New perspective on the relationships between regional gas markets : focusing on information flow through transfer entropy

다국어 초록 (Multilingual Abstract)

The purpose of this study is to draw policy implications for introducing natural gas as the future energy source that is stable and economic, by examining how the co-occurrence of increase in natural gas demand, C2G, and increase in natural gas supply, led by North American shale gas, brings about changes in the international natural gas market, especially in Northeast Asian market where South Korea purchases natural gas. This study aims to perform a more in-depth analysis in examining the relationship between the mutual influences of the natural gas markets in North America, Europe, and Northeast Asia by applying a differentiated analysis method compared to the conventional research method.

To analyze the relationship change between the regional markets, this paper utilizes HH (Henry Hub price) for the North American market, NBP (National Balancing Point) price for the European market, and JKM (Japan Korea Marker) for the Northeast Asian market, with all the daily data from 2012 to 2020. The analysis period was divided into two periods in order to analyze the impact North America’s shale gas had on the relationship between the regional markets. Considering that the North American shale gas was first exported to other regions in 2016, this paper divides the time period into pre-export period (2012~2015) and post-export period (2016~2020), and analyzes the integration and causal relationship between regional markets accordingly. The integration of the markets was analyzed using unit root test and Johansen cointegration test. The causal relationship was analyzed using vector error correction model (VECM) and Granger causality method, the conventional method of analysis, and transfer entropy model, a new information theoretic approach. This paper intends to contribute to the study of integrated analysis of the natural gas market through the analysis via conventional and new methods of approach.

The main analysis results of this study are as follows; first, starting from 2020, the integration of the price between the North American, European and Northeast Asian markets was confirmed due to the North American shale gas export. Second, it was analyzed that the North American market price (HH) had a leading effect on the European market price (NBP) starting from 2018, and on the Northeast Asian market price (JKM) starting from 2020; it was demonstrated that the influence on both market prices is growing annually. Third, it was analyzed that during the North American shale gas’ pre-export period, which is from 2012 to 2015, the European market price (NBP) affected the Northeast Asian market price (JKM): whereas from 2016 to 2020, it was found that the Northeast Asian market price (JKM) had a greater influence on the European market price (NBP). Competition is intensifying with its influence changing over time. Fourth, in analyzing the causal relationship between natural gas market prices, the transfer entropy method, a methodology based on information theory, was newly applied to analyze the effect of price between markets, and it was confirmed that it is a useful analysis method compared to Granger causality. Finally, as a result of the investigation on market and policy status by country, it was confirmed that Korea’s price signal transmission in the electricity retail market is very low compared to the US, Europe, and Japan.

The integration of the international natural gas market and the growing influence of the North American market provide Korea with the following implications and political countermeasures; first, the integration of regional markets means that the price is dependent on global supply and demand. This means that for gas importing countries, the condition had been set to secure competitive fuels. In particular, as the North American market became integrated with other regional markets as a supplier, the market integration could be seen as more advantageous for importing countries compared to when the North American market was integrated in the 2000s as a consumer. Since North America's advanced market system is likely to spread to other regions due to North American shale gas exports, a purchasing strategy that fully utilizes the positive aspects of North America-led market integration is needed in concluding long-term contracts in Korea. This means that the Northeast Asian market, to which Korea belongs, has high dependence on LNG and has had price premiums and unbalanced contract terms compared to other regional markets. In future introduction, it is urgent to take advantage of market integration conditions to resolve unfair contract conditions, such as eliminating premium in Northeast Asia, abolition of Take or Pay clause, and permitting resale. In addition, whether the integration of the natural gas market will continue and be strengthened in the future depends on whether or not investment in related facilities such as LNG terminals in North America is expanded. Therefore, it will be important to accurately understand the investment information (FID: Final Development Decision) for the North American LNG facility construction projects currently in progress or planned.

