacity
•Dealing with access for
new capacity
•Determining contestable
transportation markets
•Dealing with market power
•Balancing short term cycles and
long term capital requirements
for delivery
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
25
Achieving Competitive Demand
Pricing Consumption
The challenges:
Market
•Political will to allow wholesale
Price
price fluctuations to flow to retail
users
Margin
•Price discovery and
transparency
Retail Cost •Market structure (unbundling)
•Market power
•Market oversight
•Balancing short term cycles and
Wholesale long term capital requirements
Cost
for delivery
Not to scale
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
26
The U.S. Case
Pre-Natural Gas Restructuring
FERC
PUCs
PRODUCERS
PIPELINES
LDCs
Locate
+
Produce
Aggregate
Purchase from
Pipelines
Sell to Pipelines
Storage
Serve End User
Sell to LDCs
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
27
The U.S. Case
Post-Natural Gas Restructuring
FER
C
Marketers
Service
Gatherers &
Aggregators Companies
PUCs
Producers
Storage
Companies
Pipelines
LDCs
Production
Storage
Services
Transport
Distribution
Aggregation
Gathering
LNG
Marketing
Information
Services
End Users
Transport
Services
Processing
Capacity
Brokering
Risk
Management
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
28
U.S./Canada Natural Gas Value Chains
“LDC”
Physical
Bypass
Industrial
Commercial
Interstate
Pipelines
“City Gate”
Production
Gathering
Processing
Intrastate
Pipelines
Often vertically
integrated or affiliated
Residential, Small
Commercial
Electric Generation
(fuel, bulk market
for power)
“Unbundling” is the separation of transportation from sales
(supply) to allow third party marketing with pipelines providing
“open access” and comparable service to all shippers.
Transportation (pipe)
Most Competitive
Competitive
Sales (commodity)
Least Competitive
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
29
U.S. Case – How Well Is the Model
Performing?
•
•
•
•
•
•
Market Issues
Transparency of price
signals
Price volatility
Role of pipeline affiliates
Demand response
Problems in retail
competition
Supply security and
capital to drill
Policy/Regulatory Response
• Encourage market solution
to price information
• No action (but debate)
• FERC Order 637
• Under discussion
• Georgia re-bundling,
absence of state programs
• Producer incentives and
LNG
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
30
U.S. Case: Market Trade Off
1984 (Open Access)-2002
As unbundling for C&I customers proceeded, more cost
behind the city gate is absorbed by residential.
Prices, $/mcf
$10.50
$9.50
Citygate to Residential
$8.50
Wellhead to Citygate
Wellhead
$7.50
$6.50
$5.50
$4.50
$3.50
$2.50
$1.50
$0.50
1984
1988
1992
1996
2000
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
31
Electric Power: the Case of
Balancing a Dynamic System
“We will make electric light so cheap
that only the rich will be able to burn
candles.” – Thomas Edison
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32
…Electricity Industry Schematic
Generation
Transmission
and Distribution
End User
PGCs
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
33
The Global View
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34
Achieving Competitive Demand
Pricing Consumption
The challenges:
Market
•Political will to allow wholesale
Price
price fluctuations to flow to retail
users
Margin
•Price discovery and
transparency
Retail Cost •Market structure (unbundling)
•Market power
•Market oversight
•Balancing short term cycles and
Wholesale long term capital requirements
Cost
for delivery
Not to scale
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
35
How to ensure the maintenance,
expansion and reliable operation of
the T&D system?
How to ensure the
expansion of generation
capacity with a “healthy”
reserve margin?
TRANSMISSION
RELIABILITY
GENERATION
ISO geography?
For profit v Regulated?
Access Rules?
Congestion Management?
Resource adequacy?
Capacity payments?
Capacity markets?
Number of competitors?
Or, market share?
WHOLESALE
MARKET DESIGN
Spot market: Pool?
Bilateral contracts?
Combo?
Nodal?
Zonal?
Other?
Price transparency?
Stranded gas?
© 2001 UH IELE
NATURAL GAS
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
36
Transmission Issues
• Still searching for the right model that would
efficiently:
–
–
–
–
allocate transmission capacity
maintain & expand the transmission system
manage congestion
arrange for ancillary services
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
37
Electricity Industry Value Chain
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
38
Customers are Reluctant to Switch
Percent of Accounts Switched
% Residential Customers Switched
16%
15.0%
14%
12%
11.2%
10%
8%
6%
4.6%
4%
1.9%
2%
0.6%
0.3%
0.1%
0.0%
CA
NJ
MA
DE
0%
OH
PA
NY
TX
Source: XENERGY research, state government agencies, January 2002
© 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved.
39