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The Evolution of European Traded Gas Hubs

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The Evolution of European Traded Gas Hubs December 2015 The evolution of European traded gas hubs OIES PAPER: NG 104 Patrick Heather The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2015 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-78467-046-7 i December 2015: The evolution of European traded gas hubs Preface In following the process of the transition of continental European gas pricing over the past decade, research papers published by the OIES Gas Programme have increasingly observed that the move from oil-indexed to hub or market pricing is a clear secular trend, strongest in northwest Europe but spreading southwards and eastwards. Certainly at an overview level, such a statement appears to be supported by the measurable levels of trading volumes and liquidity. The annual surveys on pricing of wholesale gas undertaken by the IGU also lend quantitative evidence of these trends. So if gas hub development dynamics in Europe are analogous to ‘ripples in a pond’ spreading outwards from the UK and Dutch ‘epicentre’, what evidence do we have that national markets and planned or nascent hubs at the periphery are responding? This is more than an academic question. The EC’s Third Package and Gas Target model requires all member states to comply with its very prescriptive provisions for market opening. In this his third paper on the development of European traded gas hubs, Patrick Heather in addition to charting the progress of the established hubs has undertaken extensive field research: interviewing a range of market participants from regulators, TSOs, traders and government officials – from Spain to the Balkans to the Baltics and many points in between. In addition to comparing national aspirations with EC goals and deadlines he has noted not just the infrastructure projects required to create the connectivity for traded market development, but equally importantly the political will, cultural acceptance of traded markets and the commercial appetite. Clearly to achieve the vision of the Gas Target Model there is certainly ‘much left to do’. In terms of assessing the stage of development of the various hubs, Patrick presents not only an update of his own quantitative and subjective measures but also incorporates the work of other relevant surveys and academic analyses. Based on this substantial synthesis, the results, both intuitively and analytically compelling, highlight the limited progress made by other hubs in ‘catching up with’ the Dutch and British hubs. Whether a third, liquid regional hub will emerge in Europe is a moot point. Italy could in time become the Mediterranean or South European hub but ‘there must be a commercial imperative for such hubs to develop, usually driven by the diverse, sizeable import flows into a market of material scale giving rise to different dynamics to those in the other already liquid hubs, thereby creating the possibility of arbitrage in response to price signals having, at their root, different causes.’ The OIES Gas Programme has and will continue to undertake research on European market price evolution. This paper represents a powerful contribution to this body of work, in terms of the comprehensiveness of its scope, the strength of its analytical conclusions and in the searching questions it raises on the slow progress being made in several member states. Howard Rogers Oxford, December 2015 ii December 2015: The evolution of European traded gas hubs Acknowledgements This is a much longer list of acknowledgements than you would normally see but over the past two and a half years I have made many visits, had many meetings and asked many questions; these are just some of those without whom I would not have been able to collect the reams of information used in the writing of this Paper. These are just some of the many people who answered my questions, helped me plan and arrange my visits, or gave presentations to help me understand the current situation in the traded gas hubs across Europe: Ambassador Eitvydas Bajarūnas, Thierry Bros, Peter Crilly, Dr Athanasios Dagoumas, Ronald Farmer, Alvaro Franco, Tassos Giamouridis, Horen Grama, Pierros Hadjiyiannis, Gregory Heloir, Bert Hoven, Jan Ingwersen, Katarina Johnsson, Sybren de Jong, Mariusz Kawnik, Michael Kehr, Wouter de Klein, Markus Krug, Javier Lara Villafranca, Adam Marzecki, Otilia Nutu, Spiros Paleoyannis, Jason Pegley, Paweł Pikus, Michael Pleijeff, Rodica Popa, Lucie Roux, Joanna Rycerz, Egbert-Jan Schutte-Hiemstra, Maria Sicilia Salvadores, Nicoleta.Simionescu, Nigel Sisman, Gottfried Steiner, Dr. Michael Thomadakis, Arta Turcanu, Andy Williamson, Roland Wolk, Rocío Prieto González, and if I have omitted anyone I sincerely apologise but thank you all the same! The enormous task of collecting all the relevant trading data for all of the hubs since 2011 was made a little easier by the help and assistance I received from several companies, in particular: My thanks to ICIS for having provided the underlying trading data for most of the tables and figures; thanks to Argus Media, ICIS-Heren and Platts for providing background information and news items; thanks to CEGH, EEX and ICE for supplying data files of their exchange trades; thanks to the various brokers and market participants who advised, informed and helped me during the long data collection process. Lastly, but by no means least, I would like to thank my colleagues at the OIES for their help, guidance and encouragement, in particular: Anouk Honoré, Beatrice Petrovitch, Jonathan Stern, Katja Yafimava, and a special thank you to Howard Rogers for his support and patience! Many thanks also to Kate Teasdale and John Elkins for their help in preparing the Paper for publication. iii December 2015: The evolution of European traded gas hubs Contents Preface ................................................................................................................................................... ii Acknowledgements ............................................................................................................................. iii 1. Introduction ....................................................................................................................................... 1 2: Contextual background .................................................................................................................... 2 2.1: Findings from the 2012 paper on Continental European gas hubs ............................................. 2 2.2: The impact of changes in gas price formation and the Gas Target Model .................................. 3 2.3: Can the EU’s energy ‘vision’ ever be realised? ........................................................................... 4 3: The characteristics and requirements of a gas hub ..................................................................... 5 3.1 The process of liberalisation ......................................................................................................... 5 3.2 The path to maturity ...................................................................................................................... 6 3.3 Routes to market ........................................................................................................................... 9 4: The importance of gas contract price formation ......................................................................... 10 4.1 Background and initial reasons for change ................................................................................. 10 4.2 The catalyst for change ............................................................................................................... 11 4.3 What is the situation today? ........................................................................................................ 12 4.4 ‘Traded’ gas, ‘Contracted’ gas and ‘Exchanged’ gas .................................................................. 14 5: The development and functioning of the European gas hubs ................................................... 15 5.1 Important hurdles to overcome ................................................................................................... 15 5.2 The European gas geography .................................................................................................... 17 5.3 Gas price convergence, correlation and volatility ....................................................................... 23 5.3.1 Price convergence ................................................................................................................ 24 5.3.2 Price correlation .................................................................................................................... 26 5.3.3 Price volatility ........................................................................................................................ 30 5.4 European gas exchanges and their role ..................................................................................... 31 5.5 Spotlight on selected regions .....................................................................................................
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