German natural gas buyers focus on new strategies as long-term/spot price gap widens
The widening discount of German natural gas sold at the country's NCG and GASPOOL hubs to gas from long-term oil-indexed contracts continues to provide a strong incentive for domestic buyers to move away from historic purchasing strategies and towards more spot-based deals.
While most players seem to share the aim of reducing their volumes linked to oil prices, they have taken on a different mix of procurement strategies. Some focus on hub procurement, others stick with a certain portion of long-term contracts. These can either be linked 100% to the hub prices, or can be partly oil-price, partly hub-price based.
On the German market, all three strategies have recently been emerging among participants, as companies look for news ways of gas procurement.
ICIS data show that the price gap between oil-indexed contracts and gas bought at the trading hubs has significantly widened since the first half of 2011.
Gas from long-term oil-indexed contracts from Russia delivered between January and June 2011 was assessed at about a €2.30/MWh premium over the according NCG month-ahead contracts. This premium increased to an average of €6.30/MWh for the second half of the year, and has continued to increase in 2012. So far this year, the premium averages about €8.60/MWh with a long-term supply premium.
As a result, a growing portion of gas in the country is purchased at Germany's virtual trading hubs NCG and GASPOOL, with many companies moving away from long-term oil-indexed supply contracts. Companies such as gas supplier Verbundnetz Gas (VNG), which has said that it will stick with oil-indexation, have become a minority.
Three main strategies
While some companies believe that supply contracts partly linked to the oil price and partly linked to the traded gas market will play an important role in the future of gas procurement, other participants are critical of this approach.
Germany's WINGAS, a joint venture (JV) of BASF subsidiary Wintershall and Russia's Gazprom, believes that the future of long-term supply contracts lies in a combination of oil-indexed and spot market-based pricing elements, WINGAS chairman Gerhard König told ICIS earlier this year (see ESGM 7 February 2012).
Only last year, WINGAS closed such a supply contract with Bayerngas, a JV of German utilities (see ESGM 27 June 2012).
Bayerngas head of procurement Thomas Rupprich told ICIS that he expects these mixed contracts to be a considerable part of the company's future portfolio.
The CEO of RWE Supply & Trading recently said elements of long-term contracts had not been replaced with short-term equivalents during discussions with its suppliers but that pricing formula had been switched to reference a wholesale gas market index (see ESGM 19 April 2012). He did not rule out elements of oil-indexation in the future.
A spokesman of Berlin's municipal utility Gasag said that mixed indexation will remain an exception at his company, as such contracts are considered difficult to hedge. Gasag is currently exclusively entering into 100%-spot linked supply contracts, he added.
Meanwhile, Munich-based Thüga, a consortium of 90 municipal utilities, has said that it seeks to replace all its long-term supply contracts and focus on spot procurement.
In any case, most German players agree on the goal to move away from 100% oil-indexation.
Views on the future
Companies speaking to ICIS have stressed that they do not exclude the possibility of entering into an oil-indexed contract some time in the future should market conditions change. But all of them added that they do not expect oil-indexed supply contracts to gain back their previous importance.
"We do not expect the German market to return to the old system of oil-indexed contracts," the Gasag spokesman said. The company was one of the first players in the German market to announce its move away from oil-indexed contracts. In May last year, Gasag head of trading and sales Henning Borchers said that the company was to link future contracts to TTF spot prices assessed by ICIS (see ESGM 11 May 2011).
The COO of Thüga's trading platform Syneco Trading, Johannes Angloher, takes a similar view. "We expect traded hub prices to be dominant and oil-indexed supply contracts to disappear in the long run," he told ICIS. "We expect [oil-indexed] contracts to play only a minor role in the future, for instance, for diversifying one's portfolio."
Angloher also said earlier this year that the main supply request from municipal German utilities is for hub-indexed contracts with duration of one or two years, indexed to the German NCG hub (see ESGM 9 February 2012). Angloher added that the hedging of oil-indexed contracts was the only business part of Syneco that had seen a downward trend in the past year.
Bayerngas' Rupprich stressed that stronger than current demand for conventional oil price based supply deals could emerge should the premium of oil-indexed contracts over hub prices decrease. However, he also said he considered it unlikely for the German gas market to return to a model of 100% oil-indexed long-term supply contracts. JR
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