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Pathway for Establishing Gas Hub in Europe

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Pathway for Establishing Gas Hub in Europe 1 Pathway for Establishing Gas Hub in Europe Policy Brief November 16, 2016 by Lukas Kulich, Sciences Po Paris, DiXi Group Fellow 2 Introduction The current decade is far from being finished but it has already became an important part of modern Ukrainian history. Ukrainian governments were for far too long undecided in what direction to choose for the development of their country: either to align with the European Union or with the Russian Federation. When the former Ukrainian President Viktor Yanukovich refused to sign the Ukraine- European Union Association Agreement in November 2013 and thus decided to comply with the Russian Federation, pro-EU Ukrainians assembled in the Maidan square where violent clashes between police and protesters took place in the early 2014. Yanukovich then fled to Russia in March of the same year. Ukraine consequently started new period in its history with the desire to achieve economic prosperity and to join the European Union. There is nevertheless a long road ahead for Ukraine in its quest to achieve these objectives. The country’s economy had been for too long dominated by personal interests of oligarchs. Ineffective administration and corruption continue to reign in Ukraine. Effective implementation of legislation is hard to achieve and economic growth together with business creation have fallen considerably since the War in Donbas. Until the Revolution of Dignity, Ukraine’s energy sector had been heavily dependent on Russia due to both Gazprom’s monopolistic position in the Ukrainian gas market and Kremlin’s influence on Ukrainian officials. The influence of Kremlin is demonstrated by the fact that many of these officials were in possession of a Russian passport, such as the controversial Dmytro Salamatin (former deputy of Verkhovna rada and Minister of Defence of Ukraine)1 or Mykola Azarov, (former Prime Minister of Ukraine in 2010-2014)2. The 2013 rupture with Yanukovich’s ancient régime gave Ukraine a unique opportunity to create a liberalised and healthy economy. In order to achieve this objective, a stable gas supply is needed. Gas is one of the most important elements in Ukrainian economy: it is not only used for energy-intensive industrial regions in the East of Ukraine but it is also an essential fuel for residential heating. This said, gas supply was also Ukraine’s weak spot since the country had been reliant only on the Russian Behemoth - Gazprom. After the unlawful annexation of Crimea by Russia in March 2014, the need to 1 “Minoborony Ukrainy vozglavil, verojatno, grazhdanin Rossii, deputat‐regional, s durnoy reputaciey”, argumentua.com, published 2 September 2012, http://argumentua.com/novosti/minoborony‐ukrainy‐vozglavil‐ veroyatno‐grazhdanin‐rossii‐deputat‐regional‐s‐durnoi‐reputatsi 2 “Byut: zamestitelh ministra sporta – grazhdanin RF i odin iz liderov partii lyubiteley piva”, ru.tsn.ua, published 18 May 2010, http://ru.tsn.ua/ukrayina/byut‐zamestitel‐ministra‐sporta‐grazhdanin‐rf‐i‐odin‐iz‐liderov‐partii‐lyubitelei‐ piva.html 3 drift away from Russian gas and to diversify gas supply became more important than ever before in Ukraine. Graph 1: Ukrainian Dependence on Russian Gas Pipeline Imports 2008-20153 Creation of a gas hub in Ukraine plays an important role in achieving gas supply diversification and liberalisation of Ukrainian gas market. Gas hubs concentrate large quantity of gas supply which assures long-term energy security for the country, as well as gas-on-gas competition which pushes the prices of blue fuel down. Gas hubs will furthermore contribute to the improvement of overall business environment in Ukraine and to further Ukrainian integration into the European Union. In the first part of this report (‘What is a Gas Hub?’), the report will present the theory behind functioning of a gas hub and associated energy exchanges. In its second part, (‘Constructing Gas Hub’), the report will list all the necessary elements for its design and hub construction in Ukraine. In the third part (‘Threats and Opportunities to Gas Hub Project’), the report will present potential opportunities and obstacles to the gas hub construction. The report will then finish with a series of recommendations. 3 Dependence ratio is calculated as the division of Russian gas imports by Ukraine’s overall gas consumption for a specific year. Data retrieved from http://naftogaz‐europe.com/article/en/NaturalGasSuppliestoUkraine and http://www.naftogaz.com/files/Zvity/Naftogaz_Annual_Report_2015_engl.pdf, p. 86 4 Graph 2: Ukraine’s Non-Industrial Gas Consumption4 4 Gas Consumption Ratio is calculated as the division of non‐industrial consumption (households, district heating companies and governmental institutions) by Ukraine’s total gas consumption for a specific year. Data retrieved from http://naftogaz‐europe.com/article/en/GasConsumptioninUkraineeng. 