Comments on: Long term contracts in US and EU: Where are we going? http://www.energypolicyblog.com/2008/01/30/long-term-contracts-in-us-and-eu-where-are-we-going/ Sustainable energy policy, more competition, better regulation, improved policies. Fri, 03 Feb 2012 13:54:12 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: JinW http://www.energypolicyblog.com/2008/01/30/long-term-contracts-in-us-and-eu-where-are-we-going/comment-page-1/#comment-15026 JinW Thu, 24 Apr 2008 20:52:09 +0000 http://www.energypolicyblog.com/?p=112#comment-15026 Long term contract in energy market, which links buyer and sellers for a long period, has existed since long time ago. In particular, the take-or-pay clause required that the gas has to be paid whether taken or not, and oblige the seller to offer defined volumes of gas, which establishes a equivalence between the buyers and sellers. Since the expense during the transportation of gas is generally quite high, comparing with the petrol, coal, etc, companies have the tendency to build long term contract in order to protect their interests. In the beginning of the 21st century, people still believe that the influences of long term contract will continue to grow in the future for the following reasons: 1. Long term contracts are a basic element of security of supply 2. long term contracts continue to be of key importance for both importers and exporters Changes in the energy market may require changes in contract structures but it is undoubted that this kind of contract will still dominate the market in the future. However, in recent years, EU gas supply has also been ensured through spot market. The emergence of short term gas trading can be considered as a consequence of the regulatory reform promoted by the European Commission. The commission’s view on the long term contract is quite complex. On one hand, the EU judges unnecessary to redefine the take-or-pay contractual arrangements and favors market-based solutions, on the other hand, it stressed their importance for backing investment and long term security of supply. The irreversible infrastructure indispensable for the transportation of gas creates the potential risk of hold-up and explains why prices in the gas market is the outcome of long term bilateral agreements. The main drawback of long term contract is its inflexibility in face of a fluctuation of demand-supply. Particular clauses are made to mitigate this drawback. Some people propose that we should abrogate long term contracts or replace them with short term market agreements or spot markets. It is true that short term contracts may replace long term contracts temporarily. But considering that specific investment is the primary motive for long term contracts, they cannot be eliminated. Even when new relationships start, producers will be reluctant to make investment in pipelines unless they area assured of long term access to pipeline capacity. Pipelines will refuse to make these investments unless producers are willing to commit reserves on a long term basis. What needs to be discussed is a coordination between long term contracts and spot market. Long term contract in energy market, which links buyer and sellers for a long period, has existed since long time ago. In particular, the take-or-pay clause required that the gas has to be paid whether taken or not, and oblige the seller to offer defined volumes of gas, which establishes a equivalence between the buyers and sellers. Since the expense during the transportation of gas is generally quite high, comparing with the petrol, coal, etc, companies have the tendency to build long term contract in order to protect their interests. In the beginning of the 21st century, people still believe that the influences of long term contract will continue to grow in the future for the following reasons:
1. Long term contracts are a basic element of security of supply
2. long term contracts continue to be of key importance for both importers and exporters
Changes in the energy market may require changes in contract structures but it is undoubted that this kind of contract will still dominate the market in the future.

However, in recent years, EU gas supply has also been ensured through spot market. The emergence of short term gas trading can be considered as a consequence of the regulatory reform promoted by the European Commission. The commission’s view on the long term contract is quite complex. On one hand, the EU judges unnecessary to redefine the take-or-pay contractual arrangements and favors market-based solutions, on the other hand, it stressed their importance for backing investment and long term security of supply. The irreversible infrastructure indispensable for the transportation of gas creates the potential risk of hold-up and explains why prices in the gas market is the outcome of long term bilateral agreements.
The main drawback of long term contract is its inflexibility in face of a fluctuation of demand-supply. Particular clauses are made to mitigate this drawback. Some people propose that we should abrogate long term contracts or replace them with short term market agreements or spot markets. It is true that short term contracts may replace long term contracts temporarily. But considering that specific investment is the primary motive for long term contracts, they cannot be eliminated. Even when new relationships start, producers will be reluctant to make investment in pipelines unless they area assured of long term access to pipeline capacity. Pipelines will refuse to make these investments unless producers are willing to commit reserves on a long term basis. What needs to be discussed is a coordination between long term contracts and spot market.

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