Nueva ley de Hidrocarburos: ¿España finalmente en camino hacia la fijación de precios del gas basada en el modelo Hub?

Prefer English? Read the article here.

Uno de los eventos más remarcables de la última década en los mercados de la energía en Europa fue el cambio de la indexación del precio del gas al petróleo hacia el tan nombrado modelo Hub. La indexación del precio del gas al del petróleo es hoy ya una reliquia del pasado. Promocionado por sus gobiernos, las compañías del monopolio gasista establecieron contratos de larga duración con productores de gas natural con duraciones de hasta treinta años. Debido a una falta de precios de referencia de gas natural, se decidió fijar el precio al combustible competidor más importante en aquel momento: el petróleo.

Incluso si la indexación al petróleo fue una inteligente estrategia de marketing en aquellos días de cambio de combustibles de fuel a gas natural, cuando los mercados fueron liberalizados, esto causó varias cuestiones serias a tener en cuenta:

  • Los acuerdos a largo plazo aportan una importante ventaja competitiva a los proveedores que ostentan el control, ya que es difícil para un proveedor alternativo poder conseguir un contrato con un productor de gas. Por lo tanto, para obtener los suministros, estos proveedores alternativos a menudo tienen que comprar el gas de los proveedores titulares con los que se supone deben competir. En los primeros días de la liberalización del mercado del gas, frecuentemente vimos que los proveedores alternativos no eran más que los vendedores del gas que fue originalmente adquirido a un gran competidor en virtud de un acuerdo a largo plazo. Esto era obviamente una base pobre para que los proveedores alternativos ejercieran el tipo de presión competitiva que hace bajar los precios,
  • Por otra parte, este tipo de acuerdos a largo plazo a menudo contenían los derechos exclusivos para el uso de la capacidad en la infraestructura clave, como las conexiones transfronterizas para la importación de gas, terminales de GNL o de los sitios de almacenamiento. Esto hace que sea aún más difícil para los proveedores alternativos desarrollar su negocio.
  • Los precios indexados al petróleo tienen un cierto grado de complejidad matemática. Los consumidores finales a menudo no alcanzan a comprenderlo, por lo que es imposible para ellos hacer una evaluación correcta de las propuestas que les ponen en la mesa.
  • En algunos mercados (por ejemplo, Alemania) el mercado tiene una gran variedad de diferentes fórmulas de indexación al petróleo, por lo que es muy difícil conseguir una idea correcta del nivel de precios del gas en ese país.
  • En los mercados a largo plazo, los contratos indexados al petróleo no son un instrumento con mayor claridad. Los consumidores finales sólo pueden preguntarse que es lo que pagan sus proveedores por el gas a sus proveedores. Por lo tanto, no hay transparencia en absoluto respecto a los márgenes, poniendo de esta manera a los consumidores finales en desventaja en las negociaciones de contratos.
  • Esta falta general de transparencia también se ve claramente cuando se ofrecen servicios de gestión de precios. En muchos países, los proveedores tienen una larga tradición de ofrecer contratos indexados al petróleo con servicios que permiten a sus clientes hacer swaps de precios flotantes a fijo, fijo por flotante e incluso cambiar entre diferentes fórmulas. Los proveedores realizan las operaciones necesarias de fijación en el mercado de petróleo para ejecutar este tipo de swaps. Sin embargo, el cliente final a menudo carece de los conocimientos matemáticos de las formulas y de las operaciones en el mercado del petróleo para juzgar si el precio fijo por ejemplo, era la opción correcta o si su proveedor estaba abusando de la operación de fijación para obtener márgenes extra.
  • Desde el punto de vista de la teoría económica, la indexación al petróleo es también una solución peligrosa. Esto significa que el precio de un producto (gas natural) está determinado por la dinámica de oferta y demanda de otro producto (petróleo). Por lo tanto, el precio no está dando una señal correcta a productores y consumidores. Pudiendo ser que la oferta del gas natural sea baja, pero su precio sea bajo debido a una gran oferta de petróleo. En ese momento, el consumidor no está recibiendo la señal de reducir su consumo y el productor no está recibiendo la señal para aumentar su producción, por lo tanto, el mercado no está restaurando en equilibrio entre la oferta y la demanda. Estoy bastante seguro de que a Adam Smith le habría disgustado la idea de la indexación del gas al petróleo.
  • Por otra parte, hay más gas natural en el planeta que petróleo. Por lo tanto, las posibilidades de sobre-valoración de gas natural son bastante altas cuando se indexa al petróleo. Eso, obviamente, explica porqué los productores, como la rusa Gazprom, han sido feroces defensores de esta indexación del gas natural, y esto no es sólo una teoría económica. En efecto, hemos visto que en todos los países que se cambió la indexación al petróleo hacia un modelo Hub, el precio del gas natural se redujo significativamente para el consumidor final.

El modelo Hub comenzó su andadura por primera vez en los EE.UU. con el Henry Hub y en el Reino Unido. Con la creación del NBP, el Reino Unido hizo algo sumamente interesante, la creación de un Hub virtual, a lo cual volveré más tarde. A continuación, este modelo fue copiado en Bélgica (Zeebrugge), Países Bajos (TTF), Francia (PEG), Alemania (NCG y GPL), Italia (PSV) y otros países. Hoy en día, en la mayoría de los países de Europa, el gas se compra basándose en la fijación de precios en un Hub. Incluso hemos sido testigos de la integración del mercado, con los precios de esos mercados mayoristas convergiendo y el TTF convertirse en precio de referencia al cual están vinculados los precios en los contratos de los consumidores finales. Para la mayoría de los grandes consumidores industriales de gas en Europa, las desventajas de tener precios de gas indexados al petróleo se han convertido en un tema del pasado. Actualmente disfrutan de precios de gas más transparentes, acompañados de mejores servicios de gestión de precios. Por otra parte, como se mencionó anteriormente, el cambio hacia el precio Hub se acompaña de precios más bajos y ahorros importantes. Aún así algunos países se han quedado atrás y no han hecho el cambio hacia un modelo tipo Hub. Uno de ellos es España. (Portugal también, y al igual que en los mercados de gas en España y Portugal, los mercados de la electricidad están muy ligados.)

Después de años de abandono, el gobierno español ahora parece tomarse en serio la realización de las adaptaciones necesarias para reformar su mercado de gas e introducir el modelo de mercado Hub que ha sido un gran avance para los consumidores de gas en otros países europeos. El 22 de mayo se publicó la nueva Ley de Hidrocarburos tan esperada. Tras la primera lectura, parece contener algunos elementos que podrían despertar el desarrollo de un mercado Hub real en la Península Ibérica.

No cabe duda de que el elemento más importante es la introducción del Hub virtual. La primera virtualización de un Hub fue llevada a cabo en el NBP dando muy buenos resultados. Posteriormente, se repitió este proceso en diferentes países, siendo TTF el ejemplo mas espectacular. Desde el punto de vista legal, un ‘Hub’ es el lugar físico donde el gas cambia de titular. Tradicionalmente en Hubs físicos como el Henry Hub o el Baumgarten en Austria, es un lugar físico concreto. Antes del punto físico (normalmente una válvula en un gaseoducto), el gas pertenece al vendedor y pasado ese punto, el gas pasa a pertenecer al comprador. Cuando se crea un Hub virtual, éste está formado por toda la red de transporte. De esta manera, toda un área geográfica como por ejemplo Gran Bretaña o Holanda, se convierte en una gran zona de Entrada-Salida (Entry-Exit zone). Esto quiere decir que el vendedor puede inyectar el gas en cualquier punto ya que se considera que éste es inyectado en el Hub, y el comprador puede extraerlo desde cualquier punto de la red, ya que se considera que lo ha extraído del Hub.

Los Hubs físicos no son tan beneficiosos para la competitividad del mercado minorista y el trading como los hubs virtuales. Los vendedores de gas necesitan pedir acceso a un lugar geográfico específico y la capacidad que quieren extraer puede ser restringida ya que, si otros comercializadores han firmado contratos de gas a largo plazo, los derechos de capacidad se les asignan a éstos últimos. Por tanto, un comercializador necesitará transportar el gas hasta el cliente final. Durante el transporte, puede que tengan lugar restricciones de capacidad que dificultan enormemente el transporte de gas hasta las zonas de entrada en las que sí tienen derechos de capacidad para inyectar el gas. Esto está claro en el caso de España, donde las distancias entre los puntos de inyección y los clientes son grandes. Un comercializador que obtenga su gas en Huelva, puede tener dificultades para suministrar el gas a clientes industriales en el norte. Sin embargo, hemos observado el desarrollo de un mercado de swaps en el que unos comercializadores intercambian cantidades de gas que pueden suministrar en ciertas áreas con otros comercializadores que no pueden suministrar gas en esas áreas. En conjunto, no podemos decir que el mercado español sufra la falta de ofertas. Cuando lanzamos una licitación de gas, obtenemos fácilmente hasta diez ofertas de comercializadores diferentes. Lo que realmente nos produce frustración es que los precios que ofertan son altos comparados con otros países de Europa, continúan indexados al Brent y al tipo de cambio y en muchos casos no permiten a nuestros clientes gestionar su riesgo.

La nueva Ley de Hidrocarburos introduce un Hub virtual que cubre todo el territorio español. Es una idea muy interesante ya que opino que la Península Ibérica, contrariamente a lo que dicen los comercializadores, posee un sistema gasístico idóneo para el desarrollo de un Hub virtual. La red de transporte se asemeja a la rueda de una gran bicicleta con gaseoductos que recorren la costa y atraviesan el centro (Madrid). El gas puede ser inyectado en la rueda al menos en diez puntos diferentes: gaseoductos que conectan Francia en el norte y la costa Norafricana por el sur y ocho terminales de GNL. Si se conecta todo esto en un Hub virtual, se liberará a los comercializadores de las dificultades que tienen para acceder a los puntos de inyección cercanos a sus clientes . También se les liberará de obtener derechos de capacidad (o de hacer swaps) para transportar el gas desde las zonas de entrada hasta las zonas de salida. De esta manera, cabría esperar que España desarrollase el tipo de competición entre comercializadores existentes y nuevos que existe en otros países. Esto podría dar lugar a importantes beneficios para los consumidores españoles, tales como:

  • Ahorro de los costes. Actualmente, estamos viendo precios del gas indexado al petróleo en un rango de 24-25 €/MWh. Los precios en los Hubs del noroeste de Europa rondan los 22-23 €/MWh. Si, debido al desarrollo del hub, los precios en España convergiesen con los precios del resto de Europa, seríamos testigos de una gran oportunidad de ahorro. Cabe señalar que, debido a la bajada del precio del petróleo, la diferencia entre los precios del gas en España y otros Hubs europeos es históricamente baja. En 2014 por ejemplo, la diferencia era de hasta 10 €/MWh.
  • La posibilidad de comprar energía de una manera diferente, con productos indexados al mercado spot y al mercado a futuro.

