Natural Gas Hubs Prerequisites and Regulation

This is following my previous post on November 8 on the requirements for the establishment of new natural gas hubs outside of North America. That post discussed in general terms hub functions and some prerequisite conditions.

A more detailed list of prerequisites was published in the US Energy Administrations March 17, 2017 report “Perspectives on the Development of Market Hubs in Asia Pacific Regions.” Here is a summary list from that report:

Natural Gas Hub Development Prerequisites

1.     Gas price deregulation and gas sales unbundled from pipeline delivery services

2.     Third party access to transport delivery and terminals under reasonable regulatory scheme

3.     Bilateral trading predominates

4.     Transparency in pricing and volumes traded under regulatory review

5.     Standardization of trading rules and contracts

6.     Over-the-counter brokered trading

7.     Price indexation

8.     Ability of non-physical traders of enter market

9.     Futures exchanges established

10.  Liquid forward price curve

In addition much of this can only be accomplished if the natural gas trading market accepts the regulatory regime established to ensure smooth functioning and fair trading at the market hub. The regulatory piece of the puzzle looks like this:

• The government moves from market participant ( as owner of gas or pipeline assets) to market oversight authority by establishing the regulator
• The new regulator establishes market rules to ensure fair trading
• (The failure of the California wholesale electricity market in 1999-2000 reminds us that “A market which is designed badly, will work badly” quoting myself.)
• The residual pipeline or hub storage monopoly is subject to third-party access rules and transportation price regulation by the regulator
• The regulator monitors market behavior to eliminate or preclude any market manipulation

These regulatory conditions, are of course, easy to state but hard to do in practice. Nonetheless, they may be critical to the successful establishment of new hubs.