icis gas market pricing bursa, 26 april 2013 louise boddy – director, global energy markets aura...

ICIS gas market pricing

Bursa, 26 April 2013

Louise Boddy – Director, Global Energy Markets

Aura Sabadus – Senior Reporter, Turkish Markets

www.icis.com

Contents

1. Introduction to ICIS

2. Evolution of European gas markets and pricing

3. ICIS Turkish market coverage

4. ICIS Turkish gas pricing trials and methodology

www.icis.com

1. Introduction to ICIS

www.icis.com

• ICIS is the energy and chemicals information division

and the fastest growing business within Reed Business

Information (RBI).

• RBI is a powerful business-to-business publisher. It is

part of parent company Reed Elsevier.

• World’s third largest professional information company

(after Google and Thomson Reuters). Global leader in

Science, Medical, Legal, Risk and Business data

services, and Exhibitions. Employs over 35,000 people

worldwide. Annual revenues of over £6bn in 2011.

Corporate structure

www.icis.com

ICIS – reporting on and analysing energy, chemical and fertiliser markets.

Over 600 staff globally.

Washington Washington New York New York

Houston Houston

LondonLondonMoscowMoscow

GermanyGermany

ShanghaiShanghai

SingaporeSingapore

MumbaiMumbai

YantaiYantai

GuangzhouGuangzhou

www.icis.com

2. Evolution of European gas markets and pricing

www.icis.com

History of gas price reporting19 years of ICIS gas prices – first to bring price

transparency into every new market1994 – Heren Energy (now ICIS) started pricing UK gas trade, assessing Bacton and St. Fergus beach trade before the virtual hub was created.

1996 – Network Code launched, creating the NBP traded market.

1998 – First pipeline to continental Europe. ICIS starts first price assessments outside UK at Zeebrugge.

2005 – First LNG cargoes arrive in the UK at Isle of Grain.

2006 – ICIS launches global LNG reporting and the first Asian LNG spot price assessment in 2007.

2005-2008 - new European assessments started every year as trading spreads.

NOW - 700-1000 primary prices published every day. 193 for European gas.

www.icis.com

Market evolution phase

Characteristics Suitable pricing methodologies

FORMATIVE Low liquidity, low numbers of counterparties, little standardisation, no brokers, wide bid/offer spreads, contradictory price signals.

• Assessment.

IMMATURE Medium liquidity, growing number of regular counterparties (>20), narrowing bid/offer spreads

• Assessment.

LIQUID High liquidity , steady number of regular counterparties (<20), narrow bid/offer spreads every day on a range of contracts.

• Assessment.• Trades-based index over long

periods (all day/all month).

MATURE High liquidity on spot and curve contracts, steady number of regular counterparties (<30), narrow bid/offer spreads every day on a range of contracts, derivative trade developed.

• Assessment.• Trades-based index over long

periods (all day/all month).• Trades-based index over short

periods (5-30 minutes).

www.icis.com

European gas hubs by development phase

LIQUID

Germany (NCG)Germany (GASPOOL)

France (PEGS)Belgium (Zeebrugge)

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Pan-European hub trade volume 2003-2012Source: Transmission System Operators

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Tradability index by hub 2007-2013This measures bid/offer spread availability, not volume

Source: ICIS European Gas Hub Report

www.icis.com

Many hub contracts have consistent high liquidity

Number of trades going into the ICIS front-month indices

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ICIS prices are the most widely used benchmarks in Europe

1. In high volume, long-term, pipeline and LNG supply contracts.2. In short and medium term supply contracts.3. In floating-price end-user contracts.4. Infrastructure operators’ capacity sale and auction contracts.5. In Energy Trading and Risk Management Systems.6. In physically settled derivative contracts.

7. As a starting point for negotiations.8. In valuation of assets.9. In strategic planning.

Built into many contracts. The most reliable measure of physical traded value:

Used as a reference price by many different business functions:

www.icis.com

3. ICIS Turkish market coverage

www.icis.com

Price reporting

What is price discovery?

Just that. It seeks to determine a reliable price for a specific

contract at a specific moment in time by talking directly to a

wide

section of the market.

Why is it useful?

It brings transparency

It gives coherence to the market

It helps to minimise risk

www.icis.com

Developing spot and balancing gas prices for Turkey

• Tests carried out weekly for day 7 ex-post (“day after”)

prices from 30 November (start day of test 6 December)

• Tests carried out daily for day 7 ex-post

prices from 31 December (start day of test 7 January)

• Tests carried out daily for day-ahead

prices from 12 March (start date of test 11 March)

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Test details – who was approached?

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How is the test conducted?

• An average of five different companies submit prices to ICIS

on a daily basis

• Around one third of our communication is done via e-mail

• Two thirds by phone

• Companies are contacted between 11:00-14:00 for Day-

ahead and throughout the day for ex-post deals

• Average call duration 5 minutes

www.icis.com

Test findings

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Reporting trades and swaps…

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Challenges – Collecting data

AT THE BEGINNING

• Confusion over day-ahead, day-after prices and trades

• Reluctance to report higher volumes

• Reluctance to confirm the counterparty

NOW

• Reluctance to confirm counterparty

• Ensuring that companies submit trade prices or bid-offer spreads

www.icis.com

Intrinsic market challenges

• Natural gas volumes tied up in TOP contracts – hence little

liquidity on the market, particularly for day-ahead trading

• BOTAS book closure – what happens afterwards?

• Stamp tax – a market killer

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Stamp tax – kills the market

• Jeopardises security of supply

• Deters investors

• Fractures the market

• Drives financial trading to other jurisdictions that are not covered

by the tax. Turkish companies interested in speculation could, in

theory, trade in the UK

• Seriously affects Turkey’s ambition of becoming an energy and

financial hub

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Reliability of day-after and day-ahead Turkish gas prices

• Good reflection of market views (importers and

wholesalers). Comparison between Turkish and Czech

gas markets.

• Avoiding manipulation through cross-checking trades, bid-

offer spreads, mid points with other companies.

• Assessments done in a transparent manner

• Bring consistency to the market and visibility to traders

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Sooner or later? Developing Turkish gas prices

• Bringing liquidity to the market: the “Turkish Airlines” effect.

Where Turkish Airlines fly, business follows

• Crucial to investors

• Need to offer a south-eastern counterbalance to the north

west European hubs and reach out to the Middle East and

the Caspian region

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Price visibility is crucial to investors

Spot prices bring:

• Transparency

• Flexibility

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T-Hub is vital for southeast Europe, Middle East & Caspian region

AOC

PEGs

NBP

TTF

ZEE

PSV

GASPOOL

NCG

VTP

Czech

T-HUB

GTF

www.icis.com

Thank you!

Aura Sabadus + 44 (0) 207 911 1853

aura.sabadus@icis.com

Louise Boddy +44 (0) 207 911 1928

louise.boddy@icis.com