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DATAMONITOR VIEW
Catalyst As the impacts of full market opening in the European
gas sector gather pace, the importance of traded wholesale gas
markets will increase significantly. Both incumbent and new entrant
players in markets at all stages of wholesale liquidity development
will be impacted by the existence, and development of, wholesale
markets in their retail operations.
Summary An examination of selected wholesale European gas
markets and future projections of market developments:
Wholesale gas hub development will lead to further competition,
enhanced security of supply, and greater market efficiency.
Currently, Europe's wholesale gas markets cover the full range
of developmental stages.
Price efficiency levels in the European wholesale markets show
varying ranges of volatility.
The polarization of the markets will reduce in the wake of
market opening.
In the Netherlands, the expected trend is an increasing level of
demand and a greater diversification of supply of natural gas
through pipelines, storage facilities, and LNG. Due to government
intervention that is pushing the TTF to become Europes main gas
round-a-bout, Datamonitor expects the volume of trade to continue
to increase and to reach a par with the Zeebrugge Hub.
Two other markets Datamonitor has considered, Italys PSV and the
Spanish market, Centro de Gravedad, remain in an early stage of
development. Liquidity in these markets is still limited. While
attempts to build a
EUROPEAN WHOLESALE DEVELOPMENT SERIES
European Wholesale Gas Market Development Liquidity dynamics and
evolution of main European gas markets, with a focus on the
evolution of the Dutch wholesale gas market
Reference Code: EN00066-001 Publication Date: May 2012
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single Iberian gas market (MIBGAS) are still under way,
Datamonitor notes more encouraging progress in inter-regional
co-operation through the South Gas Regional Initiative between
Spain, Portugal, and France.
Sources wholesale pricing data for main European markets
(sourced from Spectron)
exchange-specific pricing and liquidity data
the International Energy Agency (IEA).
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ANALYSIS
Wholesale gas hub development will lead to further competition,
enhanced security of supply, and greater market efficiency
The EU continues to strive for greater competition by promoting
a single integrated wholesale gas market
European gas markets remain in a highly segmented state and gas
cannot easily flow across European borders. The European Commission
has long hoped for a harmonized, single, and competitive
pan-European market through the convergence of gas regulations and
numerous regional markets.
However, there are numerous obstacles to the goal of
intra-national gas trading:
There is an array of separate transmission networks that are
owned or operated by different companies
throughout Europe.
Third-party transmission remains costly and presents
administrative challenges.
New entrants are often discouraged by the establishment of
long-term take-or-pay contracts.
Other barriers to competition can arise from governments that
are keen to shelter and promote their national champions.
These barriers continue to exist in the European market despite
endeavors in individual markets, such as bundled transport
capacity in the Netherlands and Germany, or accords to increase
pipeline capacity between Spain and France.
The market's traditional pricing mechanisms present obstacles to
competition
At present, the vast majority of European gas supply is in the
hands of relatively few incumbents. On the production front, there
remain a limited number of production sources (Russia, Algeria,
Norway, the UK, and the Netherlands, along with liquefied natural
gas [LNG] shipments). These supplies are most commonly purchased
under long-term take-or-pay contracts (with prices fixed within a
range and pegged to prices in the less volatile and more liquid oil
market), which tie up the dominant share of pipeline capacity.
Due to the existence of the take-or-pay pricing system, new
entrants are typically driven to source gas for their retail
activities on various regional and often illiquid wholesale
exchanges. The development of European gas hubs is therefore
essential in paving the way for further market opening and
facilitating the emergence of new market players.
The development of wholesale hubs and more gas-on-gas pricing
will lead to greater security of supply
With the dominant volumes of European gas purchased through
long-term take-or-pay contracts, the market can at times fail to
reflect supply-demand fundamentals and therefore the "true" price
of gas, due to the connection between these contracts and petroleum
products. Furthermore, take-or-pay contracts remain somewhat of an
obstacle to competition, as
they prevent volumes from being traded by third parties. The
development of traded gas hubs may therefore foment an environment
in which prices more accurately reflect and incorporate underlying
market balances.
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More recently, however, the prices established in hub trading
have begun to be used as the pricing basis for gas supply
contracts, leading to the development of more "hybrid" markets
where gas is priced increasingly according to hub-based short-term
pricing, as well as to traditional long-term oil-indexed
pricing.
Traded volumes in European exchange systems Datamonitor notes
that with the exception of the developed UK hub, traded volumes in
the other European hubs are
relatively small compared with domestic natural gas consumption.
The role of non-conventional gas remains at an exploration stage
and therefore cannot be relied on to provide a significant supply
in the near future.
Datamonitor expects Europe to continue to be dependent on
Russian gas for at least the next five years, despite the
increasing decoupling of spot market prices and long-term gas
contracts in light of continued differentials with American gas.
Following this, and depending on the realization of the Nabucco
pipeline, both the Southern and Northern European markets through
investment in pipelines to connect to Southern markets will
progressively have the opportunity to diversify their gas supplies
and increase their access to Azeri gas. Not only will this allow a
greater level of energy security, it will increase trade in the gas
exchanges, thereby allowing the price to reflect the fundamentals
of gas prices.
The Netherlands
The Netherlands' Title Transfer Facility (TTF) continues to grow
in terms of traded volumes, physical volumes, and the number of
traders. The TTF's traded volumes showed an impressive increase in
2011 in particular. For example, traded
volumes in February 2012 showed a 48% year-on-year increase
compared to the 15% recorded in the same month by the Zeebrugge Hub
in Belgium. This improvement is a result of several factors:
The Dutch government has driven the development of the TTF and
wishes it to become a major hub. There is notable investment in gas
transport infrastructure, storage capacity, and a new LNG
terminal.
The unidirectional Balgzand Bacton Line from the Netherlands to
the UK acquired virtual reverse flow in Q1 2011.
A change in balancing regimes came into effect under recent
revisions to the Dutch Gas Act. As of April 1, 2011, market players
are able to buy or sell gas on the TTF directly as opposed to going
through the national network operator. This has visibly boosted
churn trades and total trade on the hub.
Storage services have been auctioned since March 2011, organized
by power exchange APX-ENDEX.
In November 2011 gas supplier GasTerra was designated as the
first market maker for APX-ENDEX hourly flow products on the TTF
spot within-day balancing market.
In the Netherlands, the expected trend is an increasing level of
demand and a greater diversification of supply of natural gas
through pipelines, storage facilities, and LNG. Due to government
intervention driving the development of the TTF, Datamonitor
expects the volume of trade to continue to increase and to reach a
par with the Zeebrugge Hub.
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Italy
Italy's Punto di Scambio Virtuale (PSV) is the oldest
established gas exchange system in the emerging markets segment,
having been launched in 2003. The PSV, while showing increasing
volumes in response to regulatory measures to improve its
liquidity, has struggled to gain momentum and remains in an early
stage of development. Liquidity is very low on the PSV, typically
under 2.0.
Various measures have been implemented that have led to positive
developments in the market. For example, in 2010 the
amount of wholesale gas procured at the PSV increased to 22%
from 15% in 2009. In particular, in 2010 the Regulatory Authority
for Electricity and Gas introduced an obligation to offer quotas of
imported gas on the PSV. As a result, the number of traders grew to
106 from 82 in 2009.
This progress notwithstanding, Italy's gas trading platform has
yet to show improvements in liquidity, supply diversification,
transport flexibility, and to a lesser extent, market concentration
of production. Storage is the main tool providing flexibility to
the market at present. Positive developments in the exchange could
be realized through the virtual storage program that is due to
start in Q4 2012, and as a result of the launch of the spot
day-ahead and intra-day market M-GAS in 2010, on which trading
volumes are very small.
Spain
Liquidity in the Spanish market is still limited. The country's
virtual balancing point, Centro de Gravedad, was created in 2005
but there is still no organized gas hub to provide a price
reference. Most gas exchange in Spain is done through the
over-the-counter (OTC) market on an electronic trading platform
called MS-ATR, which is managed by Enags. The volume of energy
traded over the counter amounted to 1,004.7TWh in 2010 and there
are approximately 33 active parties on the platform. Due to the
bilateral and anonymous trading from OTC trades, information is not
publically available and thus lacks transparency. Considerable
progress needs to be made to promote competition and increase
transparency in the OTC market.
Attempts to build a single Iberian gas market (MIBGAS) are still
under way. Datamonitor notes more encouraging progress in
inter-regional co-operation through the South Gas Regional
Initiative between Spain, Portugal and France. The achievements of
the initiative to date include the development of interconnection
capacity in 2013 and 2015.
