Over the past months, the ICIS gas markets editors have closely tracked the Belgian market developments, with particular focus on the introduction of a new transmission model and a new virtual gas hub. This market analysis summarises key themes of the upcoming changes, the impact the dual market will have on trading activity and what role the virtual ZTP could play in the long term.
Introduction of a virtual hub on 1 October will double trading options at Zeebrugge, offering virtual trading alongside the physical hub as well as a choice between €/MWh and p/th. Will liquidity soar?
For years the satellite market to the UK NBP, the Belgian Zeebrugge hub will undergo a radical transformation from 1 October, 2012, when a virtual hub will come into being alongside the existing physical market.
Starting the new gas year, Belgium's transmission system operator (TSO) Fluxys Belgium will launch a new entry/exit transmission model, accompanied by a new trading hub, the Zeebrugge Trading Point (ZTP).
The new transmission model is expected to simplify access to the Belgian gas network, implementing decoupled entry/exit booking of transport capacity and reducing transmission costs.
The possibility to book independently entry and exit capacity is expected to streamline the procedure making the hub more attractive to new participants.
According to the Belgian regulator, CREG, the new system should bring the number of market participants to 100 and traded volumes to over 70 billion cubic metres per year (Gm³/year).
Currently, 81 shippers are registered at Zeebrugge and traded volumes during the first half of 2012 amounted to about 34.15Gm³, according to data coming from Huberator, the Zeebrugge market operator.
The physical nature of the Zeebrugge hub has always been indicated as a barrier to trade growth.
Currently, natural gas is traded on two different markets at Zeebrugge: the basis (the price differential between Zeebrugge and the British NBP) and the outright market. The basis is much more liquid and always has a tight bid-offer spread.
Totalling 34.15Gm³, traded volumes increased by about 14% during the first half of 2012 when compared to the first half of 2011, though Zeebrugge remains mainly a transit hub for gas to flow from the UK to continental Europe.
Delivered volumes have fallen by about 22.5%, passing from 8Gm³ in the first six months of 2011 to about 6.2Gm³ in the first half of 2012.
Despite the slight rise in traded volumes and the presence of 81 trading companies, Zeebrugge remains a relatively illiquid market.
By comparison, traded volumes at the British NBP totalled about 552.5Gm³ in the first half of the year, and at the Dutch TTF they amounted to about 329Gm³ in the same period, according ICIS data.
As with other markets, spot contracts at Zeebrugge are traded much more than the curve. On the outright market, Day-ahead is the most traded contract, while on the curve liquidity is highest on the front month contracts, though consistent activity is also seen on the front-quarters and front-seasons products.
The new hub will enable both virtual and physical trade.
Physical trading activities will take place at Zeebrugge Beach (the current Zeebrugge physical hub) while virtual trading services will be at ZTP.
According to some participants, virtual trading is likely to attract more companies and should lead to increased trading activities on longer-dated contracts. The possibility to trade on the Belgian market without necessarily owning transport capacity is - in theory - an incentive for speculative dealers, such as financial institutions, which contribute to higher liquidity.
However, since the early announcements of the switch to virtual trading services at Zeebrugge, at the end of 2011, companies active at the hub called into question the potential improvement in liquidity at the Belgian hub.
In January, the European Federation of Energy Traders (EFET) warned Fluxys that the launch of the new ZTP could lead to a division of Zeebrugge into two hubs, killing off liquidity.
ICIS data show that during the second quarter of this year the number of trades for the Q4 '12 contract almost doubled quarter on quarter, while the number of trades for the Q1 '13 product remained stable. Interest in the Winter '12 product, conversely, registered a significant decline quarter on quarter.
This was partially attributed to the uncertainties related to the launch of the new hub.
Zeebrugge has always been a UK-driven market. The bi-directional Interconnector pipeline - running from Bacton, in the UK, to Zeebrugge - allows capacity holders to move gas between Belgium and the UK according to the value of the basis.
Liquidity at Zeebrugge, thus, has been determined by arbitrage opportunities offered by this connection, with shippers moving UK gas to Belgium when the basis sat in the positive territory, and moving gas from Belgium to the UK as the basis dipped below zero, mostly in the winter, when the NBP usually stands at a premium to inland European hubs.
