Infrastructure and Trading in a Common European Gas Market

The trader’s vision

Copenhagen, 14th May 2004

Eric Bensaude

Member of the EFET Gas Committee

www.efet.org

Table of content

EFET vision and roles

Access to infrastructure

Regulation

Hubs

The EFET standard trading contracts

Conclusions

Members

APT - Atel - Avenis - Barclays - BG International – BHP Billiton - BKW FMB – BP – BNP Paribas - British Energy - Cargill - Centrica – C.N.R. - Dalkia - Delta – Deutsche Bank – EconGas - EdFT - Edison Spa – EDP Energia - E.F.T. - EGL - Electrabel- El Paso - Elsam - Elyo - EnBW- Endesa - Enel Trade - Eneco - Enipower - Entergy-Koch - E.ON – ESB - Essent - E&T- GS - Fortum - Gaselys – Gas Natural – Getec - GEW Rheinenergie - Glencore - Goldman Sachs - H.S.E. – Hydro - Hidroelectrica - Iberdrola - Innogy – Kelag - Kom-Strom - Morgan Stanley – Magnox – Mark-E - MVM Rt. - MVV Energie - Nuon - ONS Energy – OstElektra - PowerGen – PSE Electra - Inter RAO UES - RWE Trading - Sempra – Shell Energy - Stadtwerke Hannover - Stadtwerke Leipzig - Statkraft – Statoil - Sydkraft – Syneco - Tiwag - Total – Trafigura - Trianel - Union Fenosa - Vattenfall – Viesgo - West LB - Zarubeshgaz

represents more than 80 energy trading companies in 19 European Countries

Members

EFET - Roles

To promote energy trading in Europe

( to increase market efficiency)

Analyse barriers & obstacles for trade

Lobby for removal of obstacles & barriers

Promote standardisation

EFET – Vision

Promote the development of a transparent and liquid European market in energy commodities & related products, achieved through :

- Access to gas networks and storage infrastructures

- Confidence in regulatory decisions

- Confidence in the traded markets, not hindered by national borders or other barriers

Fair and non-discriminatory access to networks and storage is achieved through:

Non-discriminatory access to information Third party access rules (negotiated or regulated)

Promotion of secondary trading of capacity or a Use It Or Lose It (UIOLI) mechanism

Promotion of the resolution of cross-border, entry, exit congestion issues

Role of regulators – EFET’s position

Promote fair and non-discriminatory access to networks and gas storage

Regulators must

- ensure tariffs are based on efficient incurred costs

- oversee unbundling and development of competition

- manage transition to market-based mechanisms (eg. Balancing versus penalty regime) and full competition

For an efficient and liquid traded market there needs to be sufficient

harmonisation:

Transparent Information

Data exchange

Products and Procedures

Laws

Regulation

Tax

European Contracts

Organised Markets e.g. Exchanges or Hubs

What is a Gas Hub?

A contractual point where buyers and sellers execute transactions for gas

Hubs can be: Notional or physical Trans-regional (1 or more TSOs) or within-country (1 TSO)

Hubs generally, consist of: Hub Services Agreement - Hub Operator own/draft Standard Trading Contract - Traders own/draft

Interconnection of transmission systems

Multiple buyers and sellers

Deliverability/Back up & down (storage)

Standard trading contract

Title transfers & matching system

Price reporting

Forward trading

Infrastructure

Systems &Commercial

Arrangements

Liquidity

Low transaction cost

Hub services

Price transparency

Risk Management

Some basic requirements need to be in place for the existence of successful hubs

Key Requirements

Independent hub operator

ImpactImpact

Firmness

European Gas market( past )

Transmission

industry

Consumer

Distribution

www.efet.org

Supplier - marketer

Producers

LNG

Storage No Customer Choice

No Customer Choice

European Gas market(near future)

industry

Consumers

Distribution

Energy traders

www.efet.org

Energy traders

Suppliers -marketers

Producers

LNG

Storage

HUB

unbundled

Suppliers -marketers

Contractual flowsProducers

Physical flows

Customer Choice

Customer Choice

Independent

Network Operators

Transmission

The trading activity is supported by the existence of hubs and vice versa

Hubs promote :

