The Gas Market

Definitions

The wholesale gas market

Historical and alternative operators, energy traders or financial players active across the entire gas chain, or only active within the gas sales loop resort to wholesale markets for their gas supply. These operators must secure their supplies and control supply costs in order to guarantee the continuity of the gas supply under the best possible conditions for their end customers.

Typology

Gas is generally purchased:

  • By mutual agreement, via traditional long-term contracts used to import the majority of gas from Russia, Algeria and Norway. These contracts are usually drawn up for long periods (e.g. 20 or 30 years).  This type of contract allows the buyer to secure his supplies and allows the producer to have definite customers in place over a long period, assisting in investment in exploration, production and transmission activities, costs which are paid off over the long term. These contracts include clauses such as “Take or Pay”[lien vers mot du glossaire], which impose a volume risk on the buyer, who has committed to pay for a minimum quantity as specified by the contract, whether the gas is used or not. For his part, the producer undertakes to supply gas volumes according to the cut-off periods and other terms and conditions stipulated within the contract, endorsing a price risk.
  • Via brokerage, which includes the organised market (Powernext) and traders/brokers. These are trading platforms on which different types of spot contract (day-ahead, week-end and within-day) and future contracts (monthly, quarterly and seasonal products) are traded. Via Powernext, these contracts are traded continuously from 9.30 a.m. until 5.30 p.m. on business days, with five market makers providing the buy and sell rates to their customers only, or to the entire market, including their competitors. The contracts are finally provided to the gas transmission network based on the nominations made by the ECC (European Commodity Clearing).

N.B.: non-brokered purchases by mutual agreement (pure two-way) can be performed for products similar to those traded on organised or brokered markets.

Gas transfer title points (PEG)

Trades on these markets take place by deliveries and physical removal of quantities of gas at virtual points known as gas transfer title points (PEGs). These PEGs are linked to three balancing areas for the gas transmission network: the Northern zone (GRTgaz), the Southern zone (GRTgaz) and the South-West zone (TIGF).

Gas prices

The price of gas versus petroleum products

Gas is not a commodity subject to captive use in the same way as electricity or petrol. For all its uses, gas can be substituted by petroleum products (domestic fuel oil [DFO] and low sulphur fuel oil [LSFO]). Gas is thus rated according to price developments by its substitutes via indexing mechanisms (generally with a three to six month time lag). The influence of changes in petroleum product pricing equally affects long-term contract pricing via indexing clauses, as well as spot and long-term market pricing.

Sources : Bloomberg, Powernext, CRE Analyses

Wholesale market prices versus long-term contract prices

Since the end of 2008, the wholesale market prices have evolved. They are lower than the long-term contract prices indexed to petroleum products. This decorrelation is partly due to an excess supply of gas as a result of massive supplies of liquefied natural gas (LNG) and to the development of non-conventional gases in the United States.

Sources : Bloomberg, Powernext, CRE Analyses

Data

 See the latest figures published in CRE’s electricity and gas market observatory

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