EU energy market drive sees gas trading growth

EU energy market drive sees gas trading growth
Updated 26 August 2012
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EU energy market drive sees gas trading growth

EU energy market drive sees gas trading growth

LONDON: Development of European gas hubs and regional markets contrasts with lagging efforts to diversify supplies from Asia, by-passing Russia, and will see a break with oil-indexed contracts.
Gas trading developments reflect a European Union drive to create an internal energy market by 2014 and mirror increased market coupling in electricity.
As in power markets, however, success in creating regional markets is racing ahead of efforts to increase transmission capacity, where congestion will slow price convergence.
Deeper internal networks, and reversibility of pipeline flow for example between Italy and Switzerland, as planned, will increase price efficiencies and arbitrage opportunities.
Obstacles to pipeline projects include planning permissioning and funds.
The European Commission estimates investment needs of about 140 billion euros ($ 176 billion) for electricity infrastructure and at least 70 billion for gas through 2020.
Meanwhile, the average time between final investment decision and the construction of energy infrastructure is approximately 12 years.
In gas, the EU has successfully reduced reliance on Russia with rising shipments of liquefied natural gas (LNG) from Qatar, but Russia retains the biggest chunk of imports at just less than a third in 2010, from a half in 2000.
Accessing central Asia through grand “Southern Corridor” projects to the Caspian basin via Turkey have flagged, leaving progress with NordStream, cementing links to Russia.
Europe’s gas prices fall roughly along a northwest-southeast gradient, from spot prices in northern trading hubs which can access liquefied natural gas (LNG) terminals to higher prices on Germany’s eastern border and central European hubs which transit gas priced on oil-indexed, long-term contracts with Russia.
Point Carbon data show a gradient from more expensive oil-indexed contracts to German import (BAFA) and British market prices at the National Balancing Point (NBP), Europe’s most established gas market.
Most continental European gas is still supplied on long-term contracts (LTCs) based on an oil-indexed pricing.
But things are changing, following Britain’s lead where all LTC and traded gas is based on NBP prices.
One result should be lower prices.
The UK NBP average price in March of 23.9 euros per megawatt hour (MWh) was 68 percent of a theoretical Platts price calculated using a traditional, oil-link formula, according to the European Commission in its latest “Quarterly report on European gas markets.”
LNG prices have been rising, following Asian demand where South Korea and Japan are paying a significant premium relative to EU importers, but generally remains cheaper than oil-indexed pricing.
“LTC prices for gas imports from Russia continue to be among the highest prices for gas,” reported the quarterly review.
Gas trading centers are growing apace, along the lines of Britain’s NBP, adding to long-standing physical transit hubs.
These will help to break the link with oil pricing.
In the Netherlands, traded volumes of over the counter (OTC) contracts at the Title Transfer Facility (TTF) trading hub has seen almost exponential growth over the past three years, to more than 2 trillion cubic meters per day compared with less than 0.5 trillion in Jan. 2009.
TTF is one of the fastest growing hubs and a front-running candidate to deliver a benchmark continental European gas price as it plans links with neighboring grids including Germany, Denmark, Belgium and France next year.
One reason for the growth is participation of Dutch producer GasTerra, which formerly focused on oil-indexed contracts but is now also supplying at the TTF hub, said Patrick Heather in an Oxford Institute for Energy Studies publication in June titled “Continental European gas hubs: are they fit for purpose?”
Heather cited Societe Generale research that market pricing had risen to 42 percent of European gas supply in 2011, with the rest in oil-indexed contracts.
— The author is a Reuters market analyst. The views expressed are his own.

Such developments mirror, but lag, market coupling in power trading. Both are being driven by the EU’s 2009 “third energy package,” meant to achieve an internal energy market targeting secure and affordable energy.
In power markets, that has seen significant price convergence between Germany, France, Belgium and the Netherlands in the central western Europe (CWE) region since 2010.
But both transmission capacity and market coupling are needed to drive convergence, and gas bottlenecks remain in particular to Spain and Italy and eastern Europe.
A February cold snap earlier this year was illustrative: the day-ahead on the PSV Italian hub reached 65 euros per MWh, a doubling of normal levels, compared with North-West European (NWE) hubs of around 40 euros.
As the commission’s quarterly report noted: “Italy’s isolation from NWE markets, and the illiquidity of its hub also contribute to its gas supply vulnerability and price volatility.”
Oxford University’s Heather reported a more routine but critical transaction cost in Italy: “Most of the rules governing the gas market and in particular those relating to third party access, capacity trading and storage are not available in English and in some cases involve complicated processes in order to achieve the desired goal.”

— The author is a Reuters market analyst. The views expressed are his own.