Generally, the price of natural gas is determined by market forces. Market forces such as the buying and selling of natural gas, which is dependant upon its supply and demand, are currently the main factors that determine the standard price of natural gas. Basically, there are two separate markets for natural gas known as the spot market and the futures market. Fundamentally, the spot market is an everyday trading in which natural gas is bought and sold on a daily basis at that specific time. It is known that the best place to obtain natural gas on a specific day is the spot market. As far as the futures market is concerned, the buying and selling of natural gas requires contractual binding for at least one month up to 36 months in advance. As an illustration, a buyer and seller can reach an agreement for the delivery of natural gas for the next three months from the time they enter into a contract. Natural futures are currently traded at the Mercantile Exchange (NYMEX).
On a national scale in the United States of America, the pricing and trading of natural gas happens at various locations. These numerous sites can be found all over the country and are known as “market hubs”. Market hubs are usually situated at the meeting points of the main pipeline systems. In the United States of America, according to estimation, there are roughly more than 30 major market hubs. The market hub that has gained the most recognition in the United States is known as Henry Hub, which is located in Louisiana. Henry Hub is recognized for its reputation for trading natural gas futures on the NYMEX. Prices of natural gas are then revealed based on the considerable delivery amount and value at this center.
However, determining the price of natural gas is not a simple affair. As the prices of natural gas rely on the supply and demand for natural gas at that particular point of time, this brings about a transverse relationship for its prices across the main hubs. Location differential is the term that explains the distinct difference between the prices of Henry Hub and another hub. City gates are other main pricing locations that exist, apart from market hubs. Basically, distribution companies get gas from a pipeline, and these locations are called ‘citygates.’ These centers, located in towns, cities or regions that have its own local government, provide another place for the pricing of natural gas.
Knowing that the pricing of natural gas is not a simple procedure, there are other opinions saying that the price of is not dependant of demand and supply per se. This is because the production of natural gas typically eliminates the cost of manufacturing gas. Pumping and piping are basically the only costs incurred to obtain natural gas. While petroleum based fuel has to be supported by certain production costs, this is not the case with natural gas. Natural gas does not only demand very little extraction cost, but also removes refining costs altogether. Furthermore, the costs associated with pipelines are reduced over a period of time according to the number of years in operation.
According to this school of thought, this leads to another alternative to natural gas pricing; which is fixing the price of natural gas to the rate of liquefied natural gas (LNG). This is quite commonly practiced on an agreement basis. As is well known, LNG is more readily available due to the fact that it can be carried without pipelines. However, LNG needs to be cooled and go through a process to be gasified again, causing it to become a little more expensive. But since a fixed market price for natural gas does not exist, countries can set the price based on agreements. For example, Europe sets gas prices regularly. India, for instance, has fixed the price of natural gas by classifying its users according to their amount of usage. Users are classified according to sectors where utility and fertilizers are seen as users having the greatest importance. This is followed by utilization of compressed natural gas in transportation, petrochemical and industry, besides small users. Another way that has been used to fix the price of natural gas is setting it through municipal gas companies.
Yet another option is to set the price of natural gas against the basket of crude imports. When the price of natural gas is linked to imported energy, its price will automatically take on a positive correlation with oil products. This means that the price of natural will increase if the typical price of various oil-based products increases. Likewise, a decline in the price of crude imports will send the price of natural gas spiraling downwards. However, understanding that there is no absolute fixed price of natural gas, this is just a concept that has been systematically put together to create the notion of a floating price index.
Given the different options to pricing natural gas, different countries in the world have different prices. According to the Asian NGV Statistics by the Asian NGV Communications, Volume IV, Number 34, December 2009, the CNG price equivalent per litre gasoline is 0.29 in Armenia, 0.30 in Australia and 0.16 in Bangladesh. In Japan, CNG sells at the highest at 0.52 followed by Singapore at 0.46 and Korea, at 0.43. Iran offers the lowest rate at 0.025, followed by Egypt at 0.05 and Thailand at 0.11. Other countries such as India, China and Malaysia charge 0.24, 0.30 and 0.13 respectively. Indonesia charges 0.16, while Pakistan, 0.36 and Russia, 0.20.