My article in November addressed both the short-run and long-term implications of the merger between PEG-Nord and PEG-TRS, in the contexts of pricing and gas security within Southern Europe. This article revisits the topic, observing the merger’s impact on Southern European gas pricing, followed by application of these findings to the proposed Gaspool -NetConnect merger within German gas markets.
On November 1st 2018, the two virtual trading points (VTPs), PEG-Nord and PEG-TRS, were merged to form one single French VTP, titled Point d’échange de gaz (PEG), which serves Trading Region France (TRF). Many analysts anticipated an increase in liquidity and competition within the single national wholesale gas market, projecting an increase in cross-border arbitrage trade with Spain (PVB). Although a persistent cross-border premium of €1.25/MWh was available, many market participants were unable to access this arbitrage opportunity, which was characterised by the low net-flows between PEG (France) and PVB (Spain).
As we can see from Figure 1, the PVB-PEG premium still exists post-merger, however a palpable change in market dynamics can be observed. This can be further observed in Table 1, which shows that the Coefficient of Variation of the PVB-PEG spread, the standard deviation normalised for magnitude, has substantially reduced, indicating that a more stable France to Spain net flow has been established post-merger. This is further supported by the 88% post-merger increase in net flows between France and Spain, indicating that the South-West European wholesale gas markets are becoming more integrated.
(Click to enlarge)
Figure 1: Right: PVB-PEG Spread in €/MWh. This has remained consistent following the merger. Left: PEG to PVB Net Flows in MCM/d. Following the merger, the cross-border gas flows have increased considerably, indicating an increasingly competitive wholesale gas market in Southern France and Spain.
Table 1: Although the PVB-PEG spread appears to have increased post-merger, this is misleading, as arbitrage flows to PVB were historically from PEG-TRS. Importantly, an 88% increase in cross-border net flows can be observed following the PEG-Nord-PEG-TRS merger, indicating an increasing level of wholesale gas market integration in South West Europe. The volatility of net flows appears to have initially decreased, but this requires validation through addition of further data points. Related: Oil Rises As OPEC Holds Off On Production Cuts Decision
Whilst this has improved the integration of South-West European natural gas markets, the European Commission has long established goals of creating a fully interconnected internal gas market (Regulation (EU) No 1227/2011), increasing competitiveness and transparency throughout the European Union.
Figure 2: The current German gas market is divided into two market zones, Gaspool, in the North-East, and NetConnect, in the South-West. The Gaspool-NetConnect merger will form a single entry/exit and balancing zone within Germany.
As such, Germany intends to merge its gas market areas, beginning at the start of the gas year, 1st October 2021, with completion by April 1st 2022. Historically, the German wholesale gas market was divided into over 20 individual market areas, which was reduced to two market areas (Gaspool and NetConnect) following the previous merger of October 2011. Related: Cuba Faces Oil Crisis As Venezuela Crumbles
The upcoming merger is broadly seen as a positive development for liquidity, transparency and competition within the German wholesale gas markets. However, some market participants see potential issues with the merger, citing the infrastructural differences within the two trading regions. The Gaspool area is configured for low calorific L-gas, whilst the NetConnect area is configured for high calorific H-gas, which is mainly transited from the North Sea fields (Groningen) or Russia.
This merger was previously discussed by regulators in 2013, with the requirement to merge underpinned by legislative amendments to the German Gas Third-Party Access Regulations (Gasnetzzugangsverordnung) adopted in 2017, where the two market areas are to be consolidated into a single entry/exit zone by 1st April 2022 at the latest.
Since the 2013 discussions pertaining to a potential gas market merger, the two existing market areas, Gaspool and NetConnect, have developed dynamically. Today they are two of the most liquid trading hubs – especially in the European spot market segment, which is reflected in the trading activities at the respective VTPs, characterised by growing trading volume and increasing churn rates.
In the future, balancing group managers operating in Germany will only have a single counterparty for their balancing group contracts, regardless of which networks they use to transport gas within the national borders. Suppliers will have direct access to all end customers and previously separate networks will form a single entry/exit and balancing zone.
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The impact that the German market merger may have on European gas pricing could be profound. Given the formation of a single entry/exit and balancing zone, the cost of transiting Russian gas to Belgium, France and the Netherlands could decrease, making Russian swing capacity more competitive within Western Europe.
Ultimately, this phenomenon should provide the end-consumer with cheaper gas throughout Western Europe, whilst increasing competition amongst suppliers. This, combined with the development of Nord Stream 2, which enables Russia to provide gas directly to Germany, circumventing Polish or Ukrainian gas transit fees, should provide lower pricing to the European consumer.
By David Woroniuk for Oilprice.com
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