Beyond boundaries - a revolutionary approach to buying natural gas

Evolution of natural gas pricing mechanisms

Historically natural gas has been consumed close to where it is produced. As a result, international trade in gas has been less active than in other fossil fuels, and in particular oil. Over time three main kinds of pricing mechanisms emerged:

• Government regulated prices
• Prices indexed to other fuels, notably oil
• Open market or spot prices

Oil-indexed gas prices gained ground in Europe, while in the United States spot market pricing became the norm. In Europe, long-term gas contracts are often pegged to fuel oil prices, in a method that originated in the 1970s.

Enter liberalization

The European gas market began to change in the 1990s. The UK introduced a liberalized market for natural gas that was based on the existing US model, including the creation of a trading hub called NBP (National Balancing Point). In 1998, the UK gas network was linked to Belgium, opening the way for gas trading on the Continent. These and other factors led pricing models in European gas markets to split along two lines: oil indexation on the Continent and hub pricing in the UK.

Recent tensions

Overcapacity in the worldwide gas supply, due primarily to investments in Liquid Natural Gas capacity coming on stream, and reduced demand for gas following the global recession of 2008-09 have raised calls for new pricing models among buyers on the European gas market. With Europe’s economy on the rebound, the price of oil has recovered steadily, putting buyers of oil-indexed gas in a difficult situation. As recently as February 2011, Europe’s largest utilities were pressing for a change to the way natural gas costs are calculated in Continental Europe, as the spread between oil-indexed and spot prices has reached an eight-month high.

Impact of new pricing mechanisms for energy consumers

A move away from oil-indexed to spot pricing provides customers with a way to source gas with a more transparent pricing structure in more flexible quantities. The emergence of trading hubs gives market players easy access to buyers and sellers of natural gas. These hubs not only serve as a market for spot trading but also for the buying and selling of longer-term contracts.

Cargill’s natural gas offering

For many years, Cargill has been a significant proprietary trader and merchandiser of gas. Through European trading offices in Geneva, London and Amsterdam, the company supplies its own industrial plants with gas as well as manages and monitors price risk.

Liberalization enabled Cargill to go from being a consumer of natural gas to being a natural gas supplier. In February 2009, the company expanded its operations by establishing a physical presence in the German gas markets. Cargill’s gas operations in Europe focus on both industrial customers and on local and regional utilities. They provide customers with a range of flexible delivery and pricing options based on access to the spot and forward gas markets. These activities are supported by Cargill’s physical storage capacity in Germany as well as its upstream supply contracts with producers.