The following section examines the key concepts regarding the
meaning of and evolution towards market liquidity and a mature
wholesale market.
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Adequate levels of liquidity on wholesale hubs are integral to
the development of a competitive European gas market
Figure 1: Liquidity in natural gas markets, as defined by the
IEA, incorporates four distinct market characteristics
Depth
Breadth
Immediacy
Resilience
Depth is a crucial feature as it allows for significant volumes
to be traded without resulting in excessive price moves. High or
low prices in illiquid markets can routinely send false price
signals, as levels can be the result of large trades rather than
supply-demand balances.
A market is considered wide when numerous buyers and sellers are
active.
Immediacy relates to the ability to execute large trades
relatively quickly.
Resilience refers to the ability of the market to return to its
equilibrium state of supply/demand after having been exposed to a
shock.
Depth
Breadth
Immediacy
Resilience
Depth is a crucial feature as it allows for significant volumes
to be traded without resulting in excessive price moves. High or
low prices in illiquid markets can routinely send false price
signals, as levels can be the result of large trades rather than
supply-demand balances.
A market is considered wide when numerous buyers and sellers are
active.
Immediacy relates to the ability to execute large trades
relatively quickly.
Resilience refers to the ability of the market to return to its
equilibrium state of supply/demand after having been exposed to a
shock.
Source: Datamonitor; IEA D A T A M O N I T O R
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The development of wholesale markets tends to follow a preset
pattern of distinct stages
Figure 2: The five distinct stages of wholesale market
progression
Source: Datamonitor D A T A M O N I T O R
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The wholesale market development cycle gradually builds up
enough momentum to spawn the creation of wholesale support
services
Figure 3: Wholesale support services emerge as the cycle builds
momentum
Source: Datamonitor D A T A M O N I T O R
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Once sufficient structural factors are in place, the necessary
support services required for wholesale market development begin to
emerge
Figure 4: The interaction between structural and support factors
creates a "snowball" effect
Source: Datamonitor D A T A M O N I T O R
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The market-based factors supporting hub development are crucial
elements in facilitating and developing traded markets
Figure 5: The key support elements to wholesale market
growth
Source: Datamonitor D A T A M O N I T O R
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Wholesale gas markets are required by different players
throughout the value chain for different reasons
Figure 6: Different players engage in wholesale trading for
different reasons
Source: Datamonitor D A T A M O N I T O R
Currently Europe's wholesale gas markets cover the full range of
developmental stages Datamonitor segments wholesale maturity and
liquidity into four distinct categories.
Nascent
Wholesale traded activity is theoretically possible, but in
reality is very modest.
Churn ratios are less than 1.2, indicating that less than 20% of
physically transported wholesale volumes are traded more than
once.
The limited volume of trade that is undertaken is for very
near-term gas.
Emerging
The concept of regular trading is becoming established, with a
small number of regular participants in the market.
Churn ratios are between 1.2 and 3.0.
The forward curve is very limited, generally at, or just beyond,
the prompt.
Price efficiency is weak, with the market often tracking a
neighboring market or oil.
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Established
Regular trading activity is undertaken by at least 20 market
players, driving the churn ratio as high as 5.0.
The forward curve extends beyond the prompt, out to at least one
year forward.
Interest from financial players is gaining ground.
Pricing signals are reflective of underlying market fundamentals
and are efficient at finding their own level.
Mature
The highest stage of market maturity, under which the market is
well and truly liquid.
A large number of physical and financial players trading
significant volumes, against a backdrop of increasingly complex and
sophisticated financial instruments and exotic derivatives.
Price efficiency and volatility are high, with the forward curve
efficient, setting market-reflective levels.
The UK remains the most mature market
This section discusses the liquidity/price changes in the three
most mature markets, provides a brief overview of the remaining
markets, then concentrates on the Italian, Spanish, and Dutch
markets.
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Europe's current wholesale gas markets cover the full spectrum
of segmentation
Figure 7: Market development in Europe
NASCENTLimited liquiditychurn rate 5UK (NBP)
Germany(Various)Italy(PSV)
Spain(CDG)
Belgium(Zeebrugge)
France(PEG)
Netherlands (TTF)
ESTABLISHEDSignificant liquidity
churn rate 3 to 5
EMERGINGGrowing liquiditychurn rate 1.2 to 3
Austria (CEGH)
Denmark (Nord Pool Gas)
NASCENTLimited liquiditychurn rate 5UK (NBP)UK (NBP)
Germany(Various)Germany(Various)Italy(PSV)
Italy(PSV)
Spain(CDG)Spain(CDG)
Belgium(Zeebrugge)
Belgium(Zeebrugge)
France(PEG)
France(PEG)
Netherlands (TTF)
Netherlands (TTF)
ESTABLISHEDSignificant liquidity
churn rate 3 to 5
EMERGINGGrowing liquiditychurn rate 1.2 to 3
Austria (CEGH)Austria (CEGH)
Denmark (Nord Pool Gas)
Denmark (Nord Pool Gas)
Source: Datamonitor D A T A M O N I T O R
Analysis of churn levels provides an insight into liquidity and
wholesale market developments
While physically traded volumes and the number of regular market
participants are useful measures of market liquidity and
development, they do not provide a truly reflective insight into
market conditions. One way to gain a more accurate reflection of
how a wholesale market is performing is to examine its churn
ratio.
The churn ratio, also known as the re-trading ratio, provides a
meaningful insight into the level of liquidity and maturity in a
particular market. It is calculated by expressing the proportion of
wholesale traded volumes to the physically transported volume. A
ratio of four, for example, means that each therm of gas was traded
four times.
More established markets have higher churn ratios, while less
mature markets have lower ratios. As more players enter the market
and as volumes grow, churn ratios will develop.
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Current levels of churn in individual wholesale markets vary
significantly
Figure 8: Europe's newer, less developed markets lag far behind
the established markets in terms of churn ratios
1
3
5
7
9
11
13
15
17
19
21
23
Ma
r-96
Sep-
96M
ar-
97Se
p-97
Ma
r-98
Sep-
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ar-
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p-99
Ma
r-00
Sep-
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ar-
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p-01
Ma
r-02
Sep-
02M
ar-
03Se
p-03
Ma
r-04
Sep-
04M
ar-
05Se
p-05
Ma
r-06
Sep-
06M
ar-
07Se
p-07
Ma
r-08
Sep-
08M
ar-
09Se
p-09
Ma
r-10
Sep-
10M
ar-
11Se
p-11
Chu
rn R
atio
NBP Zeebrugge TTF
Source: Datamonitor; National Grid; Huberator; Gas Transport
Services (GTS) D A T A M O N I T O R
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The National Balancing Point's maturity, deep liquidity, and
strong volume growth have led to the UK's position as Europe's
leading gas market
The National Balancing Point (NBP) a virtual rather than
physical OTC market remains Europe's oldest, most liquid, and
well-developed wholesale gas hub. The UK's drive towards market
opening and enhanced liberalization was a primary catalyst for the
introduction of the hub, and has contributed to its high level of
liquidity. The maturity of the NBP relative to Europe's other
competing hubs is also attributable to the UK's role as a key gas
producer in recent decades.
Since its inauguration, liquidity on the NBP has experienced
tremendous, albeit volatile, growth. Figure 8 shows that in 2010
the NBP recorded a churn ratio of 13.57, almost three times higher
than that of the two other largest hubs, the Zeebrugge Hub (4.46)
and the TTF (3.93). The NBP demonstrates seasonal variations in
actual (physical) volumes that drive variations in the churn ratio,
as can be seen in Figure 9. Despite these variations, there is an
upward trend. Datamonitor notes that changes in methodology were in
place from November 2000 for the NBP and from January 2010 for the
Zeebrugge Hub.
After seeing healthy growth in total annual volumes in 2006 and
2007 (up by 23% and 47% year-on-year respectively), activity
significantly declined to single-digit growth in 2008 and 2009.
Annual volumes increased by 18% in 2010 and then grew by a modest
4% in 2011. This is, however, somewhat a reflection of the NBP's
maturity, although traded volumes have continued to show an upward
trend since 2010.
