Continental European Gas Hubs: Are they fit for purpose?

The Oxford Institute for Energy Studies has recently published a paper by Associate Consultant Patrick Heather which assesses the development of the European Continental Gas Trading Hubs.

The paper is a natural successor to Patrick’s 2010 paper ‘The Evolution and Functioning of the Traded Gas Market in Britain’.  Although the drivers and challenges for gas trading on the European Continent have been different from those of Britain, the desire for change at an EU policy level, the catalyst of the economic recession and the sea-change in the acceptance of trading have all contributed to an astonishing development in European gas hubs over the past few years.

Based on extensive research and discussion with the key actors intimately involved, the paper provides deep insights into the characteristics of the individual hubs, the reasons behind their particular evolutionary path and their characterisation as ‘Trading Hubs’ (NBP and TTF), ‘Transit Hubs (ZEE and CEGH) and ‘Transition Hubs’ (GPL, NCG, PEGs and PSV); a framework which assists the reader in better understanding the current and future role of each.

The paper provides a comprehensive and timely review of gas market developments against the backdrop of the on-going transition from long term oil-indexed contracts to hub based contracts.  In anticipation of this transition reaching its logical conclusion, the question in the paper’s title i.e. “are the European gas hubs fit for purpose?” relates to the ability of the hubs to provide a reliable basis for hub-based pricing in long term contracts.  After studying the development in trading liquidity and the close correlation of prices between the hubs, the answer from this paper is an emphatic ‘yes’ although the exact roles of the individual hubs will probably continue to differ.

The paper will be of great interest to all who have an interest in understanding Europe’s natural gas market especially as it continues in its transition from the ‘old world’ of oil indexed contracts to the new age of traded markets.