Price formation in liberalised gas markets Patrick Heren Heren Energy Ltd
Brief advertisement Publishers of daily gas and power market reports, the Heren Index and European Gas Markets newsletter. Independent and impartial. Spot gas price series from Jan 1994. Primary gas price index at NBP, Zeebrugge, TTF, PSV etc.
Why liberalise? Short answer: better value for consumers and shareholders more efficient use of capital greater flexibility and security of supply Caveat: This may seem to conflict with other policy objectives
Pre-requisites for liberalisation Fair and effective third party access to pipelines, storage and information. Willing competitors (sometimes the most difficult condition to fulfil!). Strong regulation. Political will.
Price formation in monopolistic markets No gas price index Wholesale prices negotiated by reference to competing fuels, overall energy market Long term contract escalation against oil, retail price inflation, price of bubblegum etc.
John Browne, Dec 1994 I cannot wait to move our gas sales contracts onto a gas market index. At the moment what happens when we want to develop a new gas field is this: our people sit down with the buyers, and have a leisurely series of lunches that goes on for two years, and at the end of that period they come up with a price that any two moderately intelligent people could agree on in ten minutes. Then they index it to something completely irrelevant. I can guarantee that by the time the gas is flowing, the price we get for it bears no relation to its value.
Price formation in liberalised markets TPA encourages competition for the end-user. Balancing rules on the pipeline network encourage short term trading (for delivery periods of one hour or day to a month). This balancing trade produces prices.
Price transparency In the initial stages, prices remain private, market is driven by rumour. Price reports (e.g. Heren Energy) begin to bring transparency. Transparency increases liquidity. Futures, swaps & options, brokers. The market develops along the forward curve 2, 3,4, 5 years or more out.
Uses of competitive gas prices Transparent pricing on the wholesale market has numerous benefits. Upstream transfer pricing indexation. Tax reference. Downstream price escalator, from domestic to large industrial. Encourages arbitrage trade with other energies. Vital to carbon trading.
Seasonality Gas prices are seasonal. Typically winter peaks in January or February. However, logistical requirements can complicate that. In recent years this has led to a turbulent arbitrage between spot gas and oil-indexed term contracts.
A turbulent relationship p/therm 67 57 47 37 27 17 UK-Zeebrugge Interconnector pipeline opens Oct 98 November 04 7 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Heren UK NBP Zeebrugge oil-indexed Troll
TTF, ZH, NBP: D-1, 2004 19 17 15 13 11 9 7 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 EUR/MWh NBP Zeebrugge TTF
What drives the market? Prompt (for delivery up to one month forward) is driven by operational factors. Forward month (M-1) is where speculative and operational, prompt and forward, come together. Forward winter driven by supply perceptions. Further curve either by supply perceptions or linked to the Brent forward market.
Uneven development UK NBP dominates affected by short/medium term UK supply perceptions. Zeebrugge hub secondary to NBP but increasing in importance. TTF useful for Dutch shippers. Italian PSV works, but strangled by EGP. French PEG-Nord shows promise. Vergissmeinicht: Emden-Bunde won t happen until German TPA gets real.
Please contact us Heren Energy www.heren.com Pepys House, London SE8 3EY, UK. +44 20 8469 4700 Patrick Heren patrick@heren.com +44 20 8469 4711 or +44 7771 901608