Auctioning Long-term Gas Contracts in Colombia

Peter Cramton, University of Maryland

Abstract

This paper presents an approach to auctioning long-term gas contracts in Colombia. I propose an annual auction for long-term firm gas contracts. The auction would assign and price all firm gas contracts, with the exception of gas from the Guajira field, which is assigned administratively at a regulated price. The proposal is a partial market design in that it does not address the transportation of gas from producer to consumer.

The goal of the approach is to improve the transparency and efficiency of the gas market with a coordinated auction for long-term gas contracts. Currently, gas contracts are sold in a fragmented bilateral market. There are no standard contracts and little price transparency. A coordinated auction for standard contracts will reduce transaction costs and improve price formation. An annual auction for firm gas contracts with one to five-year duration allows both sides of the market to manage risks.

Efficient price formation is one of the most important objectives of the gas auction. The simultaneous ascending clock auction is ideally suited to promote efficient price formation. The ascending clock auction provides excellent price discovery and enables demanders to freely arbitrage across the products. This assures that any price difference among products is a reflection of value differences.

My view is that the coordinated auction proposed here will significantly improve the market for firm gas contracts.