Europe’s continental gas markets are slowly making the transition to a different market model. The Hub market model, known in the UK and the US for decades, is to replace the system of oil-indexed gas deals. Historically, gas in Europe has been sold in long term deals. These deals were between on the one side companies in producing countries, companies that we now know under the names of Statoil from Norway, Gazprom from Russia, Gasterra from the Netherlands or Sonatrach from Algeria. In the consuming countries, (predecessors of) companies such as RWE, E-ON Ruhrgas, Wingas, Gaz de France, Distrigas, Eni, Gas Natural or others were the receivers of these deals. This deal-making implied heavy political interference, as ministers were often directly involved in the negotiations. A famous example is the Belgian minister Willy Claes negotiating the contract that brought Algerian gas to Distrigas in Zeebrugge. The traditional companies in the consuming countries built the network infrastructure necessary to receive, store and distribute the natural gas. When the continental European markets were liberalized, they were forced to create separate grid companies to run this infrastructure. This ‘unbundling’ is supposed to create the necessary independence of interests to allow third parties an open and unbiased access to the grid infrastructure. Such third party access is a necessary condition for gas market liberalization to be a success.
Last week, traders in the continental European markets had complaints regarding that third party access. They specifically blamed lack of transparency regarding available storage and transit capacities for the slow development of continental European Hubs such as Zeebrugge in Belgium, TTF in the Netherlands or NCG in Germany. And indeed there are some solid reasons why transparency regarding storage and transit in these markets is low. The first reason is that some of the infrastructure is still in the hands of certain market participants. The big German gas suppliers are also the owners of the large storage capacities in Germany. The second reason is the fact that many capacities have been blocked by historical rights of certain suppliers. Unlocking these capacities is a difficult exercise. Many years ago, the governments supported companies making long term contracts for the supply of gas. Can those same governments make those contracts obsolete by taking away the capacities that those companies need to honor these contracts?
The underlying difficulty is that it proves extremely hard to transpose the English gas market model – without or with limited long term contracts – to the continent. An important reason for this is the difference in pricing models. The long term contracts have pricing based on oil prices. The Hub markets function with gas-to-gas pricing. It is supply and demand of natural gas that sets the gas price (which is much more logic). Since the summer of 2009, the Hub prices have dropped far below the oil indexed prices. If this trend continues, the holders of historic supply contracts face a huge problem. They will have the obligation to take gas from the producers at higher oil-indexed prices than the Hub prices at which they can sell in their home market. It is therefore understandable that they are not very enthusiastic in developing the Hub markets. Therefore, developing liquid and transparent continental Hub markets is the main challenge for European natural gas market policymakers.