Figure 9: The NBP remains Europe's most liquid traded wholesale
market
0
5
10
15
20
25
0
20
40
60
80
100
120
140
160
Ma
r-96
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p-99
Ma
r-00
Sep-
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Ma
r-02
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ar-
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p-03
Ma
r-04
Sep-
04M
ar-
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p-05
Ma
r-06
Sep-
06M
ar-
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p-07
Ma
r-08
Sep-
08M
ar-
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p-09
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ar-
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p-11
Ma
r-12
Chu
rn R
atio
Tra
ded
Volu
me
(bc
m)
Source: Datamonitor D A T A M O N I T O R
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The Zeebrugge Hub remains Europe's second most liquid hub
The Zeebrugge Hub was launched in 1999 and is connected to the
UK (through the Bacton Interconnector), the Norwegian offshore
fields, and transit pipelines to France, Germany, and the
Netherlands. The Zeebrugge Hub also receives LNG shipments and is
noted as the most important landing point in the EU27, a feature
that has helped it to maintain its dominance over the TTF.
Much of the Zeebrugge Hub's liquidity is owed to arbitrage
activity with the NBP; Zeebrugge gas prices have historically
exhibited a strong correlation with the NBP, with the former's gas
even traded in pence per therm. Recent years have seen an expansion
in trading activity on the hub: 2010 and 2011 both showed record
highs in monthly traded volumes, with a peak of 7.10bcm in December
2011.
According to Huberator, net traded volumes in 2010 actually fell
by 8% compared with 2009, but increased by 16% in 2011. Conversely,
volumes in physically traded gas grew over 2010 but fell in 2011,
explaining some of the peak churn rates that were observed at the
end of 2011.
Figure 10: Both the TTF and the Zeebrugge Hub have high levels
of liquidity and churn ratios
0
2
4
6
8
10
12
14
16
18
20
0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.5
Jan
-00
Apr-
00Ju
l-00
Oct
-00
Jan
-01
Apr-
01Ju
l-01
Oct
-01
Jan
-02
Apr-
02Ju
l-02
Oct
-02
Jan
-03
Apr-
03Ju
l-03
Oct
-03
Jan
-04
Apr-
04Ju
l-04
Oct
-04
Jan
-05
Apr-
05Ju
l-05
Oct
-05
Jan
-06
Apr-
06Ju
l-06
Oct
-06
Jan
-07
Apr-
07Ju
l-07
Oct
-07
Jan
-08
Apr-
08Ju
l-08
Oct
-08
Jan
-09
Apr-
09Ju
l-09
Oct
-09
Jan
-10
Apr-
10Ju
l-10
Oct
-10
Jan
-11
Apr-
11Ju
l-11
Oct
-11
Jan
-12
Chu
rn R
atio
Tra
ded
Volu
me
(bc
m)
Zeebrugge Volume TTF Volume Zeebrugge Churn TTF Churn
Source: Datamonitor; National Grid D A T A M O N I T O R
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The TTF has experienced remarkable liquidity growth and
continues to challenge the Zeebrugge Hub in traded volumes
Launched in November 2002, the Dutch TTF market is largely
modeled on the UK's NBP. It competes with the Zeebrugge Hub as
Europe's second most liquid wholesale gas hub after the NBP. The
TTF has seen impressive growth in traded volumes in recent years
and continues to record a healthy expansion in activity. Traded and
net volumes continue to record highs and the churn rate has also
continued to show peak highs, surpassing that of the Zeebrugge Hub
in mid-2011.
In January 2008, volumes traded on the TTF surpassed those
traded on the Zeebrugge Hub for the first time. Since then, both
exchanges have been locked in a battle for second place as Europe's
most liquid traded gas hub behind the NBP. The TTF's traded volumes
showed an impressive increase in 2011 in particular. For example,
traded volumes in February 2012
showed a 48% year-on-year increase, compared with 15% for the
same month in the Zeebrugge Hub. Despite this growth, churn rates
remain below those of the Zeebrugge Hub due to relatively higher
levels of physical traded volumes compared to traded volumes.
Price efficiency levels in the European wholesale markets show
varying ranges of volatility Datamonitor's Deviation Days Index
measures price movement ranges and provides insight into price
efficiency
The degree of price volatility in a market is widely seen as an
indicator of price efficiency. Stable markets with low levels of
price movement and volatility tend to reflect immature, illiquid
markets that lack price direction and are inefficient at creating
pricing signals that accurately reflect both market sentiment and
underlying supply/demand fundamentals. As an alternative to the
traditional standard deviation-based measures of volatility that
tend to work independently of a benchmark,
Datamonitor has devised the Deviation Days Index (DDI). The DDI
measures wholesale market volatility and, by proxy, price
efficiency.
The DDI measures the number of days in a given month where the
bid/offer spread midpoint closing price is within a +/- 2.5% range
of the previous day's close. The index then provides a comparison
with the number of days that the NBP was within the +/- 2.5% band.
Long periods of closing prices within the +/- 2.5% band imply a
lack of direction and weak price efficiency.
A DDI of 90 implies that, in a given month, the market closed
outside of the +/- 2.5% banding 10% fewer days than the NBP did,
and, as such, was 10% less efficient at trading outside of the
narrow +/- 2.5% band and thus finding its own fundamentally
reflective level. As such, the DDI highlights both how high a
specific market's levels of volatility are, and how this volatility
measure relates to the NBP. As Europe's most established and liquid
wholesale traded market, the NBP provides an ideal benchmark for
comparison purposes.
Levels of volatility in the established markets have been
decreasing markedly
Figure 11 shows the relationship between the daily price
movements in a +/- 2.5% range recorded by the TTF and the Zeebrugge
Hub compared to the NBP. The upper zone of the chart shows how many
more days in percentage terms the given market has shown a greater
number of +/- 2.5% fluctuations compared to the NBP. Meanwhile, the
lower zone indicates the percentage of days that the range was
smaller than that recorded by the NBP.
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In the early days of European wholesale gas market trading, the
Zeebrugge Hub tended to lead the NBP in terms of price efficiency.
However, since then the NBP has definitively established itself as
Europe's most liquid and price-reflective market, and, as such,
maintains dominance in terms of price signals.
A different pattern is discernable in the TTF. In the period
following its launch it consistently lagged behind the NBP in terms
of volatility, reflecting its relative immaturity and dependence on
other markets for pricing signals. However, as the TTF grows in
liquidity and continues to contend with the Zeebrugge Hub for the
crown of Europe's second liquidity wholesale market after the NBP,
this is likely to change. Increased traded volumes, more players,
and general market evolution mean that price efficiency in the TTF
is improving. This is compounded by the fact that rocketing prices
in the NBP are making traders more reluctant to take significant
long-term positions, which in itself has a detrimental effect on
price efficiency.
Finally, Datamonitor expects that the NBP will remain the most
liquid market across the region and that it will continue to
function as a benchmark and point of reference for other European
trading hubs.
Figure 11: On balance, price volatility on the TTF and the
Zeebrugge Hub has remained significantly lower than that on the
NBP
0
50
100
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l-05
Oct
-05
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06Ju
l-06
Oct
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07Ju
l-07
Oct
-07
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l-08
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DD
I Inde
x (N
BP
= 10
0)
NBP Zeebrugge TTF
Low relative volatility
High relative volatility
Source: Datamonitor; Spectron D A T A M O N I T O R
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Other less developed hubs The Central European Gas Hub continues
to develop its traded volumes, although it is still limited by its
single source of gas supply
The Central European Gas Hub (CEGH) is a nascent hub that offers
a title transfer facility at the location of the pipeline import
interconnections at Baumgarten, Austria, which is also the junction
point of pipeline systems where Russian gas is imported into
Europe. The hub was set up by OMV in 2001, although for a number of
years it saw only very limited activity. The CEGH Gas Exchange of
Wiener Boerse Spot Market and the CEGH Gas Futures Market were set
up in December 2009.
The CEGH stands in contrast to all other European gas hubs in
that the total supply from Baumgarten flows originally from Russia
(Gazprom). In early 2008, Gazprom gained a 50% stake in the hub
after signing an agreement with OMV Gas International. As there is
only one source of gas, the majority of this is traded around
long-term contracts held by incumbent European utilities, traded on
the OTC market.
Although it maintains a favorable geographic location with
multiple pipeline destinations to Italy and Germany, one feature
that could potentially inhibit the hub's eventual liquidity growth
is the role of Gazprom as its single supplier. Traded volumes,
although growing for example, 0.43TWh were recorded on the gas
exchange in Q3 2011, a 275% year-on-year increase are still very
small compared to the level of Austrian natural gas consumption,
which was 13TWh in Q3 2011.