Todavía no esta claro si la nueva ley va a provocar un desarrollo rápido del modelo Hub en la Península Ibérica o no. La nueva ley de Hidrocarburos es una ley generalista en la que se define el marco legal para el desarrollo de un Hub en España. Que finalmente este modelo funcione o no va a depender de la resolución en futuros reales decretos y otros textos regulatorios de conceptos más específicos tales como el código de red necesario para equilibrar el sistema. La Ley anuncia que se está trabajando en la preparación de textos importantes en materia de regulación. La dificultad surgirá a la hora de entrar en los detalles. El gobierno español ha estado trabajando en la creación del Hub durante varios años. Tal y como he remarcado en otras ocasiones, las autoridades parecen estar centrándose demasiado en aspectos financieros del mercado como la creación de la plataforma de intercambio de productos spot y a largo plazo. Sin embargo, el éxito del Hub va a depender primordialmente de poner en orden aspectos físicos en los que se defina una gran zona de entrada/salida que permita que el acceso a la red se haga en condiciones no discriminatorias. Por tanto, tendremos que estar muy atentos a estos textos regulatorios pendientes de publicarse y ver si contienen los elementos necesarios para establecer realmente un Hub en España.

La nueva Ley de Hidrocarburos asigna la figura del operador del mercado organizado de gas a corto plazo a la compañía MIBGAS. Ésta estará formada por la compañía transportista Enagás y el operador del mercado OMIE/OMIP. La ley determina también que MIBGAS establecerá la plataforma de intercambio a la que deberá acudir Enagás para balancear el gas (compraventas de gas de corto plazo con entrega en el punto virtual de balance).

El hecho de involucrar tanto al organizador de la plataforma de intercambio en el sistema de balance, resalta la visión española de confundir el modelo Hub con una plataforma de intercambio. La política energética española normalmente falla en establecer beneficios para los consumidores finales y las autoridades se empeñan en detallar todo al milímetro, aumentando así la complejidad del sistema. Pero deberíamos dar a España el beneficio de la duda y esperar que, en los próximos meses, la formación de un Hub se convierta en una realidad para los consumidores españoles tal y como hemos atestiguado en otro países.

New Hydrocarbons Law: Spain finally on the road towards Hub-based gas pricing?

Prefer Spanish? Read the article here.

One of the most remarkable events of the last decade in Europe’s energy markets has been the switch away from oil-indexed gas pricing towards the so-called Hub-model. Oil-indexed pricing for natural gas is a relic from the past, when no open markets for the trading of gas existed. Sponsored by their national governments, monopolist gas companies set up long term agreements with producers of natural gas with durations of up to thirty years. Lacking a price reference for natural gas, it was decided to peg the price to that of the most important competing fuel at that moment: oil.

Even if oil-indexation was a clever marketing strategy in the days of the fuel-switch from oil products to natural gas, when markets are liberalized, it causes some serious issues:

  • The long term agreements give important competitive edge to incumbent suppliers, it’s difficult for an alternative supplier to get a contract with a gas producer. Therefore, for getting supplies, these alternative suppliers often have to buy the gas from the very incumbent suppliers that they are supposed to compete with. In the early days of gas market liberalization, we saw that alternative suppliers were often nothing more than resellers of gas that was originally purchased by a large competitor under a long-term agreement. This was obviously a poor basis for alternative suppliers to exercise the sort of competitive pressure that brings down prices,
  • Moreover, such long term agreements often contained exclusive rights to the usage of capacity on key infrastructure, such as cross-border connections for the import of gas, LNG terminals or storage sites. This makes it even more difficult for alternative suppliers to develop their business,
  • Oil-indexed pricing has a certain degree of mathematical complexity. End consumers often fail to grasp it, making it impossible for them to make a correct assessment of the proposals that they get on their table,
  • In some markets (e.g. Germany) the market came with a huge variety of different oil-indexed formulas, making it very difficult to get a correct idea of ‘the’ price level for gas in that country,
  • The market of long-term, oil-indexed contracts is not a market with a clear wholesale – retail segmentation. End consumers can only guess what their suppliers pay for the gas to their suppliers. Hence, there is no transparency at all regarding margins, putting the end consumers at a disadvantage in the contract negotiation,
  • This overall lack of transparency is also clear when price management services are offered. In many countries, suppliers have a long tradition of offering oil-indexed contracts with services that allow their clients to swap floating prices for fixed, fixed for floating and even swap between different formulas. The suppliers perform the oil market hedging operations necessary to execute such swaps. However, the end client often lacks the knowledge of the formula’s mathematics and the oil market operations to give a correct judgement of whether a fix price e.g. was correct or whether his supplier was abusing the fixing operation to make some extra margin,
  • From a point of view of theoretical economics, the oil-indexation is also an ugly beast. It means that the price of one product (natural gas) is determined by the supply and demand dynamics of another product (oil). Hence, the price is not giving a correct signal to producers and consumers. It could be that natural gas is short in supply, but its price is low because of a large supply of oil. At that moment, the consumer is not getting the signal to reduce its consumption and the producer is not getting the signal to increase his production, hence, the market is not restoring the supply and demand balance. I’m pretty sure that Adam Smith would have disliked the idea of oil-indexation of gas,
  • Moreover, there’s more natural gas left on the planet than oil. Hence, the chances of over-valuation of natural gas are quite high when you index it to oil. That obviously explains why producers, such as Russia’s Gazprom, have been such fierce defenders of oil-indexation of natural gas. And this is not just economic theory. We have indeed seen that in every country that switched away from oil-indexation towards a hub model, the price of natural gas for the end consumers declined significantly.

The Hub model was first rolled out in the US with its Henry Hub and in the UK. With the creation of NBP, the UK did something enormously interesting, namely the creation of a virtual Hub, on which I will come back. This model was then copied in Belgium (Zeebrugge), the Netherlands (TTF), France (PEG’s), Germany (NCG and GPL), Italy (PSV) and other countries. Today, in most of the countries in Europe, gas is bought based on the pricing on a Hub. We even witnessed market integration, with pricing in those wholesale markets converging and TTF becoming thé benchmark to which prices in end consumer contracts are pegged. For most large industrial gas consumers in Europe, the disadvantages of oil-indexed gas pricing described above have become a thing of the past. They enjoy more transparent gas pricing, and it comes with a better price management service. Moreover, as mentioned above, the switch towards Hub-pricing came with lower prices and important savings. However, some countries have been left behind and haven’t made the switch towards Hub-pricing. One of them is Spain. (Portugal as well, as the Spanish and Portuguese gas markets, like the electricity markets are well linked.)

After years of neglect, the Spanish government now seems to get serious about making the adaptations necessary to reform its gas market and introduce the Hub market model that has been such a boon for gas consumers in other European countries. On the 22nd of May, the long awaited new Hydrocarbons law was published. Upon first lecture, it seems to contain some elements that could spark the development of a real Hub market on the Iberian Peninsula.

The most important element – no doubt – is the introduction of a virtual Hub. This virtualization of the gas Hub has been first tried out in the NBP with great results and then repeated in many countries, with TTF being the most spectacular example. From a contractual / legal point of view, the “Hub” is the place where the gas changes in ownership. In traditional physical Hubs such as Henry Hub or Baumgarten in Austria, this place is an actual physical location. Before that spot (often a valve on a pipeline), the gas belongs to the seller, after it, it belongs to the buyer. When a virtual Hub is created, the whole transportation grid is defined as being the Hub. Doing so, a whole geographical area, e.g. the whole of the UK or the whole of the Netherlands, becomes one big Hub or Entry-Exit Zone. This means that the seller can inject his gas at any point and it is considered to be delivered at the Hub, and the buyer can extract the gas at any point from the transportation grid, and it is considered to have been taken from the Hub.

Physical Hubs are not as beneficial to trading and retail market competition as virtual Hubs. Sellers of gas need to find access to that specific geographical location where the physical Hub is located and capacities to get there might be restricted, especially if capacity rights have historically been allocated to incumbent suppliers in the framework of long-term gas contracts. And a supplier needs to “route” his gas from that Hub to his end client. Capacity restraints can occur on that route, making it impossible for him to develop clients far away from the entry points at which he has sufficient capacity rights to get gas in. This is clear in the case of Spain, where the distances that are to be covered from injection in the Spanish system to an end client can be large. A supplier that gets his gas delivered in Huelva, on the Southern, Andalusian shore, might have difficulties routing this gas towards clients in the industrial heartland in the North and North-East of Spain. Nevertheless, we have seen the development of a market for locational swaps in Spain, where suppliers swap gas quantities that they can deliver in certain areas with quantities of other suppliers in areas where they can’t deliver. All in all, we can’t say that the Spanish market is suffering from a lack of diversity in offers. When we do gas tenders in Spain, we can easily collect up to ten different offers. What frustrates us, is that they all come with high prices (compared to other countries in Europe), oil-indexation and poor price management services.

The new Hydrocarbons Law talks about the introduction of a virtual Hub for the whole of the Spanish territory. That is a very interesting idea, as I believe that Spain or rather the Iberian Peninsula – contrary to what some suppliers say – has an almost ideal gas system for the introduction of a virtual Hub. The transportation grid is looking a bit like a giant bicycle’s wheel, with pipelines running along the coastlines and through the center (Madrid). Gas can be injected into the wheel at no less than ten places, the pipeline connections with France in the North and North-Africa in the South and eight LNG terminals. Connect all of that in one virtual Hub and you liberate suppliers from the difficulties of getting access to injection points near their clients and getting the capacity rights (or locational swaps) to go from entry to exit. You would expect that this will finally make Spanish gas suppliers and new suppliers develop the sort of competition that we’ve seen in other countries. This could bring important benefits for Spanish gas consumers, such as:

  • A cost saving. Currently, we are seeing (oil-indexed) gas prices in Spain in the range of 24 – 25 euro per MWh. Prices on the North-West-European Hubs are in the 22 – 23 euro per MWh range. If due to the Hub development the prices in Spain converge with prices in the rest of Europe we could see a two euro per MWh saving opportunity. And it should be remarked that due to the drop in oil prices, the spread between prices in Spain and Hub prices elsewhere in Europe is historically low. In 2014 the spread was rather in the 10 euro per MWh range.
  • Possibilities of buying energy in a different way, with spot indexation and forward products for securing future price levels.

Whether the new law will lead to a rapid development of such a more competitive Hub-based market on the Iberian Peninsula or not is unclear at this moment. The hydrocarbons Law is a general text, setting up the legal framework for developing the Spanish Hub. Whether it will function or not depends on how it will be worked out in decrees and other regulatory texts such as the code for the usage of the grid that is to determine the crucial balancing system. The Law announces the preparation of these important extra pieces of regulation. The devil will indeed be in that detail. The Spanish government has been working on the creation of a Spanish gas market Hub for a long time. As we have remarked here before, the officials seemed to be focusing too much on the financial aspects of the market, the creation of a platform to trade in spot and forward contracts for natural gas. Whereas the success of a Hub depends primarily on getting the physical aspects right, defining a large entry / exit zone and making sure that there are non-discriminatory access rights and balancing services in that zone. So we’ll have to watch carefully for the extra regulatory texts and see if they have the right elements for setting of the Hub market development in Spain.

What is a bit bizarre in the new Hydrocarbons Law is the definition of the entity that would be responsible for managing the balancing system. This is to be a company in which the transport grid company (Enagas) and the organizer of the exchange platform (OMIE/OMIP) would come together. In most other countries, the balancing system is simply run by the transport grid operator. Spain seems to aim at the introduction of some sort of independent system operator. Having the organizer of the exchange platform so tightly involved in the balancing is a reminder of Spain’s confusion of the Hub model with the organization of an exchange. And the preoccupation of the Law with getting involved in the financial aspects of the gas market is reminiscent of the dirigisme of Spanish lawmakers. Spanish energy policy, also in the electricity market, often fails to produce the best and cheapest results for the end consumers because of officials trying to arrange everything in too much detail. But we should give Spain the benefit of the doubt and hope that in the next months, a Hub market for natural gas becomes a reality for Spanish gas consumers, just as we have seen in other countries.

