Year in review: Spanish gas market
On face value, the inaugural year of ICIS's Spanish AOC front-month contract has been a year of very limited activity. Yet scrape below the surface and the market is in fact hard-wired into the global LNG market - it is this that has predominantly driven price direction in Spain.
January 2013 will represent the first anniversary of the launch of the ICIS daily AOC front-month assessment. Over that time the market has not developed much, but traders said nor has it withered away.
Instead, many active on the market describe a slow journey, where there are just enough gains in trading liquidity for them to maintain belief in the ultimate aim of a liquid traded natural gas hub - but not enough to suggest it will happen any time soon.
This steady trajectory of very small and incremental increases, often reflected by similarly small regressions, demonstrates the same struggle that at various times has plagued other European gas markets in their infancy.
The crux of this struggle is a contest between competing ideologies - one favouring a move towards hub pricing and the other favouring preserving the orthodoxy of gas imported by means of long-term contracts linked to oil prices.
In the case of Spain, there are reasons to believe, long-term, that the country will one day have a liquid traded gas hub of its own. But equally there remains a good deal to be done before this can happen.
Price direction and drivers
Over the course of 2012, AOC front-month prices plotted a gentle rise to a price peak achieved in June, followed by a gentle decline thereafter. The shark's fin shape of the graph representing 2012 covers a €4.60/MWh ($6.05/MWh) price range, the contract having traded at €27.00-31.60/MWh.
Over the same period the TTF and PEG Sud front-month contracts, for example, encompassed a range of almost €7.50/MWh, so clearly AOC prices are less volatile than their more liquid northern counterparts.
Traders said this highlights the fact that AOC prices as a default track oil, and are only pulled away from this when certain other issues begin to influence the fundamentals of gas demand in the country over and above the norm.
For those active in the gas business in Spain 2012 has been extremely painful, consolidating a significant decline in natural gas demand that began to come to a head in 2011. Gas demand has been waning under the weight of a combination of factors.
Chief among these has been the impact on demand of the global economic slowdown - fewer of the world's economies have been buying Spanish goods, and this has hit energy consumption significantly.
However, there are other factors in play. Spain, for example, has not been the only European country to reduce its gas burn in favour of coal, to reflect the plummeting cost of that commodity, as well as the price of emissions.
A law forcing generators to burn a set minimum amount of domestically-mined coal - permitted by the European Commission for a set period under the dispensation of shoring up member states' security of energy supply - also ate into gas demand.
Just as damaging for gas generators has been the growth of renewables generation in Spain, with its generous incentives and prioritised dispatch to the electricity grid. This resulted in demand for natural gas in August dropping to 24.3TWh - the lowest level since since 2005, based on figures produced by Spanish gas grid operator Enagás.
But despite these fundamentals, Spain's high gas prices have prevented what capacity there is to flow from Spain to the rest of Europe from being used.
According to AOC-active sources, Spain's main supply incumbents shun the AOC, and it is easy to see why that might be the case - it is not in the interests of Spain's incumbent gas suppliers to participate in a market where low demand and high availability of gas would threaten to drive prices below what they are paying for it.
LNG diversions and reloads
For this reason - and picking up on a trend that got off the ground in the previous year - 2012 was very much the year of the reload for counter-parties active in Spain.
With the price of front-month LNG in Asian markets peaking in the summer at €18.36/MMBtu (€47.35/MWh), there was enough margin to be made - even after shipping costs had been added in - to justify filling up an empty LNG vessel with gas procured from the tanks of one of Spain's under-used LNG terminals, rather than dumping it on the Spanish market and risk crashing prices there.
For this reason, probably the biggest influence on AOC pricing in Spain in 2012 was the influence of the global LNG market, rather than any domestic fundamentals.
This meant that for a while, gas where the additional third-party access charges needed to enter the Spanish gas system had been paid was less valuable than LNG stored in-tank at one of the three LNG terminals able to carry out reloads.
This is because in-tank LNG had an additional value, since it could be reloaded on to a vessel for resale on FOB (free on board) cargo free of any destination clauses. By November 2012, companies with exposure to LNG in Spain had reloaded 21.3TWh of LNG for global resale, up from 7.61TWh in the year to November 2011, according to Enagás.
Pipelines and Projects
So bad has been the collapse of this gas market in Spain that there appears to be a desire among many generators to shed as much of their gas infrastructure as possible.
In Autumn Iberdrola announced it was intending to make a disposal of "non-core" assets totalling €2bn, and others are likely to follow.
Indeed, reports in Spain - as yet unconfirmed by the companies themselves - suggest that both Iberdrola and Endesa are trying to sell their stakes (respectively 20% and 12%) in the Medgaz pipeline, which brings gas from Algeria and was only commissioned in 2010. Several equities analysts consider the reports to be credible.
In addition to this, despite the commissioning of two new gas storage projects in Spain - Yela and Marismas - a third, Castor Underground Storage, which was scheduled to begin operations this year, has apparently been hit by a funding cut.
Spain finds itself in a very difficult period right now, the victim of overspending at home and complex global crosswinds abroad, both of which have hit the country hard.
Economists believe that so serious is the effect on demand at home the country's only hope is to turn to global exports. This is an assessment of Spain's economic plight, but it also very accurately describes the state of the gas market.
Just like the wider economy, the challenge in 2013 for Spain's gas market will be how it responds internationally to issues gripping it at home. RS
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