Study sees uneven gas trade in Europe

Oct. 10, 2006
The wholesale gas market in Europe is developing unevenly and too slowly to suit many traders.

By OGJ editors
HOUSTON, Oct. 10 -- The wholesale gas market in Europe is developing unevenly and too slowly to suit many traders.

Furthermore, the liberalization that stimulates gas trade remains subject to questions about whether it's effective and even appropriate, notes a new research study.

According to European Gas Trading 2006 by Mary Jackson and Nigel Harris, principal consultants and directors of Kingston Energy Consulting of London, the UK and Benelux countries—Belgium, the Netherlands, and Luxemburg—have Europe's only "truly liquid trading markets" for gas.

Although liquidity is limited elsewhere, "nascent trading markets" in France, Germany, Italy, and Spain are growing rapidly, the consultants say. The UK accounts for 74% of total European gas trading volumes, followed by the Netherlands, 13%; Belgium, 6%; Spain, 4%, and Italy, Germany, and France, 1% each.

Among the higher-volume countries, market structures vary. The UK has over-the-counter spot and forward trading based on the virtual National Balancing Point, beach terminals, and the Interconnector pipeline between the UK and Belgium.

In Belgium, Zeebrugge is a major physical trading hub. The Interconnector links Zeebrugge prices with the UK market. The Title Transfer Facility in the Netherlands is the balancing market for the Dutch network and serves as a virtual trading point for the Dutch and German markets.

In Germany, problems of network access hamper trading. Italy, France, and Spain have small but growing markets based on virtual trading points, border-crossing locations, and LNG terminals.

Major gas producers and suppliers—some of which are formerly state-owned national gas monopolies—remain the largest traders, Jackson and Harris observe. But use of the traded markets remains small in comparison with volumes bought and sold under long-term contracts.

The consultants note that the European Union has faulted members for slow progress in the liberalization of gas markets and that the European Commission is investigating energy companies for possible violations of competition rules.

"It is evident that the implementation of competitive gas markets is deeply flawed in many EU member states, but the EC is clearly of the view that it is the implementation and not the model that is at fault," Jackson and Harris say.

Questions about liberalization arose after Russia last January disrupted gas deliveries to Europe during a dispute with the transit country Ukraine and in response to extreme price volatility last winter in the UK. According to the consultants, the questions remain open.

"There are market participants who would argue that liberalization is the only way forward and those who argue equally strongly that it is a road to disaster," they say.