Second, as market integration is strengthened, the gas on gas competition (GOG) established in the North American and European markets is likely to spread to the Northeast Asian market. In the case of long-term contracts made in the Northeast Asian market, the proportion of oil price escalation method is high as of now; however, the proportion of international natural gas hub market price escalation method is likely to increase in the near future. In addition, it has become more difficult for Korean gas buyers to predict gas prices. Before the integration, gas prices were predicted considering supply and demand in the Northeast Asian market or by forecasting oil prices. After market integration, however, gas prices must be predicted in consideration of supply and demand in not only North America but also Europe. Also, the price influence of the North American market price on the European and Northeast Asian markets has been distinguishably shown, with its influence increasing; this means that the representative hub price in North America is likely to be established as the global standard for gas prices. In other words, there is a high possibility that the North American hub price, such as the Henry Hub price, will significantly affect the price of the international gas market. As a result, the spot price and the term price introduced by Korean buyers are expected to be affected by the Henry Hub price in the future. Therefore, in order to respond to the situation in which the international natural gas price is unified with the gas on gas method (GOG) and the difficulty of price prediction has increased, it has become more important to accurately predict the Henry Hub price, the representative price in the North American market. Korean natural gas importers would need to expand channels that gather information and to expand research on the North American natural gas market in terms of establishing national energy policies to check the various factors that affect the North American gas market price.

Third, Compared to North America, Europe, and Japan, the gas wholesale market and electricity retail market system in Korea is not the most efficient, with the global price signal not reaching through it. Recently, China also devised a plan to increase the competitiveness of its domestic gas market in responses to changes in the international gas market. The conditions in which the international gas market is integrated and developed are an opportunity to reduce the inefficiency of the domestic gas market and to advance it further. In order to link the international natural gas market price to the domestic gas market and the electricity retail market, the fuel cost indexation system should be normalized.

As a follow-up study, it would be meaningful to analyze the relationship change in the integration between regional markets by considering variables other than price. Since natural gas trade between regional markets is carried out using the LNG method – instead of the traditional PNG method – due to geographical characteristics, delivery variables such as the Panama Canal capacity and supply and demand for LNG carriers may affect the level of integration.

This marks as the first study to analyze the causal relationship between the natural gas market by region in an information-driven approach. Considering the importance of natural gas in the domestic energy market and the need for energy transition, new research attempts to understand the international natural gas market more in a deeper and broader sense should be continued.

목차 (Table of Contents)

• Chapter 1. Introduction
• 1.1. Research background and objective 1
• 1.2. Research composition 6
• Chapter 2. Current status of natural gas market
• 2.1. Industrial and market characteristics of natural gas 8
• 2.1.1. Characteristics of the natural gas industry 8
• 2.1.2. Characteristics of the natural gas market 12
• 2.2. Supply and demand status of total energy 14
• 2.2.1. Trend of total energy demand 14
• 2.2.2. Trend of total energy supply 15
• 2.2.3. Total energy trade balance 15
• 2.3. Supply and demand status of natural gas 16
• 2,3.1. Trend of natural gas demand 16
• 2.3.2. Trend of natural gas supply 18
• 2.3.3. Natural gas trade balance 18
• 2.4. Price mechanism of natural gas and price trends 20
• 2.4.1. Price mechanism 20
• 2.4.2. Price trends 24
• 2.5. Natural gas trade routes 28
• 2.6. Natural gas market trends by region 29
• 2.6.1. North American market 30
• 2.6.2. European market 35
• 2.6.3. Northeast Asian Market 39
• Chapter 3. Literature Review
• 3.1. Study on the integration of natural gas market 53
• 3.2. Study on the analysis method of market integration 61
• 3.3. Study on the South Korean government’s policy on domestic market 65
• 3.4. Limitations of previous studies 69
• Chapter 4. Analytical model and data
• 4.1. Analytical model 70
• 4.1.1. Unit root test 70
• 4.1.2. cointegration test and vector error correction model 71
• 4.1.3. Granger causality test 73
• 4.1.4. Transfer entropy 74
• 4.2. Data analysis 76
• Chapter 5. Analysis results
• 5.1. Unit root test results 78
• 5.2. Johansen cointegration test results 78
• 5.3. Vector error correction model estimation results 82
• 5.4. Granger casuality test results 86
• 5.5. Transfer entropy estimation results 92
• 5.6. Analysis of changes in the relationship between markets due to the expansion of North American LNG export period 97
• 5.6.1. Results of Johansen cointegration test according to the expansion of North American LNG export 98
• 5.6.2. Results of Transfer entropy estimated by expansion of North American LNG exports 100
• 5.7. Causality analysis of the 2020 COVID-19 period 103
• 5.8. Summary of analysis results 105
• Chapter 6. Policy implications and suggestions for government policy
• 6.1. Policy implications 106
• 6.2. Suggestions for government policy 114
• Chapter 7. Conclusion
• 7.1. Summary 118
• 7.2. Limitations and directions for follow-up research 118
• References 120

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