A liquid source of supply, balancing, flexibility

The pricing of flexibility

Gas-to-gas competition

Arbitrage between regions

A forward trading market and the development of risk management tools

End-user choice of supply

Trading offers:

Sourcing

Liquidity

Flexibility supply and pricing

Price risk management

Geographic arbitrage

Time value arbitrage

Asset optimisation

Hubs enable a natural disconnection point between the upstream and the downstream, and allow the development of an efficient and competitive industry

Characteristics of notional hubs

Contained within an entry-exit tariff regime Directly related to transportation access terms, although

independent exchanges can still develop Can be influenced directly by a single regulatory authority Possible under a multi-node model (e.g. France) but with risks

of fragmented liquidity without the ability to net back imbalances to a single node

Provides natural location for a balancing market and market-based imbalance charge signals, and as location for cash-out and imbalance trading

Short term physical trading can lead to a reliable price index for longer term indexed deals and risk management products

Characteristics of trans-regional hubs

Pipeline interconnect and/or cross-border, preferably within reach of storage or other flexibility sources

Reflects longer term supply/demand fundamentals resulting in longer term transparency generating longer term investment signals

Provides flexibility for selling into adjacent local notional hubs Hub operator must want to develop services to attract

counter-parties / shippers and promote trading Have access to capacity to provide wheeling across pipeline

systems Provide platforms for secondary trading of services

Suited to longer term contracts as long as access regimes allow flexibility in onward transportation

The Traded Gas Market in Europe

Zeebrugge Hub 55 Counterparties

NBP 80 Counterparties

TTF 27 Counterparties

EynattenSmall number of traders with physical access

Zelzateapp. 7 counterparties

Baumgarten8 Counterparties?

Wallbach10 Counterparties

Emden/Oude Flange Trading > 12 Counterparties

PSV? Counterparties

Balancing Zones

GasPool? Counterparties

Eurohub Gmbh 15 Counterparties

Cross Border Hub

Confluence of pipelines

Multiple sources/outlets

Access to storage

Proximity of markets

Spot trade

Deliverability services

Title transfers

Notional or Trans-Regional Hub

Title tracking system

Standard trading contract

Financial trades

Firm deliveries

Price discovery

Screen-based trading

Forward trading

Initial phase Developing phase Matured phase

Bunde/Emden

PSV

NBP

Henry Hub

Baumgarten

PEG Nord

Zeebrugge

TTF

EXAMPLES

EXAMPLES

The European hubs have reached various degrees of maturity

Gas Hub Development Group & Standard contractual terms

EFET has established the Gas Hub Development Group (GHDG) to foster the development of successful Gas Trading Hubs

GHDG membership is from companies actively trading the existing Hubs and individuals who have been actively involved in their development

The GHDG is working on standard trading terms at the same Hub and where possible consistency across Hubs

In the longer term convergence of trading terms is both desirable and achievable.

EFET Standard Master Agreements

Designed for Physical Trading physical delivery as settlement

Download from internet@<www.efet.org> free of charge

Negotiation-Friendly Format Similar Structure to Principle Trading Agreements used in

other Markets and for Other Commodities and Commodity Derivatives

A truly “Pan-European” Contract, acceptable for common law and civil law

EFET Master Agreements

A beneficial framework

•neutral basis to start negotiations

•time saving on negotiations

•modular approach gives flexibility

•standardisation of procedures (less mistakes)

•Less credit necessary (netting)

•better risk control (close out netting)

•BIG savings on legal costs

Conclusions

EFET promotes the development of efficient markets throughout Europe

Access to infrastructure is key to market development

The development of hubs is also key to the evolution of markets

EFET would welcome a new Danish Gas Hub with effect of enhancing the customer choice

Thank you for your attention

www.efet.org :for position papers

- Key principles for the development of European gas market

- Creating successful transparent & liquid gas trading hubs

- Gas market information requirements