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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 Table of content. EFET vision and roles Access to infrastructure Regulation Hubs

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Eric Bensaude Member of the EFET Gas Committee efet

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    1. Infrastructure and Trading in a Common European Gas Market The trader’s visionCopenhagen,14th May 2004 Eric Bensaude Member of the EFET Gas Committee

    2. Table of content • EFET vision and roles • Access to infrastructure • Regulation • Hubs • The EFET standard trading contracts • Conclusions

    3. Members represents more than 80 energy trading companies in 19 European Countries 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

    4. Members

    5. 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

    6. 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

    7. 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

    8. 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

    9. 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

    10. 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

    11. Some basic requirements need to be in place for the existence of successful hubs Key Requirements • Interconnection of transmission systems • Multiple buyers and sellers • Deliverability/Back up & down (storage) • Standard trading contract • Title transfers & matching system • Price reporting • Forward trading Liquidity Infrastructure Hub services Low transaction cost Impact Independent hub operator Systems & Commercial Arrangements Firmness Price transparency Risk Management

    12. European Gas market( past ) Producers industry No Customer Choice Storage Supplier - marketer Transmission Distribution Consumer LNG

    13. European Gas market(near future) Producers Producers Contractual flows Energy traders Energy traders HUB industry Suppliers -marketers Customer Choice Storage Transmission Distribution Suppliers -marketers Consumers Physical flows Independent Network Operators LNG unbundled

    14. The trading activity is supported by the existence of hubs and vice versa Hubs enable a natural disconnection point between the upstream and the downstream, and allow the development of an efficient and competitive industry 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

    15. 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

    16. 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

    17. The Traded Gas Market in Europe GasPool ? Counterparties Emden/Oude Flange Trading > 12 Counterparties Eurohub Gmbh 15 Counterparties NBP 80 Counterparties TTF 27 Counterparties Zelzate app. 7 counterparties Eynatten Small number of traders with physical access Zeebrugge Hub 55 Counterparties Baumgarten 8 Counterparties? Balancing Zones Wallbach 10 Counterparties PSV ? Counterparties

    18. The European hubs have reached various degrees of maturity Cross Border Hub Notional or Trans-Regional Hub Initial phase Developing phase Matured phase • Confluence of pipelines • Multiple sources/outlets • Access to storage • Proximity of markets • Spot trade • Deliverability services • Title transfers • Title tracking system • Standard trading contract • Financial trades • Firm deliveries • Price discovery • Screen-based trading • Forward trading EXAMPLES • Baumgarten • PEG Nord • Bunde/Emden • PSV • Zeebrugge • TTF • NBP • Henry Hub

    19. 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 bothdesirable and achievable.

    20. EFET Standard Master Agreements • Designed for Physical Trading • physical delivery as settlement • Download from internet@<> • free of charge • Negotiation-Friendly Format • Similar Structure to Principle Trading Agreements used in other Markets and for Other Commodities and Commodity Derivatives Atruly “Pan-European” Contract, acceptable for common law and civil law

    21. 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

    22. 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

    23. Thank you for your attention :for position papers - Key principles for the development of European gas market • Creating successful transparent & liquid gas trading hubs • Gas market information requirements