3. Evolving gas markets and energy security: mitigating market risks

Gas sector is one of the most complex economic segments. Rigidity of the trade is explained by high transport (LNG and pipeline transmission) costs. Up to now, pipeline transmission dominates but LNG markets develop and create conditions for a further internationalization of the market.

Cost structure of pipelines needs to be assessed: capital costs, compressor stations, operational and maintenance costs, fuel (technical) gas to ensure compressor stations. In average, capital costs of a pipeline is about million dollars per 1 km. Operation & maintenance costs increase if the pipeline diameter decreases.

Three regulatory models are distinguished: Vertically Integrated Company, Single Buyer and Third Party Access. At the initial stage, gas sector was developed within Vertically Integrated Companies. Single Buyer model allows a competition between producers, who compete for access to the company who has access to markets. In this case, gas supplier loses ownership over commodity. By contrast a Third Party Access regime separates production, supply and transport (transmission and distribution). The regime allows ownership over commodity. Third Party Access regimes emerge in developed and saturated markets and constitutes a basis for gas-to-gas competition.

In case of the EU regulation, TPA exemptions are allocated for new pipeline infrastructures in order to provide a necessary investment pay back. However, exemptions are time located and issue-specific. In some cases, States do not opt for exemptions for new pipeline development.

Risks of supply capacity mismatch emerge. Indeed, a company can conclude a 5 years supply contract but only 2 annual transport contracts. In this situation, there is no transport to fulfill the 3 years supply obligations.

In order to face the issue, the EU developed network codes for access and congestion management. Nevertheless national specificities need to be taken into account. For instance, Estonia’s market does not experience congestions and cannot (up to now) have conditions for a market competition. The main reason is the small and declining demand.

TPA regime also provides a ground for a hub-based gas trade. Hubs can evolve either from interconnections between pipeline systems or from trading platforms organized by gas suppliers and transmission companies. Noteworthy creation of a hub does not always mean a trading platform. This means a hub does not have a price mechanism, hence the gas pricing remains dependent on external pricing. Here, is one of the main market risks for the LNG hubs in Baltics.

High level expertise is provided by an Interview with the chairman of board of Chairman of the Board Executive Director, Eesti Gaas Võrguteenus Mr Sergei Jefimov. He talks about main priorities of the Estonia’s gas sector and highlights challenges related to the small market and declining demand.

Sergei Jefimov, Chairman of the Board Executive Director, Eesti Gaas Võrguteenus

Interview questions:

1. Please tell us briefly about Eesti Gaas and about its main activities?
2. What are the latest gas sector reforms in Estonia? What does the full ownership unbundling means?
3. What are the new market risks? Is it low demand? Are the risks linked with international price? Are there any risks involved with short term transmission capacity agreements?
4. Patrick Heather from Oxford University said that anyone can build a gas hub, but it does not mean that the hub will be functional. Might it be the case in Baltics?

Obligatory learning material

Patrick Heather, Senior Researcher of the Oxford Institute of Energy Studies "European gas hubs dynamics and their consequences on competition, price and security"

[Focus on natural gas hubs in Europe, their logic, functioning, variety of contracts and transactions, mitigation of supply-capacity mismatch]

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