That said, the hub has showed impressive increases in traded
volumes over 2011 and 2012 to date. For example, the total
trading volume (both OTC and gas exchange) reached an all-high
peak in April 2012 with 47.52TWh (4.24bcm). Further, the number of
customers in the OTC market has more than doubled to 133
customers.
Datamonitor expects developments such as regulatory change and
the introduction of products that will improve liquidity to drive
further growth in the CEGH. On January 1, 2013 the hub will become
the Virtual Trading Point for Austria, and it has been announced
that a gas exchange within-day market of the Wiener Boerse will be
launched by the end of 2012. In particular, the CEGH plans to
launch a reference price for the CEGH spot market called CEGHIX
that will show customers a transparent daily exchange index price.
In addition, Datamonitor notes that the CEGH will transfer its spot
and futures markets to the new Trayport Exchange Trading System in
July 2012. This change in technology which is already in use in
Denmark's Nord Pool Gas will improve the market's transparency by
allowing traders to see bids on other gas exchanges on one screen,
thereby providing an efficient view of the whole market.
Europe's emerging wholesale gas hubs continue to expand in both
traded volumes and liquidity
Of the markets in the emerging segment Italy's PSV is the
oldest, having been launched in 2003. However, Italy's gas trading
platform has yet to show improvements in liquidity, supply
diversification, transport flexibility, and to a lesser extent,
market concentration of production. Storage is the main tool
providing flexibility to the market. Positive developments in the
exchange could be realized through the virtual storage program that
is due to start in Q4 2012, and as a result of the launch of the
spot day-ahead and intra-day market M-Gas in 2010.
France's Point d'Echange de Gaz (PEG) market prices typically
trade in line with Europe's other hubs. Factors driving price
include the colder weather in the country. Traded volumes continue
to show impressive increases. For example, traded
volumes on the spot segment increased to 29.2TWh in 2011 while
the number of trading members had grown to 45 by the
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end of 2011, up from 38 in 2010. However, like Germany a
relatively small proportion of France's total gas demand (some 7%)
is delivered via the Powernext platform. Datamonitor notes that LNG
prices continue to exceed the price of gas traded on the PEG,
though LNG prices still remain below those paid in Italy.
Datamonitor expects that the PEG will progress looking out to late
201415, when it will benefit from the France-to-Belgium
interconnector that will offer up to 12bcm (134TWh) per year firm
capacity to transfer gas.
In Germany, the NetConnect (NCG) and Gaspool hubs (formerly E.ON
Gastransport EGT and BEB respectively) have seen a modest increase
in traded volumes since 2010. Gaspool typically trades at a
discount to NCG due to the market zone's large amount of storage
flexibility in times of high demand. Combined volumes on the two
hubs have varied between approximately 1.5TWh and 2.5TWh over
201011. Thus, the volumes traded in Germany remain small compared
with those seen in other Northwestern European hubs such as the TTF
or the NBP, and indeed are small compared with
Germany's consumption of natural gas. Part of this is due to the
fact that the Netherlands is an important gas producer, whereas
Germany is largely dependent on long-term contracts with Russia for
supply. The associated take-or-pay obligations faced by German
buyers means a relatively lower level of demand on the spot market
compared with the TTF. Increasingly, the German border price has
been decoupling with respects to the oil indexed price towards the
spot gas price, indicating increasing power on the part of larger
players in the market to negotiate supply concessions to reflect
the price differences.
Europe's nascent markets are seeing renewed impetus towards
development
Despite Denmark's long history as a gas producer, wholesale hub
activity, although undergoing some changes of note, is yet to
develop to any significant degree in the country. The initial
impetus towards Danish wholesale trading took place in late 2003
when Gastra (the transmission system operator formerly known as
DONG Transmission before legally unbundling in early 2004) and
Nordpool, the Nordic power exchange, set up a joint project to
examine the possibility of developing a Danish gas exchange.
Various other initiatives, including the development of a standard
trading contract in 2004, failed to catalyze any significant
trading activity. However, in March 2008 Nordpool and Energinet.dk,
the current transmission system operator, set up a gas exchange on
the Nord Pool called Nord Pool Gas. In April 2011 the Nord Pool
Spot took over all clearing activities in relation to trading
activities on Nord Pool Gas.
The Danish wholesale market still has a high degree of market
concentration. Trading volumes continue to progress at Nord Pool
Gas, although they remain small in comparison to other European
hubs. In February 2012 trade volumes reached a high of 819,720MWh,
an increase of 46% from February 2011. The number of participants
has also continued to increase and reached 19 in February 2012.
Nord Pool Gas currently offers six trade products, of which the
most traded are next-day and next-month delivery products. In April
2011 the exchange introduced a within-day product and a weekend
product. Future changes of note that will assist the progression of
Nord Pool Gas include an initiative by the Danish energy regulatory
authority and Energinet.dk to set up a transparency platform for
the gas market. This is due to take the form of a joint web
platform so that market information can be disclosed in a timely
and transparent way. The first phase will include a limited part of
the market production and grid facilities in the Danish North Sea
and will be finalized by July 2012.
Also of note is the role of DONG Energy, which will become the
market maker from May 2012 on a three-month trial basis. This is a
step towards higher liquidity on the exchange.
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The Netherlands
This section provides an analysis of the Dutch TTF market,
particularly its most active players, and offers information on how
GTS, the country's transmission system operator, functions on an
operational level.
Market overview: demand and supply
In the Netherlands, domestic consumption of gas in 2012 is
expected to be 48.2bcm, of which 23bcm will be distributed to
households, 16.4bcm will be used by industrial facilities, and 9bcm
will be used for power generation. Total demand is forecast by GTS
to increase to 51.3bcm in 2021 and 55.4bcm in 2031. Specifically,
these projections show gas demand rising modestly by 2030, driven
by non-domestic (industrial and power generation) demand. Domestic
demand, on the other hand, is forecast to fall due to better
isolated homes and energy efficiency programs.
The Netherlands is expected to produce 83.7bcm of natural gas in
2012, up from 79.0bcm in 2009 (IEA). GTS expects Dutch production
to fall to 58.9bcm in 2021 and 20.7bcm in 2031. With regards to the
Netherlands' renewable energy target of 14% of renewable energy in
2020, the government has introduced a subsidy scheme called SDE+ to
encourage the use of renewable electricity, heating, and green gas.
The potential for green gas is estimated by the government at some
56PJ by 2020.
Future supply diversification
The Dutch government forecasts that the country will become a
net exporter rather than a net importer of gas by 2025. Domestic
demand for gas and export obligations are currently covered by a
guaranteed supply of both domestic production and imports from
Russia and Norway; however, GTS projections to 2031 indicate a
substantial fall in import volumes from Norway to become
approximately equal with import volumes from Russia. The decline in
gas production in Northwestern Europe naturally translates into
reduced flexibility in the Dutch market and a national policy of
diversification of supply sources by LNG and different countries of
origin.
A survey undertaken by GTS shows that long-term contracts are
expected to dominate the market to 2031 in order to meet demand,
while storage facilities will play an increasingly important role
in compensating for decreasing production flexibility. The GTS
survey is based on a survey of shippers' contracted volumes of gas
to, from, and through the Netherlands over the next 20 years and
provides a useful indication of the volumes of gas that will be
traded out to 2030 on the TTF. The survey observed two scenarios
for the security of supply: the low scenario is based on contracted
volumes, whereas the high scenario is based on volumes yet to be
contracted but reported to GTS.
Under the low scenario, incoming volumes vary from 112bcm in
2012 to 22bcm by 2031 while outgoing volumes range from 60bcm in
2012 to 2bcm in 2031. The high scenario estimates incoming volumes
to fall from 137bcm in 2012 to 40bcm in 2031, and outgoing volumes
to fall from 78bcm in 2012 to 10bcm in 2031. GTS also expects a
rise in the demand for gas transport capacity until 2015, but
forecasts a shortage of supply capacity after 2016 that will be met
from new or expanded storage facilities, LNG terminals, and import
pipelines. Therefore, supply will be geographically more
diversified.
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The role of non-conventional gas
In its Energy Report 2011, the Dutch government recognized the
possible contribution of unconventional gas to the country's future
energy mix. It has issued four licenses for unconventional gas
exploration, including coalbed methane and shale gas. It is
therefore at the stage of investigating the potential of such gas,
while reserving the right to evaluate further exploration based on
the results, risks, and benefits.
