EU GAS TRADING
Figure 3: European Gas Supply: 49% Oil-Linked in 2013e (if RWE Wins Against Gazprom)
Other Spot (incl. Gazprom, Norway and Gas Terra) 34%
Gazprom (oil) 22%
and the Belgium ZEE. The NBP-ZEE spread tends to remain in a close
Sonatrach (oil) 9%
Norway (oil) 6%
UK Market (spot) 17%
Source: SG Cross Asset Research
... buyers and sellers will have to find new ways to price gas
prices. One possibility is that the arbitrators may decide (in H1 2013e) that this long-term contract which was oil-indexed – this being the only price mechanism available at the time – should now be spot-based, since this is the way the majority of gas is expected to be sold in Europe. Such a decision could reduce oil indexation
Other Oil Indexed 12%
range (representing the cost of pushing the gas along the pipe) as long as the pipe allows arbitrages. But prior to 2012, during annual maintenance closures (such as in September 2011 in the above graph, when flows in the interconnector are stopped), the NBP used to de-correlate from the ZEE. However, during the last annual maintenance closure (13-28 June 2012), prices between NBP and ZEE didn’t de- correlate as they did in the past. This is another sign that: 1) Europe as a whole is moving towards a majority of its gas being priced on a spot basis; and
2) That the UK is looking more and more like Continental Europe as it needs more and more imports to mitigate the falls in its domestic production.
Prices Based on Final Use Medium term? As the share of oil-indexed prices falls to less than 50% of European supply, buyers and sellers will have to find new ways to price gas. This means there could be three different gas prices in Europe:
• Oil-indexed pricing with security of supply in mind for residential customers. Thus the share of
oil-indexed contracts could further be reduced to around a third.
Figure 4: Spread Day Ahead NBP-ZEE vs Interconnector Interconnector Flow (LHS)
100 200 300 400 500 600 700
-300 -200 -100 0
May-11 Aug-11 Nov-11 Source: SG Cross Asset Research, Reuters
to below 50% of the total. We believe this could be a tipping point.
Increased Price Alignment on European Hubs: UK Looks Like Continental Europe Low demand and more
Feb-12 May-12 Aug-12
• Spot-pricing based on the European gas supply-demand
Spread NBP-ZEE (RHS)
-16 -14 -12 -10 -8 -6 -4 -2 0 2 4
Nov-12
balance for industry. • Electricity-based
index
pricing for gas used in the power sector. Pricing gas used for power generation by benchmarking gas prices against electricity at a baseload electricity price index would make gas-fired power plants more profitable than coal-fired power stations, for instance. This pricing would then displace coal in the electricity mix, boosting growth in gas demand that could later tighten the supply-demand balance. There should be no
competition issues if Europe ultimately bases gas prices on final use rather than maintaining pricing based on region. •
flexible infrastructure
are resulting in increased price alignment between European hubs. This is now evident between UK NBP
64 March 2013
Dr. Thierry Bros is Senior Analyst, European Gas and LNG with Société Générale Cross Asset Research.
www.sgcib.com
GWh/d
p/th
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