Programme Overview European Gas Market – since 2008 and looking ahead
Over the last three years significant changes have taken place in the European and international gas market, affecting discussions and negotiation on price formation and ‘globalising’ the gas industry. Amongst the influencing factors were: the development of unconventional gas production (primarily shale gas), the growth in global LNG supplies, as well as the global recession.
Due to lower demand, brought on by the recession in 2008-2009, there was an oversupply of gas in Europe; leading to low gas spot prices on the market. With long-term take-or-pay contracts still in existence and forming the majority of gas supply contracts in Europe, gas marketers and distributors faced a situation where they had to sell oversupply of gas at a lower price on the hubs than they paid for it.
This highlighted the problem of a hybrid price system (both oil- and market-linked prices exist in the current market) and brought with it the debate of price formation in long-term contracts and whether this should stay linked to oil prices or should be linked to market based prices as realised on the gas trading hubs in Europe.
Despite the decrease in European gas production over recent years and the fact that it is set to decrease even further, thus increasing the dependency on gas imports from outside Europe; analysts predict an oversupply of gas in Europe for the near future, likely to end sometime between 2012 and 2014. However, towards the end of the 2010s gas supplies will once again be limited due to lack of increased availability from North Africa (Algeria, Libya and Egypt) and Caspian and Middle East supplies as well as lack of substantial contribution from unconventional gas production and uncertainty on the scale and timing of new global LNG supplies. This is in contrast to predictions that gas demand will have fallen substantially from late 2000s levels due to an increase in energy efficiency and the introduction of low carbon energy sources.
Thus the main concern in the European gas industry at this stage is security of supply at competitive and fair prices. Although there are some fears in the industry regarding hub-based prices due to fear of manipulation by sellers or buyers and the volatility of prices in a market environment, with the experience of low hub-prices compared to high oil-linked prices, utility suppliers are keen to move away from oil-linked prices and base long-term contracts on hub-based prices.
The main external gas suppliers to Europe (Russia, Algeria and Norway) are reluctant or outright refusing to move away from oil-linked prices in their long-term supply contracts. It remains to be seen what the outcome will be, whether long-term contracts will start to dwindle or the duration of these will be reduced and what price formation mechanism will be used.
The third Gas Directive and the “Third Package” of measures became legally binding in March 2011 and contains fundamental changes to the legal/regulatory status quo in relation to third party access in EU countries. Namely, it requires: much greater separation of network operations, the introduction of network codes in all countries, the creation of an Agency for the Cooperation of European Energy Regulators (ACER). |
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