The emergence and development of European trading hubs over the past decade has radically altered European gas markets. Traditional long-term contracted gas is now complemented by spot-traded gas on liquid hubs such as the Title Transfer Facility (TTF) in the Netherlands and the National Balancing Point (NBP) in the UK. Together, they form a hybrid market for gas in Europe that calls for greater insight into market design and regulation, as well as into the geopolitical challenges and opportunities resulting from market transformations. The Energy Delta Institute provides resources and information to remain up-to-date on current market developments. In addition to the introduction provided below, please note the following resources:
- A selection of "Top Gas Market and Trading Hubs papers"
- For a more extensive list of papers, see our publication database
An Introduction to Gas Market and Trading Hubs
According to the International Energy Agency (IEA), the gas market is set to embark on ‘a golden age’¹. Both the long-term demand and supply side fundamentals of natural gas appear robust. The long-term demand for gas is set to rise due to multiple factors. The nuclear disaster at Fukushima in Japan has set nuclear power back and made several countries rethink their nuclear plants. The German government decided to phase out nuclear power completely by 2022, and gas-fired power plants seem a natural substitute in many of these cases. The third phase of the EU ETS system may impose higher costs for coal-fired power plants, making gas-fired power plants more attractive due to lower CO2 emissions. In addition, gas-fired power plants are flexible, complementing the intermittent nature of renewable power generation, and do not face major public acceptance issues. Adding the demand of energy giants like India and China, which is set to increase substantially in the decades to come; one can only conclude that the case of gas is seems growing.
The supply side looks strong as well. More and more LNG will come to the market via Qatar and Australia, while Russia and the Caspian countries are keen on exporting gas to Europe. A number of new pipeline project plans are now in various stages of planning and operationalisation, such as Northstream, Nabucco, South Stream and Trans Adriatic Pipeline. Unconventional gas production represents 60% of the total natural gas production in the US. Coalbed Methane (CBM) production is developing in Australia, China and India. In short, there seems to be ample supply available to the market for a number of decades, if not longer.
Recent years have shown a growing pressure on the link between oil and gas prices. Traditionally natural gas has mostly been traded in the form of long-term, take-or-pay contracts, mostly indexed to predominantly a basket of oil products. However, with the drive for creating an internal energy market in the EU, gas hubs have been created to facilitate organized trading markets. On these markets gas is traded as a commodity, which can generate a reference price for gas. These two price signals create arbitrage opportunities in the gas market. Where the oil price recovered from its low in 2008, the gas price remained suppressed, thereby creating a price gap between spot markets and long-term oil indexed prices. In 2010, the market conditions created a gap as large as 40%, forcing producers to re-negotiate their long-term contracts. The different market fundamentals for oil and gas and their effect on the gas price fuels the debate whether to weaken the linkage with oil.
Besides providing general information about the gas market, EDI will also provide more fundamental research papers and updates on current developments in the field.