European gas market 2017: movement to hub indexations

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ACER recently published the status of the European Natural Gas Market 2017. The 2017 gas consumption rose to 5.230 TWh, an increase of 5% compared to 2016. The increased consumption of gas-fired power plants accounted for 46% of the annual growth. External gas imports increased in order to meet demand. The annual growth of external gas imports was 10% compared to previous year. Reduced domestic production in the Netherlands accounted to the growth of imports.

EU gas supply portfolio by origin – 2017 (100% = 526 bcm) (Source: ACER, MMR Wholesale gas 2017)

Main suppliers to the EU are Russia, Norway and Algeria. Gazprom increased its yearly supply to an all-time high of 179 bcm. Although long term gas supply contracts are in place, Gazprom moved to hub indexations or direct hub-based sales. Next to Gazprom, the production of Norwegian gas fields achieved records: 122 bcm in 2017. Growth of Norwegian production was driven by the closure of the Rough gas storage facility and further optimization of Equinor’s non-contracted production on Northwestern Europe gas trading hubs. Also the Algerian gas supplier Sonatrach moved to hub indexations. Overall the trend is movement towards hubs instead of long term supply contracts at certain delivery points at certain European borders. For example Baumgarten (Austria), Mallnow (Germany), Greifswald (Germany) and Oude Statenzijl (Netherlands). In 2017 70% of gas supplies was based on hub indexations.

Major hubs: TTF and NBP

TTF and NBP differentiate from the other hubs in Europe mainly because of the higher development and liquidity of their forward markets. This manifests itself in the traded volumes on the curve, longer trading horizon and tighter bid-ask spreads. Over the last two years, TTF has overtaken NBP in both volumes traded and its role as price-setter in Europe. For companies wanting easy and fast access to the TTF trading hub, have a look at our software solutions for market communication and balancing.

 

Ranking of EU hubs based on monitoring results – 2017 (Source: ACER, MMR Wholesale Gas 2017)

Central Europe: transit of Ukraine

Will Ukraine play an important role in future for Russian gas exports to Europe? The current transit contract between Gazprom and Naftogaz Ukrainy will end on 31 December 2019. After 2019 Ukrainian transit flows will be shaped by political and commercial changes already in progress. (Oxford, 2016)

The Ukraine post-2019 outlook: (Oxford, 2016)

  • Russia considers that the transit of some volumes across Ukraine is not incompatible with security of supply, and that 100% transit diversification away from Ukraine remains desirable, but not at any cost.
  • Central Europe supplies from the west? Lifting the OPAL cap would potentially able deliveries to central and eastern European countries. This has been effectuated after an EU Court ruling in July 2017.
  • Ukrainian gas market and infrastructure integrated into the European market? More parties at Eastern Ukraine border point. Currently only Naftogaz Ukrainy.
  • Sales strategy of Gazprom in the European market and the movement to hub sales and prices. Recent short term trades of Gazprom Export show deliveries to Central Europe and transiting Ukraine.
Gazprom Gas Sales October 2018 (Source: http://www.gazpromexport.ru/en/esp/sales/)

EGSSIS and presence in Central Europe

Recently EGSSIS started a partnership with CEE Service in order to serve shippers, traders and supplier with expertise and local presence in Central Europe. CEE Service can assist with consulting and setup services for successful entry in the Central European energy markets.

Sources:

ACER / CEER, Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2017, 2018

Oxford, Russian Gas Transit Across Ukraine Post-2019: pipeline scenarios, gas flow consequences, and regulatory constraints, 2016