Buying energy in the land of the free

Prefer video? Have a look at the end of this blog article.

In April 2014, E&C has opened its New York office and started working for clients in the US energy markets. This first birthday of our trans-Atlantic presence is a good moment to make a first round-up of our experiences with buying energy in the land of the free.

American energy markets go through a period of abundance. The rapid growth of production of natural gas and oil from shale layers has put the country on a path towards energy independence. Wholesale gas prices on a month ahead basis have traded in a $2 to $6 per MMBTU range since 2009. Recently, prices have dropped back towards the lower end of that range, with the month ahead currently trading at $2,684 per MMBTU. That is 8,63 euro per MWh, a price that European gas consumers can only dream of. In power production, coal-fired power stations are rapidly being replaced by stations using the cheaper natural gas. However, anyone thinking that all over the US, natural gas and electricity are cheap could be quite surprised. An industrial client of ours with his plant in Massachusetts pays an all-in electricity price of more than $125 per MWh (113 euro per MWh). When the (European) owner of this company expressed his wonder over the height of this price, we joked that he was unfortunate enough to have located his plant in the energy market equivalent of Germany in the US. Indeed, the high power prices in Massachusetts are partly caused by an ambitious renewable energy program, comparable to green zeal in Germany. What’s causing this diversity?

Transatlantic Energy Conference

The first thing that strikes European observers is that in the land of the free the energy markets are in many aspects not as free or liberalized as in Europe. For electricity, for example, only 16 States have a liberalized market as we traditionally understand it, namely with consumers having a free choice of electricity supplier. However, free enterprise is involved in many aspects of the American energy markets. Even if the end consumer markets are regulated in many States, the infrastructure for supplying electricity and natural gas to the Americans has been developed through a myriad of private initiatives and not centrally planned by a government.  Moreover, the US is a federal country with regulatory competences spread over the different levels (Federal, State and even local). This means that as a market place it is definitely less orderly than what we’re used to in Europe. Nevertheless, the basic challenge for an energy buyer is the same. As you can see from the $2 to $6 range of the gas prices, volatility is high. US energy buyers often have such big difficulties seeing through the complexity of the pricing in itself that they don’t manage to implement a hedging strategy to protect their companies against that volatility. A six-step comparison of US and European energy markets can offer some understanding of this complexity

  • Lack of a clear federal competence for energy market regulation

In Europe, energy market liberalization has been driven forward by the European Union which once started as the European Coal and Steel Community. The EU Member States have granted the EU the authority to decide how energy markets should be structured. The EU uses this power to draft Internal Energy Market Directives that Member States are obliged to implement in their national energy market legislation. This means that many main aspects of energy market design in the different European countries, such as third party access or unbundling, are very similar as they are all based on the same text in the Directive. The US Federal Government has less legislative powers in the energy markets, meaning that there is a much larger variety of systems in the different States.

  • Bottom-up versus top-down market development

Before liberalization, national governments in many European countries often had a strong impact on the organization of their national energy markets, not in the least because in many cases they actually owned the monopolist energy suppliers. That power was often used to build an orderly, centralized energy supply system. It was the national government that ordered where centralized power production plants and gas injection systems were to be built and it was that national government that designed the transport and distribution systems. They made the power- and pipelines neatly stop at the borders. Europe entered its energy market liberalization (as of 2000 in continental Europe) with energy markets largely organized in unified national systems. That made it easy to rapidly push through the liberalization in a top-down fashion.

As I’ve already remarked, the US energy infrastructure has been largely built on private initiative with the government (on a federal, State and local level) limiting themselves to granting authorizations and regulating prices. Some investor company at some point decided to build a power station or a gas production facility somewhere in the US. It was again that same company or another one that decided to start building the transportation infrastructure to bring the power or gas to the end clients in the surroundings. Those power- and pipelines didn’t stop at the State borders, so supply systems were created that crossed the State Borders and within one State different systems were supplying different parts of the State.

So, in top-down regulated Europe, in most countries, one market was created based on one nation-wide supply system. Regulations for organizing those national markets were similar as they were based on the same directives. All that was needed then, was the organization of cross-border trading to move towards one internal European market for energy, a process which is still going on. In bottom-up USA, State regulations had to be applied to different supply & transportation systems and one supply & transportation system is often subjected to different regulations as it’s supplying in different States. Moreover, as these regulations are not based on common Directives, they can diverge widely. In some cases, one supply and transportation system supplies energy to a deregulated, free-choice market in one State and a regulated monopoly market in the next State. The Federal Government has tried to bring some order to the electricity markets by grouping different supply systems in so-called ISO’s (Independent System Operators). But that hasn’t reduced much the regulatory complexity. Moreover, as I will explain in the next paragraph, it has even failed to reduce the often large locational price differentials that we see in the US.

  • No development of entry-exit zones

The places where energy is produced are not always close to the places where it is consumed. Moving energy from one place to another can be quite expensive. Moreover, in the US, with its wide diversity of companies operating transportation systems, moving natural gas or electricity around often means that you have to use the infrastructure of different companies, each of them charging you for the usage, or rather reservation of capacity on their system. Due to these many differences, large differentials in the pricing of energy occur. In the electricity market there are no less than 41 different wholesale price references for forward price fixing. And in the spot market, in Texas alone, you can find more than 4.000 different prices. For natural gas, the situation is somewhat different. The wholesale price of natural gas is almost always linked to the price at the Henry Hub, a physical location in Louisiana. However, for the end client, a basis price will be added to the wholesale value that for a large part consists of costs to buy access to the different transportation systems that a supplier needs to use to get the gas from the production site to the client’s site. Price differentials between two gas supplier’s offers can often be quite large as they might use different production sources and physical routes to go from those sources to a client.

One of the great accomplishments of European energy market liberalization has been the creation of so-called virtual Hubs to solve the problem of locational cost differentials. To understand how this works, I first have to give a clear definition of my usage of the container term “Hub”. In the energy world, a “Hub” is the location where the ownership of the energy is being transferred from seller to buyer. A virtual Hub will be defined as one large entry – exit zone, for example, the whole Netherlands with the TTF Hub. This means that wherever the seller puts its natural gas on the grid (entry) it is considered to be no longer his property, wherever the buyer takes that natural gas from the grid (exit) it is considered to be taken off the grid. The place where the ownership changes is the place where the gas is injected into the Dutch grid for the seller, the place where there is a connection with that Dutch grid for the buyer. Anything that happens in between that entry point and exit point is the responsibility of the transportation grid operator, which is one operator for the whole geographical area encompassed by the Hub. (Note: for a client connected to a distribution grid, the exit point is defined as the connection of that distribution to the transportation grid. However, this nuance doesn’t have any impact on the wholesale pricing).

The creation of such virtual Hubs over large geographical zones offers a myriad of advantages that facilitate the development of liquid, transparent wholesale and retail energy markets:

  1. Energy companies no longer have to go into the markets to obtain the capacity rights to get access to clients in different places within one of those large zones. That makes it much easier for them to launch commercial activities in those zones.
  2. Costs of usage of the transportation grid are no longer billed through commodity pricing but exclusively through the transport grid fee, which (in Europe) is regulated and one price regardless of the physical location. Therefore, there are no more differences in wholesale prices within those Hub zones. This causes the number of wholesale price references to go down.
  3. As one price reference is applied to a large geographical zone, the liquidity of the wholesale trading on that reference goes up, making it possible to develop exchange trading on that price reference. Such exchange traded wholesale prices make the energy pricing much more transparent for end users.
  4. Price levels offered by different suppliers converge more as there are no more differences based on routing of natural gas or electricity.

In the European electricity markets, straight after liberalization almost every country launched a Hub encompassing the whole country with the designation of a single transport system operator delivering balancing services in the whole countries. Today there is for as good as all the European countries one single wholesale electricity price, often traded on a reasonably liquid exchange. Attempts at unifying electricity pricing in the US have been taken through the creation of the 7 ISO’s, but so far they are not run as single entry – exit zones, leading to a huge proliferation of wholesale electricity price references.

For natural gas, many European countries now have one or maximum two Hubs (and price references) within their borders. Think about NBP for the UK, ZTP for Belgium, TTF for the Netherlands, NCG and GPL for Germany, the two PEG’s in France, PSV in Italy, Polpx in Poland, etc. The development of these Hubs have revolutionized Europe’s natural gas markets. Wherever you consume natural gas within these countries, your price will be based on the same wholesale price reference. In the US, no virtual Hubs for natural gas have been created yet. Therefore the buying of natural gas is more complex, with the physical routing having a material impact on the price levels in different places.

  • More complex, less transparent pricing

With a larger diversity of price references referring to the wholesale supply of natural gas and electricity, it is harder to get a good idea in the US of what energy costs. When we talk to European clients, they almost always have an idea of what the underlying price level is of the energy that they have to buy. That’s because European consumers can go and have a look at the websites where the wholesale energy for their market is traded and the price is published, wide and open for everyone to consult. That is impossible for the US. You can find information free of charge for Henry Hub in the natural gas markets, see Side 2 of this document: http://www.cmegroup.com/daily_bulletin/current/Section61_Energy_Futures_Products.pdf. But there is no source where you can find all the information necessary to make an estimation of the cost of routing the gas towards your facility free of charge. And for electricity, daily pricing data on the 41 price references can only be obtained if you’re willing to pay for it. Therefore, we observe that compared to their European counterparties, most US energy buyers have much less insight into the daily movements of wholesale energy prices. Many of them only get an idea of how high or low the energy markets are by asking offers to suppliers.

To this lack of transparency regarding wholesale energy pricing, we can also add a lack of transparency regarding the non-commodity components of the energy bills. In Europe, grid fees and taxes are almost always regulated in a top-down manner with government sources disclosing information on their price levels. Also, we’ve seen governments in Europe impose transparency upon suppliers, obliging them to disclose full details of price components on their bills. In the US, energy bills are often very opaque with no details at all about the often complicated underlying pricing mechanisms of non-commodity components.

  • More market mechanisms for setting non-commodity price component

The lack of transparency in US non-commodity energy pricing is also due to the fact that in many cases market mechanisms are used to determine those prices, e.g. for the setting of reserve capacity prices. Whereas a top-down regulated grid fee or tax will only change when the government decides (and publicly announces) such a change, these market-based prices change the whole time. And again, there is a lack of transparency, so consumers are often unaware of such changes. Variable non-commodity price components also mean that as a client, you have to make a choice between fixing the price up-front (e.g. in a fixed adder to the commodity price) or leaving it open. But with no information on the price levels or even the structure of the price components, that choice is often very difficult to make.

  • Less usage of advanced price management techniques

It is often true that energy is cheaper in the US than in Europe. But that doesn’t make it easier to buy it. To resume the observations above, compared to Europe, the US energy markets have:

  • Less unity in legislative systems,
  • More geographical disparity,
  • More different pricing references,
  • Less transparency regarding those prices,
  • More market mechanisms influencing non-commodity components rather than having them fixed by a government.