Gas infrastructure and storage investment
The Dutch government aims for the country to grow as an
important national and European supplier of gas as part of its goal
to achieve a lower carbon emission economy by 2050. Hence, the
government is investing in gas transport infrastructure and storage
capacity to support future gas trade. According to the Dutch energy
regulator Dte, 500m is scheduled to be invested in additional
capacity over the coming years. Through GTS, additional demand for
capacity has been quantified through three tenders called "Open
Seasons" since 2005.
A recent project of note is the North-South route that was
started in 2008 with the aim of enlarging the existing gas
transmission system and connecting the Netherlands to Southern
Europe. The connection will provide the country with 485km of
pipeline and compressor stations. The first section of the pipeline
was completed in 2010 and the second phase was completed in
2011.
In addition to these, transport capacity is being created
through several storage facilities:
The Bergermeer facility for hydrogen gas near Alkmaar, with a
working volume of over 4bcm due to be in use by 2013.
The Zuidwending facility for low calorie gas in Groningen where
a fifth underground cavern will be in use by 2014, bringing the
working volume to 300mcm. Official use of the caverns started in
January 2011, with working volumes of 200mcm.
The Heiligerlee nitrogen facility, due to come into use in
September 2012 for the supply of pseudo G-gas to the domestic
market.
A landing LNG terminal (Gas Access to Europe) on the Maasvlakte
near Rotterdam with 12bcm of capacity, which has been in use since
September 2011. It has a throughput capacity of 12bcm per annum and
will have four storage tanks of 180,000m once the terminal reaches
higher capacity.
Lastly, the Nord Stream pipeline, of which one shareholder is
Nederlandse Gasunie, will provide further security of supply to the
Netherlands. Gas transport began from the first line in November
2011 and the completion of the second line of the 1,224km pipeline
through the Baltic Sea is expected by the end of 2012. The pipeline
connects Russia (Vyborg) to the EU (Germany), which is well
connected to the Dutch gas grid. Once the automated twin-pipeline
is finished its capacity will be some 55bcm per year. From Germany,
gas will be piped onwards to Belgium, Denmark, France, the
Netherlands, and the UK. Gas delivery to the UK in particular will
be made through the planned connection between Bunde and Den Helder
in Northern Holland, and from there it will join with the Balgzand
Bacton Line.
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The growing importance of the TTF
The TTF continues to grow in terms of traded volumes, physical
volumes, and the number of traders. The TTF's traded volumes showed
an impressive increase in 2011 in particular. For example, traded
volumes in February 2012 showed a
48% year-on-year increase compared to the 15% recorded in the
same month by the Zeebrugge Hub. Traded volumes increased to almost
115bcm in 2010, 40% higher than in 2009.
Although the TTF's traded volumes have grown remarkably as shown
in Figure 10 and are now comparable to the volumes traded on the
Zeebrugge Hub, its churn level, which has been between 3.0 and 5.0
over the last two years, remains slightly below those of the
Zeebrugge Hub. The TTF's price volatility is also lower than that
of its counterpart, as shown in Figure 11. In terms of absolute
prices, movements in the TTF correlate with those of the NBP, with
a noticeable decoupling starting in 2010.
Figure 12: Absolute price movements on the TTF and the NBP
(p/th), July 2001July 2011
Source: Datamonitor D A T A M O N I T O R
Changes of note in the TTF
Price volatility in the TTF is typically driven by supply
disruptions particularly with regards to Norwegian deliveries and
temperature fluctuations. Market liquidity is also influenced by
the interconnector utilization rate between Belgium and the
Netherlands and by the amount of UK exports transported from
Belgium.
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A change of note and one that has driven higher traded volumes
on the TTF is the fact that the unidirectional Balgzand Bacton Line
from the Netherlands to the UK acquired virtual reverse flow in Q1
2011. Until then, the pipeline had only allowed physical flows in
the direction of the UK due to pressure differences and a lack of
compression at the UK end of the
pipeline. In February 2011 BBL Company began auctioning capacity
to interruptible reverse flow (IRF) gas from the UK to the
Netherlands for the period April to June 2011. In practice this
change means that physical flows are canceled out from the
Netherlands to the UK through the pipeline and that flows will be
more responsive to demand in the two countries. The IRF service
allows shippers to nominate gas flows to be deducted from the
capacity booked from the UK to the Netherlands from the physical
flows in the reverse direction. IRF capacity is sold in tranches of
30,000kWh, and Balgzand Bacton Line data show that all auctions up
until May 2012 have sold out.
Also of note is the fact that the Balgzand Bacton Line is not
likely to pursue physical reverse flow capacity. It conducted a
consultation in July 2011 regarding possible market demand for
physical reverse flows as required under EU regulation, but due to
limited interest BBL Company indicated that it would submit an
exemption request to the EU authorities in March 2012.
A second notable development that has driven higher traded
volumes is the change in balancing regimes. Changes to the Dutch
Gas Act (Gaswet) came into effect on April 1, 2011 to improve what
the Netherlands Competition Authority considered to be limited
success in the wholesale gas market to date. As a result GTS
implemented a new market model and a new balancing scheme. As of
April 1, 2011 market players are able to buy or sell gas on the TTF
directly as opposed to going through GTS, which was previously
responsible for keeping the system in balance. Also of note is the
fact that in April 2011 a regulatory measure came into effect,
which means that all traded gas in principle should be delivered on
the TTF. As a result of these changes and the introduction of new
products on the back of the new balancing regime, the churn ratio
in Q2 2011 reached 5.2 due to higher volumes of trade and a fall in
physical volumes. In October 2011, an all-time monthly high was
reached with a total of 128.5GWh traded on the within-day
market.
In November 2011 gas supplier GasTerra was designated as the
first market maker for APX-ENDEX hourly flow products on the TTF
spot within-day balancing market, for a period of at least six
months. The aim of this was to improve liquidity in the market in
addition to the market change in April 2011 that allowed
participants to do their own balancing.
GasTerra started auctioning natural gas storage services in
March 2011. The auctions are organized by power exchange APX-ENDEX
(which has been appointed as the gas exchange operator) and
followed talks between GasTerra and the Netherlands Competition
Authority to improve competition in the market.
Regulation in the Dutch market
The Netherlands Competition Authority is committed to ensuring
the efficiency and development of the TTF as well as encouraging a
single European gas market. In addition to contributing to measures
to promote competition such as product diversification on the TTF,
the authority is vigilant with regards to possible anti-competitive
behavior on the TTF. Developments include:
In July 2011, the Netherlands Competition Authority investigated
the possibility that prices on the exchange had suffered from hedge
funds and speculators and found that there was only a small degree
of such activity on the TTF due to the majority of trading being
predominantly physical. In the same month the authority also
revised its decision regarding anti-competitive behavior by
GasTerra.
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The authority gave its approval in late March 2011 for GTS to
experiment with an auction of bundled transport capacity between
GTS networks and its German affiliate, Gasunie Deutschland. This
was a step towards a single gas market and capacity prices that
reflect market conditions to a greater extent.
In December 2011 the authority increased the tariffs of Dutch
regional network operators of natural gas and electricity by 8.9%
effective as of January 2012, thereby increasing household energy
bills by some 23 per annum. This price rise, however, follows a
return of 400m in excess revenues by GTS to network uses decided in
October 2011.
In May 2011 the authority released the draft method decision for
the regulation of GTS for the current and previous regulatory
period in order to increase transparency and create greater
security for future investments.
Major players in the market The Dutch wholesale gas market has
seen an increase in the number of players to over 70. This section
analyzes a selection of the major players and notes relevant points
regarding their sales, strategies, and operations.
GasTerra
GasTerra is the largest supplier of natural gas in the country.
It buys and sells gas and provides gas-related services. It has
exclusive access to the Groningen gas field and also has the
obligation under the government's "small fields policy" to take gas
from the majority of small fields at a representative price.
GasTerra's most recent financial results revealed a record
turnover of 21.1bn in 2011 and a lower volume of gas sold. This
high turnover was driven by the higher-than-average price of gas,
whereas the volume, which was 5% lower than in 2010 at 87bcm, was
due to a relatively mild winter. Operating profit totaled 44m, a
3.5% increase on 2010, while net profit at 36m was stable. Of its
total sales, domestic gas sales in 2011 amounted to 38.1bcm, a
slight drop compared with 2010. GasTerra supplied 9bcm to
non-domestic consumers in 2011, and 48.6bcm to customers abroad.
Its major foreign customers in 2011 were Germany (18.8bcm), the UK
(10.6bcm), and Italy (7.1bcm).
