German NCG L-gas premium jumps as natural gas demand rises
The spread between over-the-counter low-calorific and high-calorific natural gas (L-gas and H-gas respectively) at the German NCG and GASPOOL hubs has widened significantly during the first liquid trading sessions of the year, according to traders polled by ICIS.
After an unusually narrow spread during the first months of winter, the spread has widened notably since the second week of January. Traders now estimate the average NCG Day-ahead L-gas premium over the H-gas equivalent at about €0.50-0.60/MWh.
While this spread is at a similar level to the one seen last winter, the L-gas market is unlikely to see similar price spikes. Last year, the NCG L-gas premium went up to well over €1.00/MWh on days of high demand. If a seller was to offer at a similar premium this season, however, market participants would start buying H-gas instead and using the conversion service.
The fee for converting between gas qualities dropped to €0.70/MWh from 1 October 2012 - down from €1.50/MWh a year before (see ESGM 15 August 2012).
"The L-gas market is extremely volatile. At times of high demand, gas can get extremely expensive, but this year there is a lower cap on how much it can go up," one trader said.
Generally, the L-gas market is more weather-sensitive and more directly driven by fundamentals than the H-gas market, traders agree. As temperatures have dropped well below normal in recent sessions, many L-gas buyers have been using their own volumes in order to meet customer obligations, and the L-gas price has therefore jumped upwards.
Dutch market link
Both the L-gas NCG and GASPOOL markets are closely linked to the Dutch TTF, where German traders can also procure L-gas volumes. In the Netherlands, there is no conversion fee and the costs for converting between gas qualities is covered by transport charges. Many German traders therefore use the option of buying at the TTF and booking transport capacity into the NCG or GASPOOL L-gas zone.
The price for this capacity can vary strongly, however, depending on if it is booked yearly, seasonal or monthly and if it is firm or interruptible capacity.
"You might get yearly capacity for around €0.40/MWh, but then you have the problem that in the summer German L-gas can get really cheap, and the capacity becomes a liability," one trader said.
Also, many smaller players are not registered at the Dutch hub, as their main business focus is supplying customers within Germany. This means that when the NCG L-gas demand rises due to falling temperatures, only a certain portion of participants have the option of switching their L-gas procurement to the TTF.
At the less liquid GASPOOL hub, it remains extremely difficult to procure L-gas volumes, according to participants. "If you have 10 possible counterparties to do NCG L-gas deals with, you can expect about two of them to also be interested in GASPOOL L-gas transactions," one trader said.
ICIS data show there are usually no offers for GASPOOL L-gas products on brokers' screens, and the majority of deals are done bilaterally.
Generally, traders estimate the GASPOOL Day-ahead L-gas premium over the H-gas equivalent to stand at a slight premium over NCG L-gas, at a level of around €0.60-0.70/MWh. Extreme L-gas price spikes are also more likely at GASPOOL than at the NCG.
GASPOOL's conversion fee also has dropped significantly year on year - to €1.76/MWh from 1 October 2012, down from €2.20/MWh in the previous year - but remains high compared to the NCG fee. (see ESGM 16 August 2012). This means that in times of rising demand this season, the L-gas premium at the GASPOOL hub can very well exceed a level of €1.00/MWh.
For the next winter season, however, GASPOOL will have to lower its conversion fee by at least €0.44/MWh. By 30 September 2013, the €1.76/MWh charge will have to drop to at least €1.32/MWh.
For each hub, the German regulator Federal Network Agency (BNetzA) has set a maximum yearly fee from 2012 until October 2016, at which point the conversion fee will drop to zero. The current NCG fee of €0.70/MWh will not have to be reduced until 30 September 2015, at which point the maximum level for the hub will drop to €0.45/MWh. JB
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