Therefore, a US energy buyer has a much harder time than his European counterparts simply finding out what is on his energy bills and what the drivers are of those prices. He often completely depends on energy suppliers and brokers for information on the energy markets in all their different components. That complexity is often enhanced by the fact that US suppliers and brokers disguise as consultants. Many US companies remain stuck in the mud and never manage to develop the sort of advanced price management techniques that have been widely adopted by European companies. Price management is often limited to a choice between one-shot up-front fixing of the price or leaving it 100% open for spot market indexation. Only big US companies have rolled out contracts and fixing strategies for layered purchasing, fixing prices at different moments, using different forward products and the spot market. US energy companies are therefore often over-exposed to rapid increases of wholesale and non-commodity components of energy prices, such as witnessed in the cold winter of 2014. Fortunately, they now have E&C to help them see through the complexity and take firm control over their energy procurement.

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La fin de l’ « arenhisation » du marché Français

The English version of this article will be available in our E&C magazine. Order your free copy here.

Par Baptiste Desbois.

Deux types de modèles sont proposés aux clients français qui signent une offre de marché : une offre 100% marché ou une offre combinant un volume marché et un volume ARENH. Il semble aujourd’hui que l’ARENH a perdu ses lettres de noblesse en raison de l’attractivité des prix de marché et d’un problème de visibilité (et donc de risque) quant au nouveau prix du volume ARENH. En parallèle, les prix de marché sont devenus volatils.

Pour rappel, la France a mis en place un système très particulier au travers duquel les fournisseurs alternatifs et donc les clients finaux peuvent s’ils le souhaitent acheter de l’électricité produite par les centrales nucléaires d’EDF à un prix régulé appelé prix ARENH (le volume est actuellement plafonné à 100 TWh/an). Le 4 décembre 2014, la Commission de Régulation de l’Energie (CRE) a annoncé que le volume total d’ARENH demandé pour le 1er semestre 2015 s’élèverait à 15,8 TWh. En 2014, les volumes réservés étaient 36,8 TWh pour le 1er semestre et 34,5 TWh pour le 2e semestre. Les consommateurs français ont donc fait le choix de s’orienter massivement vers les prix de marché, délaissant l’ARENH. Ainsi, la CRE explique le plongeon des demandes ARENH par deux facteurs :

  • « l’absence de visibilité sur les évolutions à venir du prix de l’ARENH »

Celui-ci a été fixé à 40 €/MWh à partir du 1er juillet 2011 puis à 42 €/MWh au 1er janvier 2012. Un nouveau prix aurait dû être publié au plus tard le 7 décembre 2013 mais cela n’a pas été fait en raison de l’absence d’un décret du gouvernement fixant la méthodologie du calcul du prix. Un projet de décret a tout de même été établi en 2014 pour soumission à différentes autorités. L’examen de ce projet par la Commission Européenne est encore en cours et a conduit la France à reporter la réévaluation du prix de l’ARENH au 1er juillet 2015. L’annonce de ce délai a été faite le 4 novembre 2014, soit après la date limite de réservation des volumes ARENH pour les clients finaux (Les fournisseurs peuvent réserver les volumes avant la mi-novembre mais ne permettent en général pas à leurs clients finaux de le faire après octobre). Dans un souci de visibilité, beaucoup de clients ont donc opté pour des prix 100% marché. En parallèle, ce communiqué du 4 novembre indiquait que la CRE estime à environ +2€/MWh l’évolution nécessaire du prix de l’ARENH en juillet 2015, sur la base des informations disponibles aujourd’hui.

  • « la baisse des prix sur le marché de gros de l’électricité »

Il est arrivé à plusieurs reprises que les prix de marché tombent sous le niveau de l’ARENH, d’où une remise en question du choix de ce système par rapport à un contrat indexé uniquement sur les prix de marché. Si l’on s’appuie sur l’augmentation de 2 €/MWh estimée par la CRE, il est donc plus opportun de sécuriser aujourd’hui son prix pour les prochaines années sous les 42 €/MWh. Les prix ont cependant été volatils, en fonction des divers bruits de couloirs et annonces. Une hausse brutale avait été observée le 15 octobre 2014. A cette date, la CRE avait publié un rapport sur les tarifs réglementés dans lequel on pouvait lire qu’elle retenait pour certains calculs une hypothèse de hausse du prix de l’ARENH de l’ordre de 2 €/MWh et par an. Les prix se sont ensuite progressivement relaxés, bien que soutenu par la nouvelle estimation publiée le 4 novembre 2014 estimant une hausse de l’ARENH de 2 €/MWh en juillet 2015. Pourtant, dès décembre, les prix sont largement passés sous le niveau ARENH pour toucher les 38 €/MWh. Les acteurs de marché pensent-ils que le prix de l’ARENH ne montera pas ou que le mécanisme sera adapté ? Sont-ils en train de bouder ce système et plaident-ils pour un marché sans ARENH comme dans les autres pays européens ? Il est vrai que les niveaux de production sont relativement sains, les réserves hydroélectriques élevées et la demande orientée à la baisse. En parallèle, les prix dans les autres pays sont aussi en baisse. Est-ce la France qui influence ses voisins ou l’inverse ? Ce phénomène est d’autant curieux dans la mesure où l’effondrement des prix a eu lieu après avoir l’annonce d’une forte baisse des réservations de l’ARENH pour le premier semestre 2015 (signifiant que la demande sur le marché devient élevée). Par ailleurs, avec la fin des tarifs réglementés en France, les achats sur le marché sont logiquement appelés à croître, d’où une pression supplémentaire. Affaire à suivre…

baseload fr

Has the Ukraine Crisis affected gas prices in Western Europe?

French version available, written by Baptiste Desbois

It was hard for market observers to not fall asleep these past two years…European calendar year strips had stabilized at around 26 to 28 euros per MWh in the wholesale market. Then, the situation changed radically in 2014. An exceptionally warm winter decreased demand and drove prices down. Now, market observers have their eyes glued on the Ukraine crisis. Market fundamentals haven’t changed, but a « gas war » with Russia is in the back of everyone’s mind. Yet, after a tumultuous few months, a temporary supply deal has finally been reached: the risk of a supply shortage has been averted, for now. This has allowed consumers indexed on floating formulas to benefit from historically low prices. However, the threat of higher prices has not disappeared: we are still in the heart of winter and this temporary agreement stops at the end of March.

1. Gas and Geopolitics

Geopolitics play an important role in the gas market. The best example of this is the tense and shifting relationship between Europe and its main supplier, Russia. Their strong interdependence makes for a very complicated relationship. Russia has established a strong presence on the European market to affirm its position and secure the delivery points for its gas. The European Union needs this gas but is trying to diversify its supply to reduce its dependence on Russia. However, a solution is not yet within reach. Let’s not forget, after all, that it is these same European countries that wanted to create strong gas ties with Russia in the past. Strong European dependence on Russia gas was a choice, not an obligation.

Three conflicts involving natural gas have erupted between Russia and Ukraine since the 2004 Orange Revolution. The first conflict took place in 2006 when Gazprom decided to align Ukrainian prices with European prices. Following Ukraine’s refusal to abide by these new prices, Russia cut supplies for three days in the midst of a particularly harsh winter. It was revealed over the course of this conflict that Ukraine was illegally diverting gas intended for Europe for its own consumption. In 2008, gas shipments to Ukraine were cut back again due to outstanding debt. The third conflict broke out in 2009 around the same points of contention: gas prices and payment defaults. Gazprom responded once again by shutting off the tap, which resulted in a decrease in supply in Europe. In more recent news, the threat of another gas war is looming with the political crisis in Ukraine.

2. The fourth gas conflict

Russia reacted to the situation in April by announcing two back to back increases in Ukraine’s retail gas price. This included:

  • A first price hike due to the cancellation of a rebate granted in December 2013 following Ukraine’s late payments. The price rose from $268.5 to $385.5 thousand cubic meters.
  • In that same week, a second increase was announced. The new price climbed to $485 thousand cubic meters, one of the highest in Europe. This hike was attributed to the end of an exemption in export rights.

Kiev rejected what is considered to be an arbitrary price increase and refused to pay the bill. Nonetheless, Gazprom decided to implement a prepayment mechanism. If Ukraine were to violate its payment terms again, gas deliveries would be partially or completely stopped. As Russia had received no advance payments, tensions rose until finally it shut off the gas supply to Ukraine on June 16, 2014. Gazprom also indicated that Ukraine already owed a whopping 4.458 billion dollars (1.451 billion from November to December 2013 and 3.007 billion from April to May 2014)1. Luckily, gas shipments destined to other countries were honored.

After several months of negotiations and with the help of the European Union, an interim agreement was finally reached at the end of March 2015. This served to relieve tension hanging over the winter months. As per the agreement, Ukraine can now pay in advance for as much gas as it needs at the lower price point of $385 dollars per thousand cubic meters. Furthermore, it will not have to pay for previous breaches of its Take- or- Pay commitments2. Ukraine will also pay back $ 3.1 billion in debt. This sum was calculated based on a gas price of $268.5 per thousand cubic meters. The total amount of debt owed by Ukraine will be decided by the Stockholm Board of Arbitration. Ukraine has repaid the debt in two sittings and has provided an advance payment for one billion cubic meters in December for $ 378 million3. A transfer of $150 million will follow in January. The alternative of re-exporting gas from Europe to Ukraine from backhaul connections is a problem since it remains Russian gas4. Ukraine reported receiving less gas from the European Union via backhaul flows following Gazprom’s warning about the the legality of these operations5. In September, the manager of the Polish network Gas -System also indicated that the reductions in supplies from Russia had forced him to stop re-exports of gas to Ukraine6. This is therefore a very complicated issue…

3. Then why did prices drop?

During this episode, market prices were trending downwards. In fact, levels reached at the end of 2014 were historically low. Some volatility / nervousness was felt following successive announcements. After all, Russia supplies about 30 % of Europe’s gas. However, the halt of gas shipments to Ukraine has not fundamentally affected supplies to Western Europe. Dependence on Russian gas is much lower compared to that of some Central European countries. So what explains this downward trend? Here are three main factors behind lower prices:

  • Ukraine is not the only transit route for Russian gas to Europe. Russian gas can be shipped from the Yamal pipeline to Poland or to Germany through the North Stream pipeline under the Baltic Sea. Note that Gazprom cannot use more than 50 % of the capacity of its OPAL prolongation due to European regulations1. As a result, a large part of Russian gas does not transit via Ukraine. Russia does not seem to want to reduce the shipments delivered through these alternative routes. The risks are therefore much more limited than in previous gas crises, when fewer alternatives to Ukrainian transits existed. There are also many more connections between European countries then before and even some two-way transport capacities.
  • The mild winter reduced European demand. As a result, storage levels were very high throughout year. These were filled up to 66% at the time of the disruption of supplies to Ukraine and continued to increase to over 95 % in September. Aside from the mild weather, gas demand has been declining for the past three years amid an economic crisis, substitution of gas by coal and renewables, and improvements in energy efficiency. Société Générale predicts an 11% reduction in gas consumption in 20148.
  • A significant increase in natural gas liquefaction capacity is anticipated at the international level. If all goes as planned, Australia will surpass Qatar and become the largest exporter of liquefied natural gas before the end of the decade. The United States is also rapidly entering the race, with several upcoming projects. On the other hand, shipments delivered to Europe have reached historically low levels in recent years as they have been redirected to more profitable parts of the world such as Asia. However, spot prices in Asia have also trended down in recent months due to a drop in demand9. This has allowed in increased an increased in LNG shipments to Europe. For instance The Fosmax LNG terminal in the south of France reported beating its LNG unloading record in November.