In November 2011 GasTerra was designated as the first market
maker for APX-ENDEX hourly flow products on the TTF spot within-day
balancing market, for a period of at least six months. In 2011,
GasTerra expanded the range of products and services available on
the TTF, providing private sector companies with more options to
supply their customers. In January 2011 it announced the provision
of a
virtual gas storage service to provide seasonal flexibility to
the market for a total of 19TWh. GasTerra now provides a
temperature-dependent product whereby gas supply is dependent on
the next day's predicted temperature. Customers can also opt for
its Spark Spread product, under which supply volumes will be
determined based on the relationship between electricity and gas
prices. This product is particularly interesting for customers with
gas-fired power stations that procure gas to generate electricity
as and when it is profitable to do so.
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Other developments include a long-term agreement to supply
natural gas to Eneco, the Rotterdam-based energy company, signed in
January 2012. The gas will be supplied via the TTF, and the amount
will vary each day depending on outdoor temperatures and wind
speed.
Nederlandse Aardolie Maatschappij
The Nederlandse Aardolie Maatschappij is one of the largest
producers of natural gas in the Netherlands, accounting for around
75% of Dutch demand, and is a jointly owned subsidiary of Shell
ExxonMobil. The company undertakes the exploration and production
of crude oil and natural gas. Annual production in 2010 totaled
67.3bcm, a 26.3% increase on 2009. 53bcm of the volumes generated
in 2010 were purchased by GasTerra.
Essent
Essent, which is part of RWE Group, is a long-standing gas
player in the Dutch market. It is the third largest power producer
and the leading player in the gas retail market. Essent has
installed power capacity of 4,046MW from gas, hard coal, and
biomass. It also holds a minority stake in the sole nuclear
Borssele plant in the Netherlands.
Essent's retail sales base in the Netherlands and Belgium
numbers 4.370 million customers, of which 2.024 million are gas
customers. In gas volume terms, Essent sold 50.8TWh to its
non-domestic customers, compared with 36.9TWh to its domestic
customers.
The company made an operating profit of 245m in FY2011 from
revenue of 5,818m, a fall of 37% and 11% respectively compared to
FY2010. Gas sales decreased by 16% to 3,460m, partly due to some of
its larger industrial and corporate customers switching suppliers
as well as lower demand in general due to higher temperatures.
Recent investments of note include Essent's two new
combined-cycle gas turbine power stations, Claus C and Moerdijk 2.
They came online in January and February 2010 with a net installed
capacity of 1,304MW and 426MW respectively. In addition to these
investments, Essent has also invested in renewable
technology research with the construction of a 100m meteomast
situated 75km off the coast of Ijmuiden in the Netherlands. The aim
of the research is to inform future wind farm projects far out to
sea.
Nuon
Nuon, which has been part of Vattenfall Group since 2009,
undertakes gas retail, trading, and storage services in the
Netherlands where it has a market share of 30%. It has a client
base of some 2.6 million
customers, of which 1.9 million are gas customers. Vattenfall
previously had gas production capacity through Nuon Exploration and
Production, but this was sold to Tullow Oil in June 2011. Nuon's
net profit in 2011 was 299m from a net turnover of 4,450m. In terms
of volume, its sales amounted to 5.5bcm.
Vattenfall Group's strategy appears to be focused on the core
activities of sales, trading, and storage in the Netherlands. Its
two other key markets are Germany and Sweden. In line with this
strategy Vattenfall Group has divested its existing gas fields in
the North Sea and some of its activities in Belgium, indicating
that it continues to pursue investment in storage capacity.
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Nuon has a number of gas-related investments in process,
including:
The construction of the multi-fuel Magnum power plant in
Eemshaven, which is due to be commissioned at the end of 2012. The
plant has a production capacity of 1,311MW, with a predicted load
factor of 58% due
to three combined cycle gas turbines composed of a gas turbine,
a steam turbine, and a generator.
A gas-fired plant with an operating capacity of 435MW called
Hemweg 9. The plant will be operational by the end of 2012 and will
supply Amsterdam.
A gas-fired power plant is being built in Diemen with a capacity
of 435MW of electricity and 260MW of heat.
Nuon is considering expanding its gas storage capacity at
Zuidwending (Groningen Province) in collaboration with AkzoNobel to
a maximum of four caverns and a gas installation to store
high-calorific gas. This would supplement Nuon's existing storage
facility in Epe, Germany, where it has 280mcm of natural gas
storage as of April 2011.
GTS
Title transfers of gas on the TTF are registered by the GTS by
means of a "nomination," which states the characteristics of the
transfer (quantity, period, and parties). Only shippers that are
admitted into the GTS and have a TTF subscription are allowed to
trade. GTS earns revenue from shippers through monthly subscription
fees and a variable volume-based fee.
Matched trades are nominated by GTS on the shippers' behalf.
APX-ENDEX acts as the central counterparty to all trades. Contracts
are fully collateralized thereby reducing risks, and settlement
cycles are fully undertaken by APX-ENDEX's financial services team.
All members have access to realtime credit and settlement details
and a 24/7 customer support help line.
GTS allocates firm capacity on an online "first come, first
served" basis. For a shipper, there is no reservation or separate
conditions for transit contracts. Using the TTF, a shipper can
transfer gas that is brought into one of the 50 entry points of the
national grid to one of the 1,100 exit points on the grid. Should
capacity be fully booked, the shipper can request interruptible
capacity based on three tranches, where the possibility of
interruption is reflected in the price. The proceeds
from the selling of capacity go directly to GTS's revenue. At
the import points (the borders with Germany and Belgium), GTS makes
high-calorific gas firm transmission capacity of over 38GW
available, and at the export points with Germany, Belgium, and the
UK, GTS makes firm capacity of over 66GW available. For exports of
low-calorific gas at border points with Germany and Belgium, over
87GW is available.
Since April 1, 2011 shippers have benefitted from the new
balancing regime and market model. Every market party on the TTF is
now responsible for its balancing position and can access hourly
information regarding its balancing position and that of the gas
system. In the new regime, each party that transports gas can now
contribute to keeping the network in balance. These players are
known as "program-responsible parties." Previously, GTS was the
only player that was both authorized and capable of keeping the
network in balance. In practice, this meant that every day shippers
had to send in a program containing predictions of their entries,
exits, and trades. During the gas day, GTS would compare the
program with the actual allocation on a near realtime basis to
determine the portfolio imbalance. The calculated imbalances per
portfolio
are accumulated and shared with market parties on an individual
basis through the portfolio imbalance signal (POS). The summation
of all POSs is called the system balance signal and is published on
the same timescale as the POS.
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If balancing is required, GTS buys gas from a balancing platform
where market parties can offer gas. This system encourages shippers
to keep themselves in balance as GTS can identify shippers that are
causing imbalances and can target the balancing costs to them.
Specifically, GTS engages a corrective bid ladder mechanism if the
imbalance falls into a certain zone. Shippers that find themselves
in an imbalance can use their own physical means to correct it if
possible, trade on the TTF, or enter into other commercial
balancing contracts,. If they do nothing they bear the costs of the
bid price ladder system. The Netherlands Competition Authority is
currently evaluating this new balancing system.
Italy
This section provides a summary of the recent movements in the
Italian PSV market.
Market overview: demand and supply
Compared to other European countries Italy consumes a large
amount of gas: some 60% of the country's electricity is produced in
gas-fired plants. Final consumption in 2009 was 44bcm (473TWh), of
which 27% was used for industrial purposes, 46% for residential
purposes, and 24% for commercial and public services. In 2010
natural gas consumption increased, driven mainly by the
residential/services and industrial sectors. Despite stagnant
demand in 2011, the Regulatory Authority for Electricity and Gas in
Italy expects demand for gas to increase substantially, mainly
driven by the fact that the country has abandoned its nuclear power
generation program. According to the authority total demand rose in
2010 to 173.5bcm (including volumes sold and resold in the
wholesale and retail markets).
2009 national data and IEA data show that total domestic supply
was 76.7bcm (826TWh) in 2009, of which domestic natural gas
production was 7.88bcm (85TWh). Hence, imports made up the majority
of domestic supply at 68bcm (732TWh). In 2010, domestic production
increased to 8.3bcm and imports rose to 75.3bcm. Thus 10% of the
country's gross gas demand is met from domestic production and 90%
from net imports.
