FUTURE DEVELOPMENTS IN PRODUCER PRICE INDEXES FOR NATURAL GAS

SAMPLE REVIEW AND MAINTENANCE OF EXISTING INDEXES

The ongoing sample review and maintenance program is used to ensure that the coverage, structure and weights of PPIs and ITPIs remain relevant and representative.


DEVELOPMENT OF AN OUTPUT PRICE INDEX FOR NATURAL GAS

Challenges in Price Measurement

Medium to long term bilateral arrangements are the predominant form of contracting between buyers and producers in the domestic natural gas market.

There are a number of factors which may influence a contract price for natural gas, and from a price index point of view can be regarded as influencing the quality of the agreement:

• Length of contract.
• Firmness of supply. This indicator of the commitment to supply is either "firm" or "as available". An "as available" commitment indicates that gas will be supplied only after "firm" commitments are met (Lowe 2013).
• Contracted quantity. There are a number of measures of contract quantity. These include total contract quantity (TCQ), annual contract quantity (ACQ), maximum daily quantity (MDQ). These quantity measures are taken into account in determining take or pay proportions and load factors.
• Take or pay. This specifies the minimum proportion of the ACQ which a buyer must pay for in each year (even if the gas is not used).
• Buyers can sometimes "bank" gas which they do not use, and take it at a later date.
• Load factor measures the extent to which a buyer can take more than the MDQ, subject to the cap imposed by the ACQ (Lowe 2013). A higher load factor gives greater flexibility to the buyer. Load profiles of gas users can be related to seasonal factors.

As contracts run over periods of time they usually employ an escalation mechanism, in which one or a combination of publicly available price measures is applied periodically to the contract price which is fixed for the length of the contract. A recent development is for escalation to use international oil prices. Contracts have traditionally covered many years, however the recent trend is for shorter contracts. Transport of gas is usually contracted separately by the purchaser from pipeline operators.

Invoicing is usually done on a monthly basis, with two elements: a commodity charge and a service charge. The commodity charge reflects the escalated contract price in $/energy value units (usually gigajoule) and the quantity. The service component reflects other contract terms: for example, a capacity charge which is related to the load factor and is a payment made by the buyer to reserve a peak volume which may be required.

The challenges in price measurement include taking account of the factors that can influence the quality of contracts, and in accessing price and other information from contracts and/or invoices.

One way to measure price change is to sample a set of contracts, controlling for compositional change regarding some of the factors which influence the quality of the contracts. For example, the contracts could be clustered according to a selected quality which most influences contract price, for example contract quantity. Then comparability could be increased by using only contracts with certain characteristics, eg: firm supply; take or pay proportion higher than 80%, contracts with durations greater than a defined period. Period to period price movement could be measured as a combination of the average escalation of the sampled contracts, plus any change in the average contract price of the cluster (arising from the striking of new contracts). Or, alternatively, period to period price movement could be measured simply as the average of the change in invoiced price for sampled contracts in the cluster.

In practice, price collection and measurement depends on the amount and type of information that it is practicable for the provider to supply to the ABS. The ABS takes into account the amount of time and effort required to provide the information and the ongoing maintenance required by the ABS. Ultimately, pragmatic considerations may influence how prices are measured and collected.

Index Design Considerations

Output PPIs are constructed using a framework of industry which is then broken down by product. The industry of most relevance to measuring producers selling price of natural gas is ANZSIC class 0700 Oil and gas extraction. This industry consists of businesses mainly engaged in producing crude oil, natural gas or condensate through the extraction of oil and gas deposits. Products covered by this industry are Input Output Product Classification (IOPC) 07000010 Crude oil (incl. condensate); IOPC 07000020 Liquified natural gas; IOPC 07000030 Natural gas in the gaseous state; IOPC 07000041 Liquefied petroleum gas from the well head; IOPC 07000050 Coal seam gas; IOPC 07000060 Other naturally occurring gasses.

The design of a new index for ANZSIC 0700 would incorporate a structure which takes account of all the above products. The following discussion is for only IOPC 07000030 Natural gas in the gaseous state. It should be noted that IOPC 07000050 Coal seam gas is treated as a separate product, however from the perspective of price measurement and collection it could be difficult to separate from IOPC 07000030 Natural gas in the gaseous state and a single index may cover both those products.

There is demand for separate indexes for the east coast and west coast markets as they are seen to be independent in terms of some of the forces driving price movements. The ABS will explore the options for a geographic split, starting at the state and territory level. It should be noted that given the relatively small number of businesses operating in this industry, it may not be possible to release lower level indexes if their publication breaches ABS disclosure control guidelines.

Using Existing Data

The ABS currently collects data which could be used as the basis for a price index for IOPC 07000030 Natural gas in the gaseous state.

In early 2015 the ABS established a monthly collection of natural gas prices from several major producers. This collection is currently not large enough to allow publication, however it could be augmented with quarterly information collected from the producers for the natural gas input to manufacturing price index (as noted above, some of the providers to this collection are producers), and with information collected from new providers. All up this would broaden coverage and reduce the likelihood of disclosure problems. The PPI sample review and maintenance program could then be used to adjust the way providers report prices if it is necessary to more closely align all the price information for this new index and address some of the challenges in price measurement discussed above.

Summary of the Proposed Development

The proposal is to initially develop an output price index for IOPC 07000030 Natural gas in the gaseous state using existing data augmented with information collected from new providers. As an output price index the measure would focus on prices received by producers, excluding taxes, transport and trade margins. The aim is to produce an index for Australia, and if possible for lower level geographic splits. The ABS will explore options for extending this development to eventually producing an output price index for the whole of ANZSIC Class 0700 Oil and gas extraction.

During industry consultation, some potential users of this new index expressed interest in historical data. If the ABS publishes these new series, subject to data quality, the ABS will aim to provide index numbers going back one year from the quarter the index is first released. Provision of earlier data cannot be guaranteed.

Work on the output price index for IOPC 07000030 Natural gas in the gaseous state index will commence in early 2016. Publication of the new index will depend on an assessment of its quality and whether it meets ABS guidelines preventing the disclosure of information which can enable the identification of individual providers. It is not possible at this point to name a specific release date. The ABS is exploring options on how this information will be disseminated, however it is likely that release will initially be done through a feature article in Producer Price Indexes, Australia (ABS cat. no. 6427.0), followed by incorporation into the published suite of time series spreadsheets.


REFERENCES

K. Lowe, 2013, Gas Market Scoping Study: A Report for the AEMC, Australian Energy Market Commission.