graf

Evolution of Seasonal Gas Prices on the TTF Exchange

Supply shortages could be repeated in the absence of a new agreement between Russia and Ukraine beginning in April 2014. However, a momentary interruption in gas supply at the end of winter will probably not have immediate consequences. The stress test conducted by the European Commission shows that prolonged rupture in supply would have a substantial impact on the European Union but indicates that protected consumers would remain unaffected if all countries cooperate with each other. However, prices could be affected. Furthermore, any unexpected event can occur at any time and upset the markets. Fukushima is the best example. Japan had to compensate for the sudden closure of nuclear power plants with thermal gas plants. Both demand and prices had climbed very quickly as a result. This tumultuous episode shows that we still have some ways to go before we can enjoy a risk-free market. Central European countries are particularly sensitive to this issue…

4. What can we do going forward?

Herman Van Rompuy considers that “we have let our dependence on Russian gas become too high.” Europe is trying to reorganize its energy market in response to this problem. This is a legitimate goal, but it will not be accomplished overnight. One must also keep in mind that new sources of supply will not necessarily come cheaper. LNG is one way to diversify. LNG shipments to Europe have decreased for the past few years but boosting imports would be easy. The market could take advantage of new liquefaction capacities in the coming years (depending on demand and the “willingness to pay”). For example, the largest LNG import terminal in Europe will be built in Dunkirk. However, regasification infrastructure would also need to be developed in countries most dependent on Russian gas, like Lithuania. A floating terminal, baptized “Independence” was installed in Klaipeda. This project, dubbed a “success story” by Oettinger11 will also relieve other Baltic countries. Other such projects are underway. Strengthening internal circulation routes is also a key. ACER indicates that at least one third of the connection nodes between E.U. member states are congested12. E.U. states have recently agreed to allocate € 647 million for the most important energy infrastructure projects13. The biggest allocation is intended for the construction of a gas network from Poland to Lithuania14. It is also necessary to strengthen the links between North and South. France could benefit from a new pipeline with Spain called Midcat. Spain is 100% independent of Russian gas. Discussions have been lingering for years, but this project is on the list of projects that are of strategic importance to the European Commission15. The pipeline would bring gas to Northern Europe provided that odor problems are resolved between France and its neighbors. In this scenario, Spain could cover 10% of Europe’s Russian gas imports from Europe16.

Europe is also working on its supply sources and is in favor of the development of the Southern European gas corridor that would link up to Azerbaijan via for example the SCPX, TANAP and TAP pipelines or even the Nabucco project, which has been left on the back burner. These pipelines can benefit from the recent abandonment of the South Stream gas pipeline from Russia to Austria, hampered in part due to European regulations relating to third party access to the network. Putin said he wanted to favor other markets because “that is the choice of our European friends”17… Finally, to reduce external imports, European production would need to be increased. Unfortunately, production levels have been falling steadily since 2004. This is why the controversial debate on shale gas has returned to the front of the stage … In Britain (where production has dropped sharply in recent years), the company Cuadrilla Resources has announced that it would be ready to produce shale gas within four years if a state of emergency was declared because of the crisis in Ukraine. Gas companies are obviously on high alert. But committing to shale gas is more complicated than simply striking a balance between economics and environmental risks. Improving energy efficiency and increasing the share of renewables is another way forward, despite the fact that gas power plants are a great way to overcome renewable’s irregularities in production. If such is the case, then why not make a transition towards bio methane? A small revolution in the world of networks began with injections of bio methane in fifteen European countries.18

These events have at least revived the debate. Significantly altering Europe’s energy supply will not happen overnight. It will take years. Moreover, Europe is linked with Russia by long-term contracts. These will first have to expire before alternative links can be created. Finally, even if Russia continues to defend oil-indexing, it is in its interest to not increase prices too much as higher prices would give energy alternatives a boost in Europe. A contained pricing policy may even ensure its continued dominance in Europe’s gas supply. This is not necessarily a bad thing for Europe from a strictly economic point of view. The cause of the tensions observed in recent years is also strongly linked to the accumulation of Ukraine’s debts. Russia hasn’t tried to disrupt the supply of gas to the European Union so far. Its deteriorating economic situation would make this unreasonable. Russia has guaranteed several times that shipments to Europe would not be affected. Securing transit zones is therefore as important of a goal as finding new supply sources. It will certainly be interesting to keep an eye on future developments.

La crise ukrainienne a-t-elle eu un effet sur les prix du gaz en Europe occidentale ?

You can find the English version here.

Par Baptiste Desbois, auteur du livre Panorama : le marché du gaz en France

Au cours des deux dernières années, le principal défi rencontré par les observateurs du marché  gazier était de ne pas s’assoupir… Les prix calendaires européens s’étaient stabilisés dans un tunnel de 26 à 28 euros par MWh sur le marché de gros. La donne a pourtant radicalement changée en 2014. L’hiver exceptionnellement doux a apaisé le marché sur le court terme, avec une diminution marquée de la consommation.  Pourtant, même si rien n’affecte physiquement les fondamentaux du marché, les acteurs ont les yeux rivés sur la crise en Ukraine.  Le terme bien connu de « guerre du gaz » avec la Russie est de nouveau sur toutes les lèvres. Après de multiples péripéties, un accord intérimaire de fourniture a finalement été signé, faisant s’éloigner le spectre d’une rupture d’approvisionnement en hiver. Les consommateurs indexés sur des formules flottantes ont alors pu profiter de prix historiquement bas, bien que très volatils. Cependant, l’hiver se durcissant, les risques sur les prix n’ont pas pour autant disparus d’autant plus que l’accord  s’arrêtera fin mars.

1. La dimension géopolitique du gaz

Comme pour le pétrole, l’aspect géopolitique est particulièrement important sur le marché du gaz. Le meilleur exemple en est la relation mouvementée entre l’Europe et la Russie, son principal fournisseur. Ce cas est très complexe, tant les interdépendances entre les deux ensembles sont fortes. La Russie est fortement implantée sur le marché européen pour assurer sa position et les débouchés de son gaz. Et cela fonctionne. L’Union Européenne a quant à elle besoin du gaz russe mais cherche à diversifier davantage ses sources d’approvisionnement pour réduire sa dépendance vis-à-vis de la Russie. Il est cependant utopique de penser qu’une solution sera trouvé rapidement. Par ailleurs, il ne faut pas oublier que ce sont les pays européens, pauvres en ressources, qui ont cherché à créer des liens gaziers forts avec la Russie de par le passé. La forte dépendance au gaz russe n’est que le produit d’une volonté historique.

Trois conflits gaziers se sont depuis produits entre la Russie et l’Ukraine depuis la révolution orange de 2004. Un premier conflit a eu lieu en 2006, lorsque Gazprom décida d’aligner les prix ukrainiens avec les prix européens. Suite au refus de l’Ukraine, l’approvisionnement fut stoppé pendant trois jours, dans un contexte d’hiver très froid. Cette opération démontra au passage que l’Ukraine prélevait illégalement des volumes destinés à l’Europe qui transitait par son territoire. En mars 2008, les livraisons vers l’Ukraine furent de nouveau diminuées en raison d’impayés de la part de l’Ukraine. Le troisième conflit eu lieu en 2009, toujours autour des mêmes problématiques : désaccord sur les prix et défaut de paiement. Gazprom décida de jouer avec le robinet et une baisse des volumes fut de nouveau constatée en Europe. Dernièrement, Le spectre d’une nouvelle crise gazière est réapparu avec la crise ukrainienne suite à la destitution d’Ianoukovitch et l’annexion de la Crimée.

2. Le quatrième conflit gazier

La Russie a réagi à cette situation en annonçant deux hausses successives du prix de vente du gaz à l’Ukraine au mois d’avril :

  • Une première augmentation liée à l’annulation d’une réduction accordée en décembre 2013, motivée par des retards de paiement de l’Ukraine. Le prix est passé de 268,5 à 385,5 dollars par millier de mètres cubes.
  • Au cours de la même semaine, une deuxième augmentation fut annoncée. Le nouveau prix est passé à 485 dollars par milliers de mètres cubes, un des prix les plus élevés en Europe. Cette augmentation est notamment due à l’annulation d’une exemption appliquée aux droits d’exportation.

Kiev ne l’entendit pas de cette oreille et n’honora pas ses factures. Gazprom indiqua alors se trouver dans l’obligation de passer à un paiement anticipé pour les livraisons de gaz. En cas de nouvelle violation des conditions de paiement, les livraisons de gaz seront partiellement ou entièrement stoppées. La Russie n’ayant rien reçu en avance, le ton s’est progressivement durci jusqu’à un arrêt des livraisons à l’Ukraine le 16 juin 2014. Gazprom souligna également que la dette de l’Ukraine s’élevait déjà à 4,458 milliards de dollars (1,451 milliard de novembre à décembre 2013 et 3,007 milliards d’avril à mai 2014). En revanche, les volumes nominés par les autres pays et transitant par l’Ukraine furent livrés, Gazprom rejetant la responsabilité sur Kiev si des quantités venaient à disparaître.

Après plusieurs mois de négociations et avec l’aide de L’Union Européenne, un accord intérimaire a finalement été trouvé jusqu’à la fin du mois de mars 2015, permettant de soulager les tensions qui pesaient sur les mois d’hiver. L’Ukraine peut réserver et payer en avance autant de gaz que nécessaire à un prix inférieur à 385 dollars par millier de mètres cubes et aucun manquement aux engagements Take-or-Pay ne sera répercuté. L’Ukraine remboursera aussi 3,1 milliards de dollars de dette, montant calculé sur un prix de gaz de 268,5 dollars par milliers de mètres cubes. Le montant total de la dette sera décidé par  la cour d’arbitrage de Stockholm. L’Ukraine a remboursé la dette en deux tranches et procédé au prépaiement d’un milliard de mètres cubes pour décembre pour 378 millions de dollars, suivi d’un transfert de 150 millions pour janvier. Par ailleurs, l’alternative consistant à réexporter du gaz de l’Europe vers l’Ukraine via les interconnexions rebours peut poser problème étant donné qu’il s’agit physiquement de gaz russe. L’Ukraine avait par exemple reporté recevoir moins de gaz de l’Union Européenne via les flux rebours en raison des avertissement de Gazprom quant à la légalité de cette opération. En Septembre, le gestionnaire de réseau polonais Gas-System avait également  indiqué que les réductions de fourniture de la Russie l’avait forcé à stopper les réexportions de gaz vers l’Ukraine. Il s’agit donc évidemment d’un sujet complexe…

3)  Pourquoi les prix ont-ils alors baissé ?

