Gas Pricing: Good News/Bad News
In a panel discussion dedicated to understanding gas pricing in an evolving market at the European Gas Conference in Vienna, Austria, Sabine Augustin, Director of Strategy & Corporate Affairs, E.ON Global Commodities SE, said she had brought some good news and some bad news.
“The good news is that, 15 years after first Gas Directive in Europe, the internal market in gas is functioning, at least in northwest Europe: we have hubs, they have liquidity, we see a lot of competition and we have cross-border trade – so it's working quite well.”
As a result, she offered, prices had converged – a signal of a well-functioning market.
“The bad news is, that gas is completely losing out in the competition against other energies right now. We've heard what an important role gas can play in the process of decarbonization of Europe, but the reality is completely different.”
Ms. Augustin said efficient gas-fired power plants were not running, coal-fired plants were, and no one was thinking about building new gas plants, while competition was increasing in the heating sector. Of the renewables sector in the last 5 years, she said: “Nobody would have predicted 10 years ago that we would see such a share of renewables as we see today and if we don't watch out carefully, we'll see a similar development in gas losing out in the household sector.”
She warned against the sector becoming too complacent by pointing to the fall in indigenous gas production in Europe, hoping that there would be enough gas demand. “The reason is that as an industry we've been focusing on an internal debate on what the right natural gas price is: it's become an academic debate with lots of studies, but what we've completely ignored is that, in a competitive market, it's all about customers,” she said, pleading for an acceptance of market realities, focusing on what customers wanted and efforts to make gas competitive.
How to make sure customers got the energy they needed and at the lowest price were the priorities named by Clara Poletti, Head of Regulation Department, Italian Electricity and Gas Regulatory Authority. “I welcome competition from energy efficiency, from alternative sources as long as this competition is somehow fair,” she said.
“The current oversupply of gas is helping spot market liquidity,” she explained, “so the question is, 'do we expect this liquidity to become structural somehow, or what can we do towards that?' Being a regulator, I must say that we cannot look at spot markets by themselves; what we are doing and need to do is to change the rules and regulatory framework in order to allow short-term markets to work properly.
“If we don't change the way our gas sectors work at national and European level, we won't be able to allow for efficient trade of the value of efficient short-term markets,” said Ms. Poletti, who admitted it was not an easy task when faced with decarbonization and an economic downturn.
Implementing a “new deal” would take several years, she said, and it would be necessary to define its constructs. How to handle incremental capacity and make new investments was a crucial issue.
“Because now we have a changing system. Once upon a time we could say that new investments were driven by increasing demand; now we are in a completely different world, not only do we not have increasing demand, but don't have regulated investments from competing fuel sources, so this is a big challenge,” she said.
Gazprom was the only reliable supplier in Europe, asserted Sergei Komlev, Head of Contract Structuring and Pricing Directorate at Gazprom Export, when it came to security of natural gas supplies.
He questioned whether Europe needed competition or security of supply. “I think that Europe rather needs security of supply because it's getting more and more independent,” he answered.
According to him, there were several ways that Europe could ensure security of supply. “Basically, long-term contracts were especially designed to provide this security. Linking to oil products is still a dominant form of pricing international trade of gas - you're basically giving guarantees as a supplier that you will be able to cover your long-term contract expenses.
“But if you have an import-export contract which is linked to a hub in this case you don't have a firm obligation to deliver,” he added, offering examples of Qatari contracts.
“They were all designed in a way that one part was firm and the rest was not – that means that the shipper or the seller has a right to re direct flows from the market if the price on the market does not meet their expectations.”
He said he could imagine Gazprom deciding to re direct gas flows in the future, going other places besides Europe. For this reason, Mr. Komlev said Europe should be very careful, because the consequences of not having a stable supply could be dangerous.
In connection with oil-linked pricing, Nils von Hinten-Reed, Founder and Managing Partner, CEG Europe, said he wanted to challenge the assumption that the price of oil was going to go up in the future.
“From a supplier's perspective, with Iran and the US coming onstream with increased oil it's not clear to me that the price of oil is something that you want your gas to be linked to, certainly not in another 10 years,” he opined. He added that there was no fundamental long-term relationship between oil and gas.
Regarding long-term contracts, Mr. von Hinten-Reed said there was little flexibility if one were speaking about 20-year timespans. “If you've liberalized your downstream market, unfortunately you can't not liberalize your upstream – you can't have the two levels not being in synch.
“This is the reason why we have arbitration, so somehow these contracts have to be re engineered.”
Europe had abundant gas available, but it wasn't always where it needed to be, according to Christopher Delbruck, CEO, E.ON Global Commodities SE. “Getting gas into Europe is not a logistical problem, it's simply a price problem – that is something we need to keep in mind,” he opined.
“Customers either can't afford to pay the price or don't want to pay the price,” he said of price levels, which were a problem for the industry.
Regarding the competitiveness of the power market segment, Mr. Delbruck showed negative spark spreads to explain the kind of generation that was attractive, “meaning that's why gas-fired power plants don't run. There are a number of reasons for that, not only related to the gas price.”