IEM: Natural Gas Market Filip Černoch cernoch@mail.muni.cz Key trends • Peak demand in 2010. • Between 2008-2013 large investments in gas-fired power plants, LNG terminals, storages and pipelines. • Market opening and liberalisation, increased hub trading and short-term flexibility, lowering the link between oil and gas prices. • Geopolitics included. Easier to store in comparison with electricity. Key trends Key trends Key trends EU 28 imports of natural gas (2015) 8 LNG • 22 LNG terminals. Klaipedos in Lithuania, Swinoujscie in Poland and Dunkerque in France opened only recently. • Utilisation of 23,5%. • Higher prices in Asia and Latin America (Brazil and Argentina). • LNG terminals used for re-export to reduce the costs and losses. Regulation • The same structure as in the electricity sector. • Based on the third internal market package, an effort to increase market effectiveness, liquidity and cross-border trade. • Strenghtening of the independency and powers of NRAs and their EU co-operation (ACER). • Active role of TSOs and their EU wide co-operation. • Common rules for the gas market – Framework Guidelines, Network codes. • Move from P2P to EE systems. Organization of wholesale market • Shift from TOP LTCs to hub trading. Traditional gas market model • LTC + ToP. • Pricing formula linked to gas replacement values (oil indexation). • Net back replacement value gas pricing. • Teritorrial restrictions. • In the EU physical fragmentation of the market. Traditional gas market model • Competition is limited. • Suppliers have significant market power. • Price arbitrage (convergence) is limited, resulting in different prices over the EU. • Competition is limited • Suppliers with significant market power • Price arbitrage is limited, resulting in different prices over the EU. IEM • Competition (TPA, unbundling). • Common regulatory framework with independent regulatory bodies. • LTCs and destination clauses etc. under pressure (foreclosure potential), shift to hub-trading. • Interconnectors. LTCs • Anti-competitive foreclosure effects –> questioned by the EU´s antitrust policy. • Gas Natural, Distrigaz, E.ON Ruhrgas, Repson, Synergen, etc. • Not forbiden per se, but volumes locked-in under the contract, duration, cummulative effect and efficiencies are evaluated. Territorial restrictions/market sharing • In 2004 EC confirmed that they restrict competition (GDFENI and GDF-ENEL contract from 1997). • 2009 EC fined GDF Suez and E.ON for the 1975-2005 behavior, EUR553 million each (partitioning the markets regarding MEGAL pipeline). • Intervention to the Gazprom-ENI, Gazprom-OMV, Gazprom-E.ON or Gazprom-PGNiG agreements. • Territorial restrictions no longer acceptable on the EU market. Oil indexation • Oil products are no longer substitutes for natural gas in Europe, Gazprom still defends this pricing mechanismus. • Questioned by EC in antitrust proceeding against Gazprom (Sept 2011). Hub definition • A point (physical or virtual) at which title to gas can be transferred between buyers and sellers. • In a physical hub, the contractual place where the gas is exchanged corresponds to a specific and well identified geographical point on the transmission system (Zeebrugge Beach) • In a virtual hub, the contractual place where the gas is exchanged is being defined as a group of entry and exit points belonging to a whole transmission system or balancing zone (GASPOOL, NBP). • Both types should allow OTC transaction (preferrably through brokers) and Exchange trading. Hub indicators • Liquidity – increases when number of customers, volumes traded, number of trades and price transparency all increases. • Churn factor – ration between the traded volumes and the physical throughput (re-trading ratio). Number of times gas volumes change hand within the hub. • Level of concentration – the Herfindahl – Hirschmann Index – higher numbers = fewer market participants. • Depth – significant volumes can be traded without resulting in excessive price moves. Hub indicators Traded volumes at main EU hubs and compound annualised growth rate (CAGR), TWh/year and % 23 Wholesale DA gas prices on gas hubs in the EU Comparison of EU wholesale gas price estimations, euro/MWh • 70 000 producing oil fields in the world • Approx. 25 fields account for ¼ of global production • 100 fields for ½ production • 500 fields for 2/3 production. •G. reduced the ToP minimum to 70% of annual contract quantity (from 85%), volumes taken in excess sold at hubbased prices. •= oil indexation preserved in Gazprom´s contracts, but base price lowered to adjust to hub prices. Sources • IEA (2014): Energy Policies of IEA Countries – The European Union. • Jirušek et al.(2015): Energy Security in Central and Eastern Europe and the Operations of Russian State-Owned Energy Enterprises • ACER (2015): Annual Report on the Results of Monitoring the Internal electricity and Natural Gas Markets in 2014 • EC (2017): Second Report on the State of the Energy Union • Széles, Z.(2017) EU natural gas demand and supply. • Remy, L. (2014): How to Establish a Proper Working Gas Hub? • DG Energy (2017): Quarterly Report on European Gas Markets, vol. 10 and vol. 9. • Stewart, P.(2016): Are LNG benchmarks still relevant?