Pendant cet épisode, les prix de marché furent orientés à la baisse, si bien que les niveaux atteints à la fin de 2014 furent historiquement bas. Une certaine volatilité / nervosité s’est faite ressentir au fur et à mesure des annonces, la Russie livrant environ 30% du gaz européen. L’arrêt des livraisons à l’Ukraine n’a cependant pas fondamentalement impacté les fournitures à  l’Ouest de l’Europe. La dépendance au gaz russe y est bien moindre au regard de celle de certains pays d’Europe Centrale. Deux grands facteurs permettent de justifier cette tendance à la baisse :

  • L’Ukraine n’est plus la seule voie de transit du gaz russe vers l’Europe. Celui-ci peut par exemple être expédié par le gazoduc Yamal vers la Pologne ou vers l’Allemagne par North Stream passant sous la mer Baltique. A noter que Gazprom ne peut utiliser plus de 50% des capacités de son prolongement OPAL en raison des régulations européennes[1]. Ainsi, une grande partie des approvisionnements de gaz russe ne transite plus par l’Ukraine. La Russie n’a visiblement pas l’intention de réduire les volumes livrés via ces routes alternatives. Les risques sont donc bien plus limités que lors des précédentes crises gazières, lorsque moins d’alternatives au transit ukrainien existaient. Il y a également bien plus de connections entre les pays européens et quelques capacités de transport bidirectionnelles.
  • L’hiver très doux a fait baisser la demande européenne. Les niveaux de stockage étaient alors très élevés au cours de l’année. Ceux-ci étaient remplis à 66% à la date de la rupture des approvisionnements à l’Ukraine et ont continué à grimper jusqu’à plus de 95% en septembre. En parallèle, indépendamment de la météo clémente, la demande de gaz en Europe est en baisse depuis les trois dernières années sur fond de crise économique, de substitution du gaz par le charbon et les renouvelables ainsi que par les efforts faits sur l’efficacité énergétique. La diminution de la consommation de gaz en 2014 est estimée à 11% par la Société Générale.
  • A l’échelle mondiale, une augmentation marquée des capacité de liquéfaction de gaz naturel est anticipée. Si tout se passe comme annoncé, l’Australie dépassera le Qatar et deviendra le plus important exportateur de gaz naturel liquéfié avant la fin de la décennie. Les Etats-Unis entrent aussi rapidement dans la course, avec différents projets dans la file d’attente. Les volumes livrés à l’Europe avaient atteint des niveaux historiquement bas ces dernières années, les volumes étant jusqu’à présent réorientés vers d’autres régions du monde plus rémunératrices, comme par exemple vers l’Asie. Or, les prix spot y sont également orientés à la baisse depuis quelques mois en raison d’une baisse de la demande. Cela permet implicitement de relâcher progressivement les pressions sur les volumes de GNL livrés à l’Europe. Le terminal de Fosmax LNG dans le sud de la France a par exemple rapporté avoir battu son record de déchargement de méthaniers en novembre.

graf

Evolution des cours saisonniers du gaz en Europe sur la place TTF.

En l’absence de nouvel accord entre la Russie et l’Ukraine à partir d’avril 2014, les risques sur l’approvisionnement pourraient se répéter. Une coupure de gaz momentanée à la sortie de l’hiver n’aura pourtant probablement pas de conséquence immédiate. Le ‘stress test’ mené par la Commission Européenne montre qu’une rupture des approvisionnements prolongée aura un impact substantiel sur l’Union Européenne mais indique que les consommateurs protégés resteraient alimentés si tous les pays coopéraient les uns avec les autres. Cela pourrait cependant toucher les prix. Par ailleurs, un autre évènement inattendu peut à tout moment se produire et bouleverser les marchés. Fukushima en est le meilleur exemple. Le Japon a en effet du subitement compenser la fermeture des centrales nucléaires par des centrales thermiques au gaz. La demande et les prix avaient alors rapidement grimpés. Cet épisode tumultueux montre qu’il y a encore du chemin à faire avant de tendre vers un marché exempt de risques. La problématique est d’autant plus importante pour les pays d’Europe Centrale.

4) Quelles sont les perspectives de développement?

Herman Van Rompuy juge que « nous avons dans le passé laissé notre dépendance au gaz russe devenir trop élevée ». En réponse à cette situation, L’Europe cherche alors à réorganiser le marché européen. Cet objectif semble légitime mais ne pourra se faire du jour au lendemain. Cela ne signifie pas non plus que ces nouvelles sources d’approvisionnement seront nécessairement moins couteuse. Le GNL est un premier levier de diversification. Les volumes de GNL livrés à l’Europe sont en baisse depuis quelques années et il serait facile de regonfler ces importations. Le marché pourrait par exemple profiter des nouvelles capacités de liquéfaction mises en services dans le monde dans les prochaines années (en fonction de la demande et de la « propension à payer»). Le plus grand terminal  méthanier d’importation d’Europe sera par exemple construit à Dunkerque. Il faudrait en revanche développer rapidement les infrastructures de regazéification dans les pays plus dépendants au gaz russe, à l’instar de la Lituanie. Un terminal flottant, baptisé « Independence », a été installé à Klaipeda. Ce projet, qualifié de « success story » par Oettinger, permettra également de soulager les autres pays baltes. D’autres projets de ce type sont en cours. Le renforcement des voies internes de circulation est également un point clé. L’ACER indique qu’au moins un tiers des points d’interconnexions entre les Etats membres sont congestionnés. Les États membres ont d’ailleurs récemment convenu d’allouer 647 millions d’euros à des projets d’infrastructures énergétiques prioritaires. La plus grosse enveloppe revient à la construction d’une interconnexion gazière Pologne – Lituanie. Il convient aussi de renforcer les liens Nord – Sud. La France pourrait ainsi bénéficier d’un nouveau gazoduc appelé Midcat avec l’Espagne, pays 100% indépendant du gaz russe. Les discussions trainent depuis des années mais ce projet est inscrit sur la liste des projets d’importance stratégique de la Commission Européenne. Ce gazoduc permettrait de faire remonter du gaz vers le Nord de l’Europe à condition de lever les problèmes d’odorisation entre la France et ses voisins. L’Espagne pourrait ainsi couvrir 10% des importations russes de l’Europe.

L’Europe travaille également sur ses sources d’approvisionnement et s’affiche en faveur du développement du corridor gazier Sud Européen qui ferait dans le lien avec l’Azerbaïdjan via par exemple les gazoducs SCPX, TANAP et TAP ou le projet Nabucco relégué à l’arrière-plan. Ceux-ci peuvent être favorisés par l’abandon récent du projet de gazoduc South Stream reliant la Russie à l’Autriche, la règlementation européenne en matière d’accès des tiers au réseau ayant en partie freiné son développement. Vladimir Poutine a affirmé vouloir favoriser d’autres marchés puisque « tel est le choix de nos amis européens »… Enfin, pour réduire les importations extérieures, il faudrait légitimement accroitre la production européenne. Malheureusement, les niveaux de production sont en chute constante depuis 2004. C’est pourquoi le débat controversé sur le gaz de schiste revient sur le devant de la scène… En Grande Bretagne (où la production a fortement baissée ces dernières années),  la compagnie Cuadrilla Resources a donc annoncé qu’elle serait prête à produire du gaz de schiste d’ici à  quatre ans si l’état d’urgence était déclaré suite à la crise en Ukraine. Les compagnies gazières sont donc sans surprise sur le qui-vive. S’engager vers le gaz de schiste relève néanmoins d’une équation bien plus complexe qu’un simple équilibre entre économie et risques environnementaux. Renforcer l’efficacité énergétique et la part des renouvelables peut être un des leviers, même si les centrales thermiques à gaz sont un excellent moyen de pallier à l’intermittence des énergies renouvelables. Dans ce cas, pourquoi ne pas s’orienter massivement vers le biométhane ?  Une petite révolution dans le monde des réseaux a commencé avec des injections de biométhane dans quinze pays européens.

Ces évènements ont au moins eu le mérite de réanimer les débats. Modifier significativement  l’approvisionnement énergétique de l’Europe ne se fera pas du jour au lendemain. Des années seront nécessaires.  Qui plus est, l’Europe est liée avec la Russie par des contrats de long terme. Il faudra d’abord que ceux-ci expirent avant de pouvoir créer de nouveaux liens de substitution. Enfin, même si la Russie défend l’indexation sur les produits pétroliers, il n’est pas dans son intérêt de trop faire grimper les prix pour ne pas encourager les alternatives en Europe. Par une politique de prix contenus, la Russie pourra peut-être garder la main sur l’approvisionnement européen, ce qui n‘est pas nécessairement une mauvaise chose pour l’Europe d’un point de vue strictement économique. La cause des tensions observée ces dernières années est aussi fortement liée à l’accumulation des dettes de la part de l’Ukraine. La Russie n’a ici pas cherché à perturber  les fourniture de l’Union Européenne. Sa situation économique dégradée ne lui permet pas de jouer à ce jeu. Elle a garanti à plusieurs reprises que les volumes nominés par l’Europe seraient fournis. Sécuriser les zones de transit est donc un objectif tout autant important que de multiplier les sources d’approvisionnement. Il sera certainement intéressant de garder un œil sur les développements à venir.

Par Baptiste Desbois

Mercado energético español: ¿qué nos ha dejado el 2014?

By Maria Martinez de Ubago

Durante el 2014 han tenido lugar cambios regulatorios en el sistema eléctrico español que han afectado profundamente la estructura del mismo. Entre otros destacan el nuevo y polémico sistema de subasta del servicio de interrumpbilidad, el establecimiento del fondo de eficiencia, el inminente cambio en la definición del sistema de periodos, las medidas para hacer frente a la sobrecapacidad, el nuevo impuesto de hidrocarburos con el que se pretender incentivar la exploración de pozos de petróleo marinos y el decreciente precio del petróleo que impacta directamente en el precio del gas en España. Este 2014 se ha caracterizado, al igual que el 2013, por la incertidumbre regulatoria. Incertidumbre que se trasladará al 2015, más aún teniendo en cuenta las elecciones generales de final de año.

El ministerio de Industria y Energía publicó en Agosto de 2014 un nuevo y polémico mecanismo para la asignación del servicio de interrumpibilidad durante 2015, según el cual los grandes consumidores reciben subvenciones por desconectarse de la red en momentos de saturación. Este mecanismo consiste en una subasta descendente en la que solo los pujantes más competitivos adquirirían ‘bloques interrumpibles’. La primera subasta celebrada, le costó al sistema 352 millones de euros, 325 millones de euros menos que en 2014 y casi 200 millones de euros menos que la previsión inicial para el 2015 realizada por el gobierno. Pero algunas industrias muy intensivas como Alcoa, muy descontentas con el resultado de la primera subasta, amenazaron con el cierre de dos de sus plantas y despidos colectivos. Tras un tira y afloja entre el gobierno y Alcoa, finalmente se llevó a cabo una segunda subasta para cubrir los MW que restaban hasta llegar a los 550 millones previamente previstos por el gobierno. Cabe destacar que este servicio no se ha usado desde 2009 y que España posee una capacidad instalada mucho mayor de la necesaria. A día de hoy queda pendiente la publicación de cuál será el coste de este servicio para los consumidores en 2015.

En Noviembre se publicó la liquidación del sistema Eléctrico así como la previsión del déficit de tarifa para 2015. Según esta circular, el déficit para 2015 sería cercano a cero. De esta manera, el gobierno justifica la congelación de los peajes en 2015. Esta medida tiene lugar un año antes de las elecciones generales y algunos tachan la medida de electoralista. Cabe destacar que, el servicio de interrumpibilidad que hasta ahora ha estado incluido en los peajes de acceso, va a pasar a devengarse como parte del precio de la energía. En parte por este hecho, el gobierno puede justificar la reducción del déficit de tarifa en la liquidación del sistema eléctrico.