Because of the connection between the two hubs, and the enormous difference in liquidity and traded volumes, trading activities at Zeebrugge Beach have historically been in priced p/th, despite the euro being the Belgian currency.
The launch of ZTP will change this.
The start of the ZTP will be accompanied by the launch of a new portfolio of products by the Anglo-Dutch APX-ENDEX exchange traded in €/MWh. Some participants expect the euro to be the currency of choice for the OTC market at the ZTP as well. Companies will be able to choose in what currency to trade.
Counterparties with existing positions at the Zeebrugge physical hub and with transport capacity on the Interconnector are likely to continue to use the p/th unit at ZeeBeach, while they are expected to eventually switch to €/MWh at ZTP.
The presence of two currencies in one national hub did not seem to raise any particular concern among traders.
Some said the currency exchange factor in moving gas between the two trading points could be a potential advantage for financial dealers. One market analyst argued, however, the impact of the change of currency will be limited. "If you trade at Zeebrugge you trade in continental Europe. This means that it is very likely that you will export your gas to Europe anyway, so the currency change is already factored in now that Zeebrugge is still physical and in p/th," the analyst said.
Most companies currently active at Zeebrugge will continue to trade at the physical hub, ZeeBeach, because of their existing contracts.
Capacity holders on the Interconnector will also continue to be active at ZeeBeach, although they do not rule out trading at the new ZTP hub as well once liquidity picks up.
Financial institutions are not constrained by physical delivery and are likely to move their trading activities to the new virtual hub.
Some counterparties believe ZTP will be more of an industrial than a trading area; therefore they do not expect liquidity to pick up soon at ZTP, considering that all major companies are active at the current physical hub and are bound by existing contracts with delivery at what will be the future ZeeBeach.
The majority of shippers expect that ZTP will be favourable for trading and shipping gas into and out of Belgium from the Netherlands, Germany and France because trading activities will be in €/MWh rather than in p/th.
The reference hub for the new Belgian market will be the Dutch TTF, rather than the NBP.
All market participants interviewed by ICIS agree on the fact that exchanges between these two markets will increase and that spot prices at the TTF will be a benchmark for the development of the Belgian market.
A few companies interviewed by ICIS are still convinced that the launch of ZTP will threaten liquidity in Belgium, splitting the market rather than gathering interest.
Most interested market parties, on the contrary, believe that liquidity will eventually pick up at the new virtual hub but that the uptake is likely to take some time.
"I would expect people will be a bit cautious at the start and be wary of taking large positions. It might take a little while before there is a tangible increase in liquidity," one market source summed up.
The fact that Belgium's TSO Fluxys Belgium will enter ZTP for balancing purposes through the new APX Gas ZTP exchange will certainly bring more liquidity onto the prompt. On the curve, liquidity may take longer to build up. "I think the front-month product will trade immediately, while liquidity on longer dated contracts will increase after two or three months from the launch of the hub," one trader said.
Fluxys Belgium will introduce a new balancing mechanism - one of the main innovations of the new transmission model.
From 1 October balancing will be market-based, which will make it easier for all grid users to access Fluxys Belgium's system flexibility on a daily basis.
Fluxys will enter the new APX Gas ZTP exchange to keep the network - including both the low-calorific and the high-calorific balancing areas - physically balanced.
The TSO will intervene in the market for balancing purposes when overall market imbalance exceeds a predefined threshold.
On the transmission side, Fluxys introduced a new electronic platform for booking short-term transport capacity on the Belgian network from 1 October.
Through the platform, shippers can book capacity for the following day until midnight of the previous day on a 24/7 basis.
All elements of the new IT system are being tested by interested market participants.
Over-the-counter trading activities will still be managed by Huberator, the Zeebrugge market operator, while the Anglo-Dutch APX-ENDEX company will launch a new series of prompt and curve products for the APX Gas ZTP exchange when the new entry/exit model kicks off.
Fluxys is also looking into shortening re-nomination timing for the country's facilities connected to the network. These include the Zeebrugge LNG facility, the storage facility of Loenhout and the gas quality conversion facilities - all operated by the TSO.
This change however, is still under review and will not be introduced on 1 October.
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