Italy's domestic production of gas has continued to fall,
increasing its dependency on imports from non-EU markets. Most
import activity is based on long-term oil-indexed contracts. Nearly
90% of gas imports originate in non-EU countries including Algeria,
Russia, Norway, Libya, and Nigeria. Of these, Algeria accounts for
over one third of Italy's gas demand. Most imported gas is
transported through pipelines (88%); however, since 2009 there has
been a notable rise in the amount of LNG transported by ship due to
progressive use of the Rovigo regasification terminal (also known
as the Adriatic LNG Terminal), which treats gas from Qatar.
PSV developments
The PSV has struggled to gain momentum and remains at an early
stage of development. Liquidity is very low on the PSV, typically
under 2.0. However, some progress has been made that is worthy of
note. In 2010, direct imports of gas accounted for 51% of
wholesalers' gas procurement. 22% was purchased at the PSV, up from
15% in 2009. Hence, the PSV's significance is growing and is being
developed in response to regulatory measures to increase its
liquidity. In particular, in 2010 the Regulatory Authority for
Electricity and Gas introduced an obligation to offer quotas of
imported gas on the PSV. As a result, the number of traders grew to
106 from 82 in 2009. Transactions on the PSV reached 35.9bcm in
2010, a 66% increase on 2009, representing 43% of gross national
consumption at 83bcm.
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Prices on the PSV are typically higher than spot hub prices and
currently hover around the 25/MWh level. Further, PSV prices are
more independent than prices on other hubs and follow their own
fundamentals. The main reason for this is that
Italy is more exposed to potential impacts on its natural gas
imports as a result of unrest in North Africa and the Middle East
than other European countries, due to its dependence on Algerian
and Libyan imports (Italy imports approximately 10% of gas from
Libya). Imports from these two areas constitute some 35% of Italy's
gas imports, which partially accounts for the higher prices
observed on the PSV. Of note is the complete shutdown of gas
imports from Libya via the Greenstream pipeline in Q1 2011.
Although this had the potential to affect prices, in reality
additional Russian suppliers compensated for the difference. Other
factors that affect PSV prices, as on other hubs, include weather
variations, import pipeline outages (for example, that of the Swiss
Transitgas pipeline in 2010) or maintenance in the Trans-Austria
pipeline, which supplies Russian gas through Austria to Italy.
M-Gas, Italy's new exchange
In March 2010 Italy's Ministry for Economic Development set up a
trading platform for imported gas called P-Gas, on which importers
must place their quotas of imported gas for transfer. Domestic gas
quotas were introduced to the platform in August 2010. The spot
market for natural gas, with Gestore dei Mercati Energetici (GME)
acting as a central counterparty, was launched in October 2010 and
is called M-Gas. M-Gas began operations in December 2010 and
consists of a day-ahead market (MGP-Gas) with both a continuous
trading mechanism and an auction trading mechanism; and the
intra-day market (MI-Gas), with a single-session, continuous
trading mechanism. In addition, there is the gas balancing platform
(PB-Gas), which is also organized by GME. The M-Gas market
currently has 33 participants according to GME.
Since the launch of M-Gas the Regulatory Authority for
Electricity and Gas has considered the OTC PSV to be a secondary
market that is useful for providing operators with a commercial
balancing tool, as well as its ability to replicate daily capacity
trading.
Trading volumes in the MGP-Gas and MI-Gas markets for the
2011/12 thermal year showed that the vast majority of trades
(45,910MWh) took place on the day-ahead market, compared with
7,800MWh on the intra-day market. The volume of trade fell in the
MGP-Gas market from 135,238MWh in 2010/11. The average traded
volume per day on the MGP-Gas was 1,836MWh in 2011/12, a fall
compared with the previous year when the average traded volume per
day was 1,982MWh.
GME balancing volumes for the 2011/12 thermal year amounted to
108,019MWh, with 23 participants buying or selling.
Virtual storage program
A prominent feature of the Italian gas storage sector is that
the majority of storage is controlled by Stogit, which is
responsible for over 90% of storage capacity. The remaining
capacity is held by Edison. Actual physical storage of natural gas
capacity at the end of 2011 was 15.0bcm, an increase of 5.6%
compared with 2010 due to the development and upgrade of
investments made at the Fiume Treste, Minerbio, and Settala
concessions.
In response to increasing demand for storage, the government
introduced new measures in August 2010 to incentivize the creation
of additional storage capacity and to increase competitiveness in
the natural gas market. The measures allow any parties that inject
natural gas into the network to increase their market share by up
to 55% under the condition of building new storage infrastructure
or upgrading existing ones. The targeted capacity addition was 4bcm
of new storage capacity.
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The proposal for this virtual storage program, which is due to
start in October 2012, will mean that a section of the gas exchange
for both spot contracts and long-term and monthly contracts will be
dedicated to the program, allowing gas to be resold on the M-Gas
exchanges. The total storage capacity available within the virtual
program is 600mcm.
Competition and concentration in the market
The Italian market has great potential for development due to
its geographical position, which allows it to have a strong
diversity of imports, and the penetration made by gas into the
power generation mix. However, Datamonitor research has shown that
the spot market has made limited progress; it continues to suffer
from a lack of transparency and in particular, a lack of
competition in the market, which continues to be highly
concentrated.
The import and wholesale sector is dominated by Eni and its
subsidiaries (including Snam Rete Gas, Stogit, and Italgas), which
control the majority of the market in terms of transport and
storage, production, and imports. For example, the share of gas
imports held by Eni Group remains dominant at just over 38% in
2010. This concentration continues to hinder the creation of a
competitive gas market by limiting the amount of spot gas available
in Italy.
The largest players in the market in terms of gas suppliers are
Eni, Edison, and Enel, which collectively covered 73.4% of the
market in 2010, a 6.1% fall from 2009. There is, however, some
improvement in competition. For example, the number
of suppliers in the wholesale market increased from 94 in 2009
to 105 in 2010, while the market share of the top three companies
on the wholesale market Eni, Enel Trade, and Edison fell slightly
to 31% in 2010.
Regulation
The Italian regulator and energy services operator is the
Gestore Servizi Energetici (GSE). As mentioned previously, GME is
the entity that organizes and manages the natural gas market M-Gas,
where parties buy and sell at the PSV, which in turn is operated by
the Italian transmission system operator/balancing operator Snam
Rete Gas. GME plays the role of the central counterparty in M-Gas.
The energy market comes under the remit of the Ministry of Economic
Development.
A recent decision of note was that in August 2011 the Italian
government raised a tax on the energy sector, the consequence of
which will be to create a tax surcharge on energy companies from
6.5% to 10.5% over three years, to finish in 2014. This levy was
also extended to distribution and transmission companies. As a
result, Snam Rete Gas and the largest utility in the country, Enel,
saw their share value fall some 10% and 5% respectively in August
2011.
Active and major players in the market This section evaluates
the three major players in the Italian gas market and notes
relevant points regarding their sales, strategies, and
operations.
Eni
Eni's main businesses include exploration and production, gas
and power, refining and marketing, engineering and construction,
and petrochemicals. Its main subsidiaries in Italy are GNL Italia,
LNG Shipping, Enipower, Agosta, Societ Adriatica Idrocarburi,
Compagnia Napoletana di illuminazione e Scaldamento col Gas,
Ecofuel, Eni Fuel Centrosud, Polimeri Europa, and Saipem (among
others).
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Eni's net profit was 6.86bn in 2011, up from 6.32bn in 2010. In
2011, Eni transported 78.30bcm of gas in Italy, down from 83.31bcm
in 2010. Domestic sales amounted to 34.6bcm in volume terms in
2011, a small
increase over 2010.
Recent commercial events of note include Eni and Gazprom signing
an agreement to renegotiate the terms of certain long-term gas
supply contracts in Italy, retroactive to the beginning of
2011.
Eni has also completed the 100% acquisition of the capital of
the Belgian companies Nuon Belgium and Nuon Power Generation
Walloon, as part of its strategy to consolidate its leadership in
the European gas and electricity market.
Edison
Edison is engaged in power generation and electricity and gas
distribution primarily to wholesale customers and distributors in
Italy. The company's business areas include electric power (the
production and sale of electric power) and hydrocarbons (the
supply, production, and sale of natural gas and crude oil).
Its net profit was 887m in 2011, a 29.8% fall from 2010. Within
Italy, Edison's total natural gas sales in 2011 were 15.2bcm. In
2011, production of natural gas, counting the output of both
Italian and international operations, grew by 14.2% to 2.2bcm. This
was achieved due to an increase in the production from the Abu Qir
concession in Egypt. The company has three gas storage centers, one
of which is under development.