5 I. What is a Gas Hub? 1. Gas hub defined Simply speaking, a gas hub is a location where several gas pipelines interconnect. The interconnection of several supply pipelines represents an opportunity to trade and physically exchange gas between a large number of buyers and suppliers. Whilst the first gas hubs were established in the United States as early as in the 1950s (e.g. the Henry Hub in Louisiana), the concept of gas hubs came to Europe significantly later except the United Kingdom which established its National Balancing Point (NBP) in 1990s. The majority of gas hubs in continental Europe have been created only in the last 10 years and their development was catalysed with the arrival of Liquid Natural Gas (LNG) into European gas market. Among the most important gas hubs in Europe are the Title Transfer Facility (TTF) in the Netherlands, GASPOOL in Germany, PEG Nord in France and Central European Gas Hub (CEGH) in Baumgarten, Austria, which was created just in 2013. A gas hub can be either physical or virtual. Physical hubs are placed in a specific geographical location where pipelines physically interconnect and where the entire gas transmission system is located; they therefore operate as a single system. Physical gas hubs are used more in the United States (e.g. the Henry Hub) than in Europe where virtual gas hubs are used more extensively. Box 1: What is Henry Hub? Henry Hub is a physical gas hub located in Erath, Louisiana. It was indirectly named by William Henry, a German national who immigrated to the United States in 1840s. Henry Hub is owned by Sabine Pipe Line LLC (a subsidiary of Chevron) and interconnects four intrastate and nine interstate gas pipelines owned by private and public operators. Its futures contracts have been traded at the New York Mercantile Exchange (NYMEX) since 1990s. The hub as such does not transport big quantities of gas (only 1.8 billion cubic feet per day) despite large number of associated exchange trading: most of futures contracts are actually not physically delivered but cleared at the NYMEX exchange. With 400 000 6 contracts being traded every day, Henry Hub is very liquid and became the benchmark for other gas prices. Henry Hub is nevertheless not a 100% physical hub. There are significant distances between entry and exit points and compressors; Henry Hub should be thus imagined as a 5 ‘bowl of spaghetti’. Nevertheless, due to the tight concentration of pipelines at one space, Henry Hub may be imagined as a gas exchange point and therefore to be classified as a physical hub. Map 1: Location of Henry Hub and Respective Pipelines in Erath, Louisiana6 5 Rusty Braziel, “Henry The Hub, I Am I Am – Understanding Henry Hub: How Changing Natural Gas Flows Will Impact The Benchmark“, RBN Energy LLC, published on 23 September 2012, https://rbnenergy.com/henry‐the‐hub‐i‐am‐i‐am‐ understanding‐henry‐hub 6 Rusty Braziel, “Henry The Hub, I Am I Am – Understanding Henry Hub: How Changing Natural Gas Flows Will Impact The Benchmark“ 7 Virtual (also known as balancing) hubs cover wider geographical area, represented by a national or a transnational gas network. In a virtual gas hub, the authority operating the gas transmission network hub may inject gas at any point of the geographical zone covered by the hub; a virtual hub is thus a balancing point inside a pipeline system. Whilst physical hubs permit larger volume trading, more participants may entry gas trading in virtual hubs. Contrary to physical hubs, participants in virtual gas hubs can choose among various exit/entry points within the gas grid and have no obligation to arrange transportation of gas; the transportation of gas within the grid is the obligation of an independent Transmission System Operator (TSO). Box 2: Types of services offered at gas hubs Below is the list of the most common services at gas hubs (the services offered may vary from one gas hub to another)7 Transportation: gas transportation within the hub, gas transportation from one pipeline to another, hub‐to‐hub transportation Storage: short‐term (so called ‘parking’) or long‐term Peaking: selling additional gas in the case of unexpected increases in demand Title transfer: changes in ownership of a specific volume of gas present in a hub Gas loaning: an advance of natural gas repaid later by the shipper within a short‐term period Gas management: compression, balancing, pooling/volume aggregation The presence of multiple supply gas pipelines in gas hubs will create gas-on-gas competition which will push gas prices down. Moreover, the interplay of supply and demand in gas hub trading will allow for the discovery of gas market price. Gas hubs thus help significantly improving overall efficiency of 7 Adapted from “Conceptual design for a virtual gas hub(s) for the east coast of Australia”, FTI Consulting, December 2015, http://www.aemc.gov.au/getattachment/98035b44‐a513‐4d34‐a5a0‐9048b7166db3/FTI‐Consulting‐ %E2%80%93‐Conceptual‐design‐for‐a‐virtual‐g.aspx, p.
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