Natural gas is staging a comeback in Europe after being squeezed out by coal during the past few years, according to a panel of market participants who spoke at Energy Risk Summit Europe
Growing optimism over the future of European gas is fuelling investment in the sector and leading to increased liquidity in the over-the-counter gas market, say panellists who spoke at Energy Risk Summit Europe in London on October 2.
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“Trading liquidity is increasing,” said Hans Jonasson, director of gas trading and optimisation at E.on Global Commodities, the trading arm of Düsseldorf-based utility E.on. “The long-term trend is that markets are well supplied and there’s enough liquidity to manage the risk of a large portfolio. It’s much easier to manage [risk] on an incremental basis now than, say, six years ago.”
Compared with the same period last year, volumes of OTC derivatives linked to the UK National Balancing Point were up almost 5% by the end of August, according to the London Energy Brokers’ Association (Leba). Meanwhile, total OTC derivatives volumes in European gas were up 48%. Trades tied to the Italian Punto di Scambio Virtuale saw the biggest growth, with volumes rising 100%, while trades linked to the Dutch Title Transfer Facility saw an increase of almost 59%. This stands in contrast to European power markets, where OTC volumes have fallen, according to Leba.
We believe gas has a future in the generation portfolio, both in Europe and the US
In the past few years, a boom in US shale gas production has had a negative impact on gas demand in Europe, diverting US coal towards the continent and making gas look relatively expensive. This caused many generators to stick with coal rather than switching to gas.
“In the last couple of years, coal plants have been deep in the money, whereas gas plants have been at the margin,” noted David Mooney, head of gas trading at Scottish Power, which is owned by Spanish utility Iberdrola. “But since July, volatility has increased and gas prices have fallen enough that we’re now back in the coal-switching channel.”
For this reason, it was useful to have gas in Scottish Power’s generation portfolio, he stressed. “We believe gas has a future in the generation portfolio, both in Europe and the US. Flexibility in the portfolio is useful. We want to be able to move gas plants in and out, offsetting coal-plant generation.”
Due to the rising amounts of intermittent renewable power, gas-fired plants would also be needed as back-up capacity, Mooney added.
Other panellists emphasised that European gas projects remained good investments, despite the challenge from coal. Kevin Selleslags, head of origination and business development at Petronas Energy Trading, the trading arm of Malaysian state-owned oil company Petronas, said his company had identified Europe’s gas sector as an investment target. That stood in contrast with “saturated” Asian markets, particularly Japan and Korea. Petronas owns gas-fired power plants in Ireland and pipeline capacity linking the UK with continental Europe.
Brad Hitch, vice-president at Houston-based energy company Cheniere Energy, which is developing the first export terminal for liquefied natural gas (LNG) in the contiguous US, noted that much of its output would be sold to European buyers. While there would inevitably be differences in the level of demand over time, he had no doubt that US LNG would be shipped to Europe. “There will be times when US LNG finds a home in Europe and times it will be priced out,” he noted. “But especially during winter and other times of tightness I expect some volume to go to Europe.”