En 2014, se ha creado un Fondo de Eficiencia Energética con el objetivo de cumplir con los objetivos de ahorro energético fijados por la UE para España. Este fondo será financiado por el fondo FEDER así como las distribuidoras y comercializadoras de gas y electricidad. Las comercializadoras se verán obligadas a aportar al fondo con carácter retroactivo. En diciembre de 2014, algunas comercializadoras ya han hecho pública su intención de trasladar el coste al consumidor.

El año termina sin claridad respecto a si se modificará o no el actual sistema de periodos así como si esto supondrá un incremento en la commodity para 2015. Algunos comercializadores han declarado que el nuevo calendario impactará en los precios. Sin lugar a dudas, este nuevo sistema de periodos hará que los peajes en Agosto se incrementen.

En Enero de 2015 se renovará el actual mecanismo de apoyo a las centrales de carbón nacional, tras la fuerte presión ejercida por dicha industria. Por otra parte, la UE obliga al gobierno español a reducir progresivamente las ayudas hasta que acaben en el 2018. A partir del 2018 solo podrán quedar en actividad las empresas mineras que sean económicamente rentables sin ayuda pública alguna.

El pasado mes de diciembre, el Ministerio de Industria publicó un informe de sostenibilidad ambiental para 2015-2020 en el que se prevé un fuerte crecimiento de las renovables y un retroceso en las centrales de gas y carbón con el objetivo de cumplir los objetivos europeos de eficiencia, renovables y emisiones para 2020 fijados el pasado 23 y 24 de Octubre en la cumbre europea sobre energía celebrada en Bruselas. Para cumplir con los objetivos marcados por Europa sería necesaria la instalación de aproximadamente 7000 MW de energía renovables, y un recorte en las energías convencionales de 7300 MW, principalmente en centrales de ciclo combinado. El sector está a la espera de la publicación de un real decreto que regule los mecanismos para hacer frente a la sobrecapacidad actual, cifrada en más de un 40%. Cabe recordar que el mecanismo de respaldo del sistema eléctrico se financia a través de los pagos por capacidad. Sería de esperar que una reducción de este backup, supusiese un ahorro para los consumidores finales.

En diciembre, el gobierno también aprobó un anteproyecto de ley en el que se incorpora un nuevo impuesto de hidrocarburos destinado a incentivar la exploración petrolífera en aguas profundas. Parte de esa recaudación irá destinada a las comunidades autónomas y ayuntamientos donde se localicen las prospecciones. Con esta medida el gobierno pretende ganarse la simpatía de los ejecutivos regionales que alegan daños medioambientales.

El precio del Brent tiene un impacto directo en el precio que pagamos en España por el gas, ya que la mayor parte de los contratos de gas están indexados al Brent y tipo de cambio. El panorama de continuo decremento en el precio del petróleo observado desde Agosto 2014, ha permitido que se hayan podido negociar contratos a 24 €/MWh frente a los 32 €/MWh observados en verano.

Como resumen, todos estos cambios regulatorios muestran los problemas a los que se enfrenta España a la hora de regular el mercado eléctrico. Los mecanismos que se crean son, con frecuencia, innecesariamente complicados y producen efectos secundarios que deben ser reparados mediante nuevas adaptaciones lo que al final no hace más que complicar las cosas. Para el consumidor final, las consecuencias de esta complejidad se traducen en un incremento del coste de la energía. Es por tanto esperable, que algunos de los cambios que hemos comentado en este artículo, se traduzcan en un incremento del precio. Desde E&C, haremos este seguimiento por ti.

The Spanish legacy of 2014

During 2014, many regulatory changes in the Spanish electricity system have taken place and some of them have deeply affected its structure. Among them we can highlight the new and polemic mechanism to finance the interruptibility, the establishment of the Efficiency Fund, the new definition of the six-period system (not implemented yet but expected to be soon), the measures to tackle the overcapacity, the new hydrocarbon tax which aims to promote the marine oil exploitation and the constant decrease in the oil price since August 2014 that has a direct impact in the gas price as most of the Spanish gas contracts are linked yet to the oil price. As in the previous year, 2014 has been characterized by the regulatory uncertainty. It is expected that this uncertainty will remain in 2015. Indeed it seems like it will be reinforced due the general elections taking place by the end of year.

The Ministry of Industry and Energy published in August 2014 a controversial mechanism to allocate the interruptibility service for 2015 where main consumers receive undercover subsidies for its grid disconnection in case of saturation events. The new mechanism consist of a reverse auction, where only the most competitive bidders will get “interrruptible blocks”. The first auction held, had a cost for the system of 352 million euros, 325 million euros less than the cost of this service for 2014, and almost 200 million euros less that the initial estimate of the government. Nevertheless some intensive industries, such as Alcoa, were dissatisfied with the auction outcome, and have threatened the administration with the closure of two of its plants and collective redundancies. After a tug-of-war between the government and Alcoa, a second auction was held at the end of December to offer extra power blocks up to a cost of 550 million euros as initially estimated. It is worth stressing that this service has not been used since 2009 and that Spain has an installed capacity much larger than the peak demand. To this day, the publication of the final cost of this service for the final consumers is still pending.

Last November, the 2014 system’s liquidation and the forecasted deficit for 2015 were published. According to this report, the tariff deficit will be close to zero for 2014. In this way, the government justifies the stagnation for 2015 of the access tolls. Some sources consider the stagnation in access tolls a populist measure considering that the general elections will take place by the end of 2015. It has to be borne in mind that the interruptibility service cost has been so far included in the toll access but, from January 2015, the cost of this mechanism will be passed on to the energy cost itself.

During 2014, the Spanish government set up an Energy Efficiency Fund to finance a package of measures in order to achieve the European Energy Efficiency Directive. This Directive established a common framework of measures for the promotion of energy efficiency within the European Union to accomplish the 2020 – 20% target on energy efficiency. The ERDF (the European Regional Development Fund), oil wholesale distributors and gas and electricity suppliers have started financing this fund retroactively as of October 2014. In the case of the suppliers, each of them will contribute depending on their market share. In December 2014, some suppliers have declared that this cost will be passed through to the end consumers, although many suppliers haven´t clarified its position yet.

Regarding the proposal of the new six-period system for the retail market calendar, it is still unclear when this new calendar will be applied. Although some suppliers have declared that it will impact the commodity prices, we consider it shouldn’t. What it is certainly evident is that the new calendar will affect the toll access, as August will no longer be entirely P6 anymore.

In January 2015, the mechanism that supports the power plants using national coal will be renewed as a consequence of the intense lobbying from the industry to maintain this subsidie . The European Union requires the Spanish government to progressively reduce these aids until 2018. As of 2018, only the profitable and without public aid power plants will keep its activity.

Last December, the Energy and Industry Ministry published an environmental sustainability report for 2015-2020. According to it, a big increase in renewable capacity is expected as well as a consequent reduction in the gas and coal power plants in order to accomplish the European targets in efficiency, renewables and emissions for 2020 set on 23rd and 24rd of October in the European Energy Summit held in Brussels. To fulfill these targets, the installation of approx. 7000 MW of renewables will be needed as well as a reduction of 7300 MW in conventional plants, mainly combined cycled plants. As part of this, a royal decree aiming at tracking the overcapacity is expected to be published in 2015. It is worth noting that most of the combined cycle plants aims at support the electricity system and that this back-up system is financed through the capacity payment and pay by all end consumers. It would appear reasonable to expect that a reduction in combined cycle plants will eventually result in a further saving.

Morevoer, in December´14, the government approved a draft law introducing a new hydrocarbon tax . This tax aims to promote the marine oil exploitation. Part of the collection will go to the autonomous communities where the exploration is located. This measure intends to win the local sympathy of the regional authorities who claims environmental damage.

In Spain, Brent price has a direct impact in the gas price as still most of the gas contracts are linked to the Brent and exchange ratio. Under the continuous fall of oil prices since August 2014, it has been possible to negotiate contracts at 24 €/MWh while in July the contracts negotiated cost the end consumer around 32 €/MWh for the commodity.

All in all, these regulatory changes show that Spain continues to struggle to regulate its energy markets in an orderly manner. The created systems are often unnecessarily complicated, giving rise to unwanted side effects which then need to be repaired by new adaptations which often do not much more than complicate matters even further. For the end consumers of energy, the consequence of this complexity is often cost increases. It is to be feared that some of the changes we comment in this article will have cost-increasing effects in 2015, we’ll keep track of those evolutions for you.

Declining oil price: geopolitics or just plain economics?

The main event in 2014’s energy market has been the sharp decline in oil prices in the second half of the year. In the first six months, geopolitical tensions regarding Ukraine & Russia still caused hick-ups in the oil markets, with Brent prices reaching 115,06 dollars per barrel on the 19th of June. But then the barrel started a bear correction that even brought it below 60 dollars per barrel on the 16th and 18th of December. Even if oil pricing has lost much of its importance for European industrial energy consumers, due to the decoupling of natural gas from oil prices, I obviously want to share some thoughts on this sharp bear trend.

“It’s the economy, stupid”

 In general, the press is always quick in looking for geopolitical explanations of oil price trends. Even seasoned oil traders often have one eye on CNN and the other on their trading screen. However, a look at supply and demand dynamics of 2014’s oil markets is telling much more than the images of war and political leaders that color the many ‘the world in 2014’ retrospectives that we currently see on television. First of all, demand is not growing as fast as before. Economic growth in Europe and Asia is sluggish, and the one economy which is doing well, the US, is switching towards other fuels and higher efficiencies. Moreover, the US is producing more and more of their petroleum needs themselves. According to the International Energy Agency, the US have grown their oil production in the first nine months of 2014 by 3,5% compared to the same period in 2013. The US is now solidifying its position as the world’s biggest producer of oil. And they’re not there yet, but they could be heading for the enviable position of net crude exporter.

The increase of oil production in the US is caused by the rapid development of shale oil production, the petroleum equivalent of shale gas. This boom is obviously attracting much attention. But we shouldn’t forget that oil production booms are happening in other countries as well. Still according to the International Energy Agency, Canada has grown its oil production in the first nine months of 2014 by 6,5% compared to 2013, thanks to the development of oil sands. And the deep sea oil production of Brazil, causes that country to report an 11,5% increase of oil production in October compared to one year earlier (source: Forbes).

Is Opec waging a price war?

All that increasing production in non-OPEC countries should obviously provoke a reaction from OPEC countries. Traditionally, we expect OPEC to cut supplies when prices hit historical lows. But that’s not what it is doing. On Monday the 22nd of December, the Saudi oil minister, Saudi-Arabia still being the most important OPEC-member, announced that OPEC would not cut supplies, however low the oil price would drop. This strongly confirms the decision at the latest OPEC summit at the end of November not to cut.

A hawkish interpretation of OPEC’s policy of not cutting supplies sees it as a price war. OPEC is consciously dragging down prices, hoping that it will undercut the economics of that new oil production in the US, Canada and Brazil. We’ve seen OPEC (and Saudi-Arabia) attempting similar price wars in the 1980’s, then mostly hoping to stop the development of North Sea and Gulf of Mexico offshore oil production. It failed spectacularly, with the competitors continuing their development and the Saudi budget fatally hurt by low oil prices. Price wars are a tough game. Mostly because of the way that supply and demand dynamics or price elasticity work. For understanding them, you need to make a firm distinction between fixed or investment costs and variable or operating costs.

