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Sunset clause in natural gas transport contracts could trigger lawsuits

26 May 2011 15:52:41 | esgm

Phasing out long-term natural gas capacity contracts under a sunset clause is a legal grey area, shippers and transporters have said ahead of new, legally binding rules which will mandate hub-to-hub delivery of gas. The European Network of Transmission System Operators for Gas (ENTSOG) has asked regulators for an assessment of the legal implications of breaking up existing contracts.

ENTSOG is drafting a new network code on capacity allocation in the gas market. The code will force shippers to take delivery of gas at hubs instead of at a pipeline entry point into a transport system. That would put an end to flange trading, which is still reported across Europe.

Energy regulators have mandated ENTSOG to include only hub-to-hub delivery in the network code, which will be sent to the European Commission for first approval in December. With a sunset clause ending five years after the code comes into force, all transport contracts would have to be renegotiated to move delivery from the flange to the hub.

TSOs are worried that they risk legal action if they break up long-term contracts against shippers' wishes, sources from ENTSOG have said.

The regulators' guidelines foresee that unless the counterparties renegotiate the contracts willingly, it will be up to the TSOs to step in and restructure the contract. But there is so far no guidance on how they could do this, ENTSOG said.

By taking delivery at a hub, instead of at an entry point, shippers would have to allow the supplier into its home market. Regulators think that this would boost competition and liquidity at hubs.

A key group of shippers advising ENTSOG − the prime movers, including Centrica, E.ON Ruhrgas, GDF SUEZ, Gazprom Marketing & Trading and ExxonMobil − have rejected the mandatory bundling of capacity products.

"The increase of liquidity is determined by the number of market players and the accessibility of markets, not by the interventionist measure of mandatory bundling," the group said in a presentation published on ENTSOG's website.

The prime movers want to keep trading at the flange, in order to avoid having to become active on new markets. That would bring issues of licensing and tax, they said.

It could also clash with the parallel development of new gas balancing rules, which aim for shippers to balance their positions as much as possible, instead of the TSO taking this role. To balance effectively, shippers say they need to be able to book capacity at set entry and exit points, which could be close to gas storage sites where they also have capacity. IS

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