In its outlook for 2012, Edison indicated that the renegotiation
of the contracts to purchase gas from Libya and Qatar would account
for about half of 2012 earnings before interest, taxes,
depreciation, and amortization, which will be in line with the
amount reported in 2010, net of the contribution provided by the
sale of its Edipower operations. In 2012, following the planned
divestment of Edipower and the concurrent reorganization of the
company's governance, Edison aims to improve its financial profile
and, consequently, its investment and development potential both in
Italy and abroad.
In November 2011, Edison was awarded three new hydrocarbon
exploration licenses in Norway, in the Barents Sea, the Norway Sea,
and the Southern North Sea. Edison, through its subsidiary Edison
International, received three new hydrocarbon exploration licenses
in the Norwegian Continental Shelf that had been put out for bids
by the Norwegian Oil and Energy Ministry.
The licenses include:
Blocks 7124/1 and 2 in the Barents Sea with Edison as operator
with a 60% stake, through a joint venture with North Energy.
Block 6407/8 in the Norway Sea with Edison as operator with a
60% stake, again through a joint venture with North Energy.
Blocks 7/1 and 2 and 16/10 in the Southern North Sea, with
Edison having a 10% stake through a joint venture with Talisman
Energy (40%, operator), Det Norske (20%), Skagen (10%), and Petoro
(20%).
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Enel
Enel is Italy's largest power company and its activities stretch
along the value chain. Some of its many subsidiaries include Enel
Distribuzione, Enel Green Power, and Enel Produzione.
The company had a resulting cash flow from operations of 11,713m
in FY2011 from revenue of 79,514m, in line with results from the
previous year. In particular, gas sales and transportation revenue
generated 3,624m, an increase of 1.4% from 2010. Domestic gas sales
decreased, however, in both the mass-market retail segment and in
the business customer segment to a total of 4.6bcm sold
domestically. Falling sales and in particular the difficult
macroeconomic situation in Italy led to a lowering of Enel's credit
rating to BBB+ from A- in March 2012.
Strategic developments of note include the following:
A strategic agreement between General Electric and Enel
Distribuzione (which manages 85% of Italy's distribution network)
to develop projects for energy efficiency and cut carbon dioxide
emissions throughout Italy. The agreement is expected to last until
December 2014.
Enel reached an agreement for the purchase of 18.375% of the
mineral interest in a gas field in Algeria from the Irish company
Petroceltic International. Following a joint appraisal by Enel and
Petroceltic of the Ain Tsila field, which is covered under
Petroceltic's permit, the two companies will be in a position
to
undertake formal application to the Algerian authorities to
develop and extract gas from the field. Gas production would start
in 2017.
Enel is planning to build a new gas storage site at Romanengo in
a joint venture project with F2i. The joint venture, Enel
Stoccaggi, involves the construction of a new gas compression and
treatment plant and the drilling of five new wells. The project,
once approved by the Ministry of Economic Development, will take at
least two years and will contribute to Italy's gas security.
Enel has been active in its investments and divestments in 2011
both domestically and abroad. For example, the company
expanded its renewable position in Europe through an acquisition
by Enel Green Power Espaa, which acquired a 16.67% stake in
Sociedad Eolica de Andaluca. The latter owns two wind farms with a
total capacity of 74MW.
Iberian Peninsula
This section focuses on providing an update on the Iberian
market, and Spain in particular.
Market overview
Spain, which is the major importer of LNG in Europe, is a market
that Datamonitor has previously considered as having made
substantial progress and one that has significant potential. The
Spanish market had two factors that could have given allowed it to
develop in the short-term, namely the rapid growth of gas demand,
particularly in gas-fired generation, and the proposed Iberian
single gas market MIBGAS, which was expected to drive liquidity.
However, both of these developments have failed to materialize.
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The virtual balancing point Centro de Gravedad was created in
2005, along the lines of the UK's NBP or the Dutch TTF. However,
there is still no organized gas hub to provide a price reference.
Most of the gas exchange in Spain is conducted through the OTC
market on an electronic trading platform called MS-ATR, which is
managed by Enags. The volume of energy traded over the counter
amounted to 1,004.7TWh in 2010 and there are approximately 33
active parties on the platform. Due to the bilateral and anonymous
trading from OTC trades, information is not publically available
and thus lacks transparency. Considerable progress needs to be made
to promote competition and increase transparency in the OTC
market.
Natural gas consumption continues to be high but has not grown
as much as expected due to increased renewable energy production as
opposed to gas-fired electricity generation. Natural gas
consumption in Spain reached 400.9TWh in 2010, a 0.4% decrease on
2009. On one hand, this demand figure reflects a 10% increase in
conventional demand for natural gas, but it is more than offset by
the 15.7% reduction in gas demand as a result of renewable energy
production. Although renewable energy subsidies for wind in the
country are variable and subject to annual review, the solar
photovoltaic sector in particular is still growing, with an
estimated installed capacity of approximately 2.5GW by the end of
2013. Thus, demand for gas in electricity generation can reasonably
be expected to continue to increase only modestly.
Attempts to build a single Iberian gas market (MIBGAS), are
still under way. Datamonitor notes more encouraging progress in
inter-regional co-operation through the South Gas Regional
Initiative between Spain, Portugal and France.
Some brief points of interest regarding the Spanish market
include:
Some two thirds of natural gas supplies to Spain and Portugal
come in the form of LNG. The price paid for LNG in the peninsula
therefore stands out as a key determinant of the cost of imports of
natural gas in that region. Relative to other importers of LNG,
both Spain and Portugal pay low prices for their LNG imports, which
is clearly a price advantage given the relative cheapness of LNG
compared to pipe gas delivered under long-term contracts. LNG
prices for the Iberian Peninsula hovered around the 19/MWh mark in
2011, which is slightly higher than the price of LNG delivered to
the UK at just under 17/MWh. Natural gas border prices in 2010
increased to 19.48/MWh.
LNG continues to dominate as the main source of domestic gas
supply. Given the very small quantity of domestic production
1,201GWh in 2010, accounting for just 0.3% of demand most domestic
gas demand is imported in the form of LNG (75.5%), with the
remaining gas imported via pipelines from several other countries.
The top four exporters to Spain include Algeria (approximately
32%), Nigeria (20.0%), Qatar (15.0%), and Norway (9.2%). In total,
Spain imports from up to 14 different countries, giving it a high
diversity of sources and therefore low dependency on any one source
of supply.
MIBGAS remains in development, and more importantly lies within
the remit of the wider South Gas Regional Initiative to create a
southern regional gas market that includes France, Spain, and
Portugal. MIBGAS development to date has resulted in public
consultation processes on harmonizing cross-border transmission gas
tariffs between Portugal and Spain. South Gas Regional Initiative
achievements to date include the development of interconnection
capacity in 2013 and 2015.
MIBGAS published its general principles and organizational model
in 2008. It is the smallest of the regional gas initiatives but it
is far from the least important on a strategic basis, in light of
the amount of LNG capacity in the region.
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In terms of infrastructure, six LNG terminals are operational
with an additional one planned for 2013 in Gijon, in the Asturias
region. The terminal will have a capacity of 300,000m. All capacity
from Spain's LNG terminals is regulated and can therefore be
accessed by new players. With the exception of the new Gijon
terminal, approximately 61bcm per year of entry capacity is covered
by LNG terminals.
New pipeline additions include the Medgaz pipeline with Algeria
with an import capacity of 8bcm per year, which has been
operational since April 2011. Future capacity will be added under
two open season
procedures in 2013 and 2015, which will increase the
interconnection capacity between Spain and France under the South
Gas Regional Initiative. Three years of work between country
regulators and transmission system operators have accumulated an
additional 5.5bcm of added capacity as of March 2013 at the
Larrau
interconnection, while 2bcm of capacity at the Irun-Biratou
point in the direction towards France will be
ready by 2015. Thus by 2015 interconnection capacity will reach
7.5bcm from Spain to France.
Possible energy security risks were raised in 2011 by potential
blockages of the Suez Canal, a key LNG supply route, due to
political unrest in Tunisia and Egypt. However, no disruptions
occurred. Measures to increase security of supply include
investments in 2010 in LNG storage capacity, and three new
underground storages planned over the period to 2014.
Supply diversification through Nabucco Nabucco pipeline
The pipeline was expected to come online by 2013 and create a
diversification of European gas volumes as a consequence of
reducing Europe's dependency on Russian imports. The pipeline thus
would also give an impetus to the Austrian CEGH market. Its
development is