Medgaz buy shows Spanish natural gas prices will converge - Fluxys
The purchase by Belgian infrastructure company Fluxys of a 32% stake in Algerian gas pipeline Medgaz represents a bet Spanish natural gas prices will converge with northwest Europe's eventually, rather than an investment that will give any immediate yield, Fluxys spokesman Rudy Van Beurden said on Friday.
He also confirmed that while Fluxys was now on track to purchase 32% of the pipeline, vendors Iberdrola and Endesa would continue to have control of the long-term gas contracts signed with Algerian state oil company Sonatrach. As an infrastructure company, Fluxys is unable to hold interests as a shipper within Europe.
As reported last week, Fluxys has agreed to pay approximately €233m for Iberdola's 20% stake and Endesa's 12% stake in Medgaz. The other partners - Sonatrach (36%), Cepsa (20%) and GDF SUEZ (12%) - must first decline their own rights to first refusal.
With gas demand declining significantly in Spain and only limited export capacity to France, the purchase of a stake in Medgaz was in effect a bet on gas demand picking up in Europe, Van Beurden conceded. According to provisional data from the Spanish gas grid operator, Medgaz flowed around 3.6 billion cubic metres (Gm3) in 2012, about 45% of its 8Gm3 nameplate capacity.
Medgaz not yet in demand
For Medgaz to become more relevant, prices in northwest Europe need to rise above Spanish over-the-counter gas prices (or Spanish oil-indexed gas prices need to fall below European counterparts) in the future, as current prices make moving pipeline gas from Algeria to northwest Europe commercially unviable. ICIS assessed natural gas for front-month delivery at the Spanish AOC at €30.25/MWh on Thursday, €3.175/MWh above the equivalent product at the Dutch TTF, even before transmission costs are factored in.
Nonetheless, Van Beurden said he was "convinced" the purchase would make sense in the medium to long term, noting: "In the future we think there'll be some value there."
In line with Fluxys's business model to "connect producers with markets", the purchase of a stake in Medgaz made sense in the same way as its purchase of a 19% stake in the NEL pipeline bringing Russian gas to Germany and beyond, he said.
"Europe's markets are evolving and converging; the UK, Belgium, France [are all now very closely matched in price] and we're also seeing the spread between Italy and Germany reduce," he said, highlighting the effect of auctions on the Transitgas pipeline linking Italy and Switzerland operated by FluxSwiss, in which Fluxys has a 50.2% stake.
In the case of Spain, greater gas flows to the rest of Europe are inevitable once planned cross-border link upgrades come online. "There will be a further price convergence between Spain and the rest of Europe - this is unavoidable in the longer term," Van Beurden concluded.
In two years, the results of the 2015 Open Season will come into effect, boosting the link between France and Spain to approximately 200GWh/day in each direction. RS
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