April 2018, Vol.245, No.4


EU Gas Trading in Transition

By Nicholas Newman, Contributing Editor

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.

No Uniform Price 

Gas trading hubs, alongside the regulatory supervision by the European Commission, are helping to ensure that prices more truly reflect supply and demand rather than entrenched dominant market powers. Nevertheless, there are times when prices in one European country can be higher or lower than in another, but this is mainly due to transmission and storage capacity issues in the trans-European pipeline network. A case in point is the recent  divergence of U.K. gas hub prices from mainland Europe, due in the main to the sudden closure of the offshore gas storage facility at Rough, unscheduled production outages in Norwegian gas fields and the persistent threat of unscheduled closures of French nuclear power plants. Recently, severe cold in Europe has markedly affected both the supply and demand for gas in Europe.

Block Chain Experiment

Block chain, most commonly associated with trading cryptocurrencies, is a virtual, digital and decentralized ledger system that records every online transaction in chunks or blocks. It is being tested in the U.S. by the Transport Alliance and in Europe by leading energy companies in wholesale gas trading, reconciliation and settlement, in parallel with their live trading systems. Hopes are high for the value of block chain. 

Catherine Newman, general IT manager at Gazprom Marketing & Trading, said using block chain in commodity trading “has the potential to provide cross-industry opportunities to improve the speed, security and efficiency of transactions with the company’s counterparties.” 

Vattenfall’s acting head of trading, Frank van Doorn, said block chain has “great potential to increase automation and efficiency of our trading operation.”  In time, block chain technologies should enable energy traders to anonymously send orders to a decentralized order book accessible to other traders and in the not-too-distant future block chain’s processing efficiency could lower transaction costs by erasing the need for exchanges or brokers.

With such potential gains waiting to be captured, consortiums of energy companies, traders and utilities are testing a variety of block chain market trading technologies provided by, among others, Vancouver-based BTL Group, Hamburg-sited PONTON GmbH and Vienna-based start-up Grid Singularity, to buy and sell energy.

BTL’s European Project

Canada’s BTL Group’s Interbit is a next generation block chain platform, able to operate and interconnect many thousands of block chains per server, in a secure, private and scalable manner. The BTL Group is testing its Interbit platform with the trading arms of BP, ENI, Gazprom, Total, specialist commodity trading companies, including Swiss-based Mercuria Energy Group, Britain’s Petroineos Trading Limited and Freepoint Commodities, along with  major utilities, including Sweden’s Vattenfall and Austrian-based Wien Energie.

In the spring, BTL will be working with the project participants to extend block chain technology beyond trade reconciliation to settlement. 

The aggregate of these developments leads to the conclusion that Europe’s energy trading, after undergoing significant transition, is now on the cusp of potentially revolutionary change with the utilization of block chain technology.  P&GJ  

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