Energy Trading Gas Pipeline Gas Journal

EU Gas Trading in Transition

 Gas imports of 345 Bcm valued at 17 billion euros were traded across Europe during the first nine months of 2017. Russia remained the E.U.’s top supplier of natural gas, increasing its market share to 44%, followed by Norway at 33%.

A new trend is the rise in LNG (Liquid Natural Gas) imports, from Australia, the United States and Russia, which collectively have attained a 16% market share. The rise of Europe as a major market for U.S. LNG exports is particularly remarkable. 

Last year, Europe imported 840 MMcm (of gas equivalent) representing 23% of total US LNG exports. In contrast, customary North African piped gas supplies fell to a market share of 7% as high oil-indexed prices provided an incentive to Italy and Spain to reduce their piped imports in favour of cheaper LNG from around the world. Overall, imported gas supplied 69% of Europe’s natural gas consumption, a rise from 64% in 2009. 

Europe is now within reach of completing the single market in energy, facilitated by huge investment in transmission and interconnectors and the establishment of gas trading hubs, chiefly in the U.K. and the Netherlands. These have almost displaced the traditional multi-year, oil-indexed, fixed-price contracts between supplier and major customers with gas being sold at the hubs at spot and futures pricing.  In these aspects Europe’s energy trading has been one of gradual market transition. 

Gas Hub Trading

Until recently wholesale natural gas prices were indexed against the price of oil, based on the assumption that customers could easily switch between oil and gas for stationary uses such as power generation. However, tougher environmental regulations and the rising cost of retaining dual fuel capacity have made switching less feasible and an oil price of over $100 a barrel made this link unsustainable. 

Therefore, the customary arrangement of Russia’s Gazprom and Algeria’s Sonatrach, in supplying European utilities with oil-indexed, fixed-price multi-year contracts were undermined by several well-publicized, renegotiated contracts with major utilities.

The industry was well aware of the E.U.’s long-term aim of creating a single market, facilitating cross-border energy trading. First to take advantage was Britain, which pioneered the first virtual gas hub, the National Balancing Point (NBP) in 1996, to sell and buy U.K. natural gas.

This was followed by the Dutch Title Transfer Facility (TTF) established in 2010, as well as CG in Germany, PEG Nord in France and PS in Italy. Today, the Dutch and U.K. gas hubs dominate the European gas market and “it is unlikely that these newer hubs will rival in dominance Holland’s TTF, which has become the benchmark hub for the euro currency market,” said professor Jonathan Stern of the Oxford Institute of Energy Studies.

Since 2015, wholesale gas is mainly sold through regional gas hubs and nearly two thirds of European wholesale gas prices are set by these trading hubs which, “means that any new buyer of gas or someone renewing a contract, whether piped from Russia or delivered from the United States will be based on some form of hub price,” Stern added. Read more

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