Best of 2016 | Gas Hubs, Network Codes and Markets: Efet's EU Market View

*This article was originally published on April 6, 2016

Turkey and Ukraine both show promising signs of market development with the potential to become hubs, according to the European Federation of Energy Traders (Efet). In an interview with NGE, Efet gas committee chairman Doug Wood also discussed security of supply, interoperability and tariffs.

Virtual gas hubs are the future way to trade in the single European gas market, replacing border trading which has historically accounted for most of the trade in markets in eastern Europe.  However, this requires more effective implementation of EU legislation to allow hubs to thrive.

Ukraine’s state-owned gas company Naftogaz Ukrainy is taking the first steps to unbundle its pipeline business as an independent transmission system operator (TSO), following the more stringent model as set out in the European Commission’s third energy package. The new owner, if it has its way, will be the state property fund, which traditionally handles privatisation. But it is five months behind schedule, for which it blames other state agencies. Naftogaz has also forged a gas tendering business with counterparties in western Europe as it cuts imports from Russia.

And a few days after this interview took place, Naftogaz Ukrainy posted an unofficial translation of the EU gas balancing network code on its website, inviting comments and hoping that it would result in a high-quality document.

“Ukraine has made extraordinary progress and liquidity is growing, mainly at the borders with Slovakia and Hungary,” Wood told NGE. “There are still more general issues that discourage trade inside Ukraine such as the requirements to hold foreign currency, but it is moving very well and we hope that given a well-designed hub, trading activity will migrate from the borders.”

Efet is also working with Turkish companies to promote a hub, as Turkey “sees itself as a corridor for Russian, Azeri and other gas,” he said. If it attracted gas from other production in the region and from LNG imports, then a hub would help to depoliticise trade. “A Turkish hub would be in a better position to repackage the way the gas is sold,” he said. But he said that would require a Turkish hub and an exchange of some kind that could generate local gas prices, reflecting Turkish supply and demand, rather than rely on an external index such as the Dutch hub, the TTF.

Efet said it was also “supportive” of hub developments in Bulgaria, Romania and Greece and that it “looked forward to more practical progress.”

Intervention vs markets

In the mature markets of western Europe things are not as rosy as Efet would like, as the conflict between markets and intervention shows no sign of abating. This is particularly the case with security of supply and the winter package. These are leading to pipelines being built that, Wood says, risk becoming “tomorrow’s stranded assets.” This needs to be addressed, he told NGE, along with the question of compensation payments for the transmission system operators (TSOs).

Speaking about the planned bi-direction pipeline between Slovakia and Poland, for example, Slovak pipeline operator Eustream told NGE last month that the final investment decision has not been taken but that “taking into account the low level of ship or pay contracts for new pipelines in EU, then the role of grant for works will be essential.”

The Slovakian pipeline system risks being stranded if Nord Stream 2 is built, and there is a question over who will pay for the security of supply that it used to represent for countries downstream such as Italy and Germany. Nord Stream 1 for example led to the termination of gas flows through Ukraine through Slovakia to Lanzhot on the Slovakia-Czech Republic border, while Gazprom’s contract for flows through Slovakia to Baumgarten in Austria does not expire until 2028. So far it has used that contract successfully to block reverse flow.

Wood said that the tariffs network code is yet to go through the EU Comitology process and detailed points are still under discussion. Efet is very keen to see a high level of transparency and consultation on revenue setting and how transporters may be allowed to recover if their sales underperform – a very likely outcome given the depressed gas markets of today.

Keep awake at the back!

Because the network code discussions on tariffs have been going on for some time, he says, “boredom and fatigue are now a real risk to the process,” he says.

On the other hand creating detailed rules could constrain its ability to solve tomorrow’s problems, says Wood who worked at BP for many years and joined Efet's staff in late 2014. If the price of cross-border capacity is set in stone you undermine the market and the use of pipelines.

Cross-border trading is also not as free as the ideal of a single market suggests. Different TSOs are allowed to sell capacity in different ways. For example capacity bought from Dutch system operator GTS in the Netherlands does not confer the same rights as capacity sold by German TSOs across the border.

Some TSOs oversell capacity and then buy it back to manage congestion; others are imposing limits on re-nominations to achieve the same end, meaning that the products cannot be bundled. One solution that might have worked was conditional bidding, where a planned series of cross border capacity purchases would be invalid if one bid in the chain was not successful.

But the European Commission (EC) wanted to go further. So now companies have stranded capacity that was bought on just one side of the border and may be unable to buy matching capacity on the other side.

Another area of complexity arises from different tax and licensing arrangements across the EU.  Historically, gas shippers formed different national subsidiaries to comply with local rules, and passed title to gas from one subsidiary to another at national borders.  Platforms for selling transportation capacity do not recognise this, and this will discourage the development of trading in member states where tax and licensing arrangements present risks that cannot otherwise be contained. Efet raised both issues – capacity mismatches and legal entity – with the EC and Acer, which represents regulators across the EU. So far however Efet has met with little success and is “disappointed” that regulatory authorities do not seem to recognise the real difficulties that poor implementation imposes on market parties, Wood said.

William Powell