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How European liberalization changed traditional business models in the gas market

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Gas Market|Regulation

The physical supply chain for the natural gas industry is built around a capital-intensive asset base, which includes upstream (gas exploration and production), midstream (gas transportation and storage) and downstream (gas distribution to the final consumers). The business (commercial) layer encompasses gas trading and commercial transportation of gas. The Shippers and Traders are crucial institutions that link the Upstream and Downstream business segment. Traders buy gas at the wellheads or hubs and sell to utilities and end-users. The role of shipper implies the organization of the gas transportation. Therefore, services of these market players composed not only of the provision of gas volumes but also booking of capacities from network system operators (owners of the gas pipelines).

Another important market player is the gas distribution company. The local gas distribution company is responsible for delivery of the gas between the local city gates and the customer base (commercial and residential). The roles of gas shipper, gas trader and distribution company are interlinked and can be fulfilled by one company (for instance, a distribution company can trade gas and organize the gas transportation to its clients, that is, acting as a shipper and a gas trader.)

Direct natural gas sales in Europe

Business strategy of gas producers and final consumers is traditionally quite passive in the illustrated supply chain model – producers typically sign long term contract(s) with gas traders, which buy gas directly at the wellhead, while end-users typically let the gas traders to deliver the gas to the place of consumption.

 

Opportunities to expand the business model in Europe

 

European gas market liberalization

European gas market liberalization opened a market significantly, resulting in creation of liquid wholesale gas market in Europe, enabling a so-called third-party access to the transmission systems and overall decreasing the barriers for market entries. At the same time this also lead to the fact that the natural gas industry has been subject to rather complex regulations, and despite the new opportunities gas producers and big industrial consumers in many cases stick to the traditional business model, and do not enter gas market directly.

Significant price volatility at the main European gas hubs

Recent developments in the European gas industries might however provide new arguments in favor of adjustment of traditional business models of the gas producers and end customers despite the complexity of the gas market and the related investments. These developments include the decline of gas demand in Europe in the past years and a corresponding price volatility at the major gas markets.

 

Figure: Gross inland consumption of natural gas in EU-28, in thousand terajoules (Gross Calorific Value)
Figure: Gross inland consumption of natural gas in EU-28, in thousand terajoules (Gross Calorific Value)*

 

This decrease in gas demand lead to significant price volatility at the main European gas hubs. Which in its turn resulted in the difference between the long-term gas prices at the wellhead (which are subject to individual negotiations between the producer and the trader) and spot market price at the hubs (set by a market based mechanism).

This industrial trend makes entry to the wholesale gas market attractive for both producers and end users, because gas might be as attractive to buy as it is to sell, and the short-term prices might outperform the long-term contract prices. Another positive side effect from this strategy is the diversification, which allows both producers and final customers to decrease the dependencies from current gas trading partners.

Which strategy to choose?

Still it is a big challenge to choose the right expansion strategy: for various reasons, both commercial and regulatory, there is substantial variety in both who participates in the business phases (production, transportation, storage, and consumption) and how the commercial structure is set up. That is why the expansion of the business model along the gas supply chain would require substantial investments in supporting technologies, know-how about gas markets and peculiarities of various European regulations.

The size and complexity of individual projects might therefore vary significantly, and therefore should be carefully studied. If you consider to expand your or adjust your business model, our experts, are happy to advise you. Feel free to contact us at energy@EXXETA.com.

 

*Source: Eurostat

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