A new era of the European gas market: Surviving under stronger competition

Antonio Melcón's picture
Antonio Melcón, General Manager, Cepsa Gas Comercializadora
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The European gas industry is fast entering a new era alongside global gas markets as the world shifts towards a decarbonised economy.

In this tough environment that might discourage long-term investments, and where the natural gas industry has yet to find its role within the energy mix, we are witnessing a market that is increasingly more volatile. This creates a climate where traders can thrive as we see a strategic switch towards vertical integration including gas equity, liquefaction and regasification projects, capacity off-takes and long-term supply contracts. This shift is also leading progressively to the Henry Hub as a main price driver in the European gas market.

If we look at Europe, we see a market that is gradually converging towards a ‘single price’ market with TTF as the benchmark. Both the Gas Target Model and Network Codes aim to promote a single European market to enhance stronger competition and supply security. Yet Europe appears to be split into two main market areas: in north-west Europe, we see clear gas indexation, while in the Mediterranean area retail prices remain partially indexed to the price of Brent crude. So, in the case of Spain, Brent is regarded as the main price benchmark for gas contracts. But the reality is that this is no longer the case since the main price driver in most retailing offers is now the TTF forward curve.

In this evolving market, gas shippers must assure they properly assess their risk profile and design manageable risk bands in order to stay competitive. It is also essential that gas shippers aim to have a well-balanced and diversified supply portfolio. A key is to successfully combine contracts of different durations: short, medium and long-term, together with spot contracts for balancing optimisation and short-term arbitrage opportunities. A diversified portfolio must also be well distributed between piped natural gas and LNG and cover a wide range of pricing from Henry Hub, Brent to TTFN.

Above all the key factor to remain competitive in this new era marked by high volatility is flexibility.  

The shift in the markets is also bringing with it a growing weight of new markets for natural gas, as is the case for Small Scale LNG. This provides new opportunities within Europe including LNG transportation for heavy goods vehicles and for ships through tailor-made offers adapted to every customer’s needs. This would include long-term retail contracts with a diesel or LSFO indexation. Proactive risk management will be required for this to be successfully implemented.

And really there is no alternative but to progress on the path we are on: Europe is moving towards a low carbon economy and will do so with or without us. The natural gas industry must work very intensively to achieve further cost reductions on technologies to produce renewable natural gas, and in turn benefit from a circular economy.

It is apparent that development and progress is still needed and those companies who wish to be among the most competitive should progressively integrate the renewable natural gas triangle into their portfolios. This would include bio-methane, Power to Gas and Carbon Capture & Storage.

If you would like to hear more on the European gas and LNG market developments and trends register to attend Gastech 2018 taking place on 17-20th September. Do not miss out on the incredible 4-day event!