Short term price elasticity is mostly influenced by operating costs. If the price of a product drops below the operating costs, producers will stop producing the product. In terms of crude oil, if the price of crude drops below the variable costs of operating a well, the producers will shut down production from that well. Now, as far as oil production is concerned, we need to make an important remark here. Operating costs of oil wells are often quite low. Wells are often quite expensive to drill, causing a high investment cost. This is especially the case for the US shale oil and Brazilian deep sea offshore wells. But once drilled, the costs of letting the oil flow out are not very high. To understand this, look at the situation of Brazilian oil producer Petrobras. They have just invested hundreds of billions of dollars to develop their deep sea offshore oilfields. Why on earth would they stop producing from those wells now? Of course, they and their American shale oil colleagues would prefer getting the 110 dollar plus prices for their oil of a few months ago. But the less than 60 dollars that they get at this moment is still giving them some return on their massive investments. Stopping production and getting 0 dollars per 0 barrel is not paying back anything.

With its combination of high investment and low operational costs, the oil market is not a good place to see short term effect in a price war. Price warlords should therefore aim for the long term effects of lower oil prices. Investors in the US, Brazil and Canada could be frustrated and stop investing in the oil developments in those countries. Lower stock prices of oil companies seem to point in that direction. This could have only limited effect on large scale developments like those that we’ve seen in Brazil. However, it could be more effective in hurting the US shale oil development. Shale oil wells typically have steep production decline curves, meaning that most of the oil is produced in the first years after drilling the well and then the production volumes per well drop rapidly. So, you need to maintain investment in drilling new wells to keep up the overall production rate. If lower prices would cause a decline in investment, the expansion of US shale oil production could be slowed down or even reversed. However, experience in the shale gas industry has shown that investment has been more resilient to lower prices than initially thought, especially since a fall in natural gas prices coincided with a drop in the investment costs due to the falling cost of the newly developed horizontal fracking technology. Therefore, it’s all but certain that a conscious price war by OPEC (and/or the Saudis) against further investment in new oil production could produce results.

Maybe, what we are seeing is far from a conscious attempt by OPEC to wage a price war, but a simple struggle for market share. OPEC cannot idly sit by and watch the US, Brazil and Canada steal away its market share. Oil supply growth is currently outstripping oil demand growth, meaning that the oil market is currently a buyers’ market and not a sellers’ market. In such a market, price wars are usually not fought in an offensive attempt at hurting competitors, they are fought as a defensive strategy for keeping market share. In the end, at the sellers’ side everybody is hurt and only the strongest survive. The Saudis could be hopeful that they will prevail with their low cost oil production.

Are Opec and the US working together?

Amateurs of geopolitical explanations of the events in oil markets are pushing an opposite theory. Saudi-Arabia and the US are not fighting each other, they are collaborating. Flanked by the economic sanctions of the EU, they work together to lower the oil price down to levels that really hurt the Russian enemy. Early in November, Vladimir Putin himself put forward this theory by stating that he believed that politics were the cause of the lower energy price. Whether this global conspiracy theory is true or not, it is indeed effective, if you see the turmoil of the Russian economy and currency in the last weeks.

 

All in all, these events are showing once again how utterly unpredictable energy markets are. Six months ago, Russia, an important oil producing country was engaged in a deep geopolitical conflict, with concerns over the impact on supply causing oil prices to increase. Anyone that would have said then that by the end of 2014 the oil price would drop below 60 dollars per barrel would have been declared a nutcase. But it happened. We can make educated guesses about its causes: simple supply and demand dynamics, a conscious commercial policy by OPEC or a complicated geopolitical intrigue? Or a combination of two or even all three of these options? Which explanation we choose, probably depends more on our own personal convictions than on empirical reality. Which obviously shows that we shouldn’t attribute any predictive quality to our theories. What has happened has happened. The oil price is historically low, benefit from it. And prepare for the next move which will come just as unexpected as this decline.

Copernican revolutions in international (energy) procurement

One of the main rationales for M&A activity in international business is the search for “synergy effects”. In procurement this means that companies hope to achieve cost savings by buying goods and services in a centralized manner. In the last decades, many international companies have gone through a Copernican revolution in their procurement divisions: buying decisions have been centralized. Buyers are buying goods and services for factories across the globe. Sometimes they carve up the world in zones. It always makes me smile when I see ‘EMEA’ on a business card. It means Europe, Middle East and Africa. That’s quite a big and diversified geographical zone, I would say. Other companies still have their procurement functions organized on a local or even on plant-level. And we have even talked with some companies that are turning their Copernican procurement revolutions back again, scaling down the centralized procurement organizations and bringing back the previously centralized buying decisions to local procurement people.

 

As often, there are no laws written in stone about this topic. Centralized buying has advantages and disadvantages. For some products and services the advantages will be larger than the disadvantages, for others it will be the opposite. In a general sense, the advantages of centralized buying decisions are to be found in the economies of scale that they generate. Bringing together the tons of goods bought in e.g. 20 different factories can lead to serious price reductions on the prices that each of these factories can obtain individually. And in services, things like joint account management or usage of IT infrastructure can make the pricing of centrally procured services cheaper. The potential for such cost savings is limited by transportation costs. If transport is an important cost component, locally supplied goods and services can be cheaper. Further advantages can be derived from the accumulation of procurement knowledge by the international buyers. Working in different countries in itself can provide a deeper insight into how markets work. And whereas local buyers might have a very broad range of products and services categories for which he has to buy, large centralized procurement organizations will allow for more specialization with category buyers that acquire a deep insight into the specific products and services for which they are responsible.

 

These advantages can disappear for goods and services for which local circumstances have a big influence on their value. Country- or even region-specific geographic, legal, cultural or other factors can have an important impact on the pricing, quality and/or service level. For centralization of procurement to be successful, it will be important that a company makes the distinction between the goods and services where the localization have an important impact and those for which they haven’t. A hybrid organization with central and local buyers working together is therefore often a good solution. Another problem of centralized buying can be the distance from the operational practice. The local buyer often has its office in the factory where the goods and services that he buys are being processed, giving him a better insight into, for example, quality and service levels that are required. Smart central procurement organizations will therefore make sure that there is sufficient travel budget to allow the buyers to go to the factories and see the results of their buying decisions in the operational practice. Unfortunately, we only see too often that in its cost-reduction attempts, companies first decide to centralize procurement and then to cut the travel budget. This will cause further disadvantage for those products and services for which frequent personal contact with the suppliers is necessary.

 

Finally, due to their size and their distance from operational reality, centralized procurement organizations can degrade into corporate bureaucracies. They can start to create unnecessary formalistic tender procedures that hamper rather than promote the signing of good deals. Local buyers will often have a more entrepreneurial approach to energy buying, working closely together with plant managers that really care about the budgetary impacts of buying decisions on their factories. Sometimes, local managers complain that the central buyers can take the decisions but they are the ones that get blamed when there is a negative impact on the profitability of a factory.

 

A smart centralized procurement organization will make a good combination of central and local decision-making. It will centralize the buying decisions for those categories of goods and services where the economies of scale and knowledge concentration can be beneficial. It will keep the buying decisions local for those categories where local presence is important. It will facilitate collaboration between central buyers and local buyers and plant managers and make sure that taking decisions also means taking responsibility.

 

Now, what does this mean for energy?

 

When thinking about the centralizing of energy procurement, organizations always think about negotiating cross-border electricity or gas supply contracts in the first place. We have to remark here that the potential for this is still limited at this moment as the electricity markets and to a lesser extent natural gas markets are still largely organized on a national level. Negotiating a cross-border electricity contract is still largely an illusion. Best case, you can get some sort of framework agreement under which different electricity contracts per country are brought together but the conditions per country will often be widely different. For natural gas, the negotiation of cross-border contracts has become much easier in the last years. At E&C we have assisted many international companies to negotiate contracts under which natural gas in several North-West-European countries is bought under one and the same (commodity) price arrangement. Other arrangements such as volume regulation, price fixing services or payment conditions can also be brought together for different countries. What advantages should you expect from such cross-border contracts?

 

Some economies of scale can be expected, but should not be exaggerated. An energy bill contains three main components: 1. The wholesale value of the energy, 2. The retail add-on, 3. The regulated component, the grid fees and taxes. Economies of scale can only impact on the second component, the retail add-on, but that component is just a few percentages of the overall energy bill, so you shouldn’t expect miracles in terms of savings on the total cost of energy. Non-price advantages will often be more important. For example the bringing together of volumes from different factories in different countries under one common volume arrangement. Or the reduced time for processing price fixing decisions when this can be done for a collection of factories rather than for each factory individually.

 

Accumulation of knowledge can bring important advantages. As the length of some of the articles on this blog illustrates, buying energy is a very knowledge-intensive activity. Local buyers that have to buy a large diversity of products and services often lack the time for acquiring all the knowledge necessary to buy energy. Having a central energy buyer dedicating 100% of his/her time on studying the energy markets is therefore no luxury. We have seen many companies taking large step forwards in e.g. their energy procurement risk management practices when specialized central buyers take over from local buyers.

 

However, as I have said before, energy markets are organized on a local scale, which can create the disadvantage of a lack of knowledge of local factors of a centralized buyer. Energy markets are organized by regulations, and these are different in every country. As far as the commodity component is concerned (the wholesale value plus the retail add-on), as markets mature the differences between the different countries become smaller. But for the regulated part of the bill, the grid fees and the taxes, these continue to vary widely across Europe. This regulated part is an important percentage of the overall electricity cost, and to much lesser extent for natural gas. Good energy procurement means that you have a good insight into this non-commodity component so that you can budget it correctly. Moreover, every country has is specific set of exemption rules which you have to know to make sure you’re not missing out on an energy cost reduction possibility. It’s impossible for a central buyer to have in-depth and up-to-date knowledge of these tariffs and reduction schemes in all the countries in which you have to buy energy, moreover since they are written in law texts in a large diversity of languages. Consultants such as E&C with a local presence in the countries can make up for this. But it is also a good idea to work together on this with local buyers or for example technical managers in the plants.

 

As far as the commodity part is concerned, the buyer needs to take decisions regarding signing contracts and making price fixings. For contract negotiations, in pre-mature markets the contact of a local buyer with the local suppliers can play an important role in obtaining a good deal. But as markets mature, it becomes increasingly easy for a central energy buyer to negotiate in the different countries. Moreover, the experience from other countries can help a buyer in negotiating good contracts. As an international consultant we have several times negotiated new contract types in different countries by explaining suppliers how their peers in other countries were solving this or that issue. One important aspect to consider is the volume issue. Lack of collaboration between the central and local level can lead to delays in the signature of contracts as the central buyer lacks knowledge of the volumes for which he is to negotiate the contracts.

 

As far as the price fixing is concerned, the most important advantages of centralized energy procurement pop up. An energy procurement strategy can be defined that covers the whole company, making sure that no local buyer in a distant country is taking too much risk. And the centralized buyer will often have more time available for following up the different wholesale markets leading to more timely decisions at opportunity moments.

 

Centralizing energy procurement can have important advantages for international companies. But as with centralizing procurement in general, too much of it can create problems, especially as far as the non-commodity component of the energy bill is concerned. Smart energy procurement centralization will start by focusing on the development of a common price fixing strategy, then gradually get more involved in the contract negotiation process and the budgeting and bill validation. It will set up collaboration with local plant people to facilitate communications regarding expected volumes and local regulations regarding grid fees and taxes.