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Insight – LNG and the global gas market
The last 12-18 months have seen some pretty dramatic developments in gas markets from the US to Europe to Asia. The commercialization of US unconventional gas, increased availability of LNG shipments, and reduced demand in Europe has lead to declining gas prices across the board. Uncertainty over the pace of the economic recovery continues to blur the issue, but one thing is clear – the increasing influence of LNG imports in the development of global gas markets is here for the foreseeable future.
In this month’s Market Insight, we talk to Dr. Ingolf Hoven, Director of Gas and Oil Trading for E.ON Energy Trading, about the growing influence of LNG imports and the development of gas trading hubs across Europe.
In this month’s Market Insight, we talk to Dr. Ingolf Hoven, Director of Gas and Oil Trading for E.ON Energy Trading, about the growing influence of LNG imports and the development of gas trading hubs across Europe.
Since the end of 2008, we’ve seen a strong surge of imports into North West Europe. What impact has this had on European gas markets?
IH: Most of the increased imports are spot deals, and this LNG has been delivered from Qatar, Algeria, Trinidad and Egypt - countries that have also in the recent past supplied growing demand in the Far East.
In Europe, while long-term gas import contracts (LTCs) still form the backbone of supply, the importance of LNG imports and the spot market will continue to increase. More transparent and liquid trading at hubs, especially those beyond North-West Europe, will provide clear price signals and offer the ideal platforms to connect national and regional gas markets throughout the Continent.
In Europe, while long-term gas import contracts (LTCs) still form the backbone of supply, the importance of LNG imports and the spot market will continue to increase. More transparent and liquid trading at hubs, especially those beyond North-West Europe, will provide clear price signals and offer the ideal platforms to connect national and regional gas markets throughout the Continent.
Gas has recently decoupled from the oil price. Does this spell the end for oil-indexed long term gas contracts?
IH: It’s not an either-or scenario. Gas price oil-indexation is a function of the demand/supply situation in gas and oil markets and of base price (p zero) in long term gas contracts. Gas markets currently show a global oversupply, which might last for a couple of years.
Oil prices are showing a fast recovery (v-shaped) and are driven by large financial players (strong influence of USD rate and equity prices). But it’s also possible that oil prices might come down, because fundamentals are bearish.
Last but not least, European buyers of oil-indexed long term contracts have ‘price review clauses’, which give them the right to adjust prices in order to be competitive.
Oil prices are showing a fast recovery (v-shaped) and are driven by large financial players (strong influence of USD rate and equity prices). But it’s also possible that oil prices might come down, because fundamentals are bearish.
Last but not least, European buyers of oil-indexed long term contracts have ‘price review clauses’, which give them the right to adjust prices in order to be competitive.
The creation of an integrated internal market is a big priority for the European Commission, as outlined in the regulatory framework provided by the 3rd Energy Package. Does this mean a more prominent role for gas trading hubs across Europe?
IH: Absolutely. The trading of natural gas across European borders at open and competitive hubs is vital if we’re to ensure secure gas supplies at fair prices for European consumers.
How would you characterize the development of gas hubs so far?
IH: There’s a great deal of room for improvement, but we can also see plenty of evidence to suggest we’re moving in the right direction.
Following a number of initiatives to drive liquidity in the spot gas markets over the past years, we can already see a high degree of correlation between spot prices at hubs throughout North-West Europe. The UK market is still by far the most liquid, but Dutch and German hubs have shown the most growth in the last year*. TTF now shows the highest traded volumes on the Continent and NCG is the fastest growing – the NCG has grown from 1 TWh per month in 2006 to about 30TWh per month this year.
But to get closer to an integrated internal gas market connecting the whole Continent, we need to see more developed hubs across Southern and Eastern Europe, in addition to those in North-West Europe.
Following a number of initiatives to drive liquidity in the spot gas markets over the past years, we can already see a high degree of correlation between spot prices at hubs throughout North-West Europe. The UK market is still by far the most liquid, but Dutch and German hubs have shown the most growth in the last year*. TTF now shows the highest traded volumes on the Continent and NCG is the fastest growing – the NCG has grown from 1 TWh per month in 2006 to about 30TWh per month this year.
But to get closer to an integrated internal gas market connecting the whole Continent, we need to see more developed hubs across Southern and Eastern Europe, in addition to those in North-West Europe.
The chart shows the traded volumes on NCG, going from 1 TWh to almost 30 TWh in little less than three years.
What emphasis does E.ON place on trading at Europe’s gas hubs?
IH: E.ON has been active for years at the major Western European hubs, such as NBP, TTF and Zeebrugge, and we’re market maker at NCG in Germany, but we’re also committed to supporting less-developed hubs. In the last three months, for example, we’ve registered to trade at PEG in France, PSV in Italy, and the CEGH in Austria, and we’re keen to support the development of emerging gas markets in Eastern Europe, such as Hungary, Czech Republic, Slovakia and Romania.
European gas hubs show a high degree of correlation throughout North-West Europe. The UK market is still by far the most liquid, but Dutch and German hubs have shown the most growth in the last year. TTF now shows the highest traded volumes on the Continent and NCG is the fastest growing.
* Prospex - European Gas Trading 2009