French north-south link gas auctions point to tight winter ahead

Source: Heren


High subscription rates and high prices at natural gas transport capacity auctions indicate a large amount of risk is associated with winter 2017-18 supply in France’s TRS zone.

Traders booked almost 100% of the volume put up for sale in PRISMA’s auctions of quarterly transport capacity on the north-south link, a series of pipelines connecting northern and southern France, held between 7-9 August.

The auction result is regarded as a strong price signal for forward contracts in the illiquid TRS market, where ascertaining fair value is a challenge for traders.

Prices for Q4 ’17 and Q1 ’18 capacity were €1.09-1.12/MWh, around double the equivalent sold last year, and twice the value of the auction reserve price.

The premium of the TRS over PEG Nord during winter delivery will have to be higher than this in order to cover the cost of capacity.

And forward prices do suggest this will be the case. ICIS assessed the TRS Winter ‘17 contract €1.20/MWh above its PEG Nord equivalent on 10 August.

In contrast, the spread between TRS and PEG Nord contracts for near-term delivery is close to zero, as supply, both piped and LNG, is more than sufficient to meet sluggish summer demand.

Winter risk

The risk premium built into TRS 2017-18 winter contracts is a response to price spikes seen in early 2017, which burnt the fingers of many market participants. Spiralling demand due to a cold snap, coupled with a dearth of LNG deliveries, saw TRS prompt and near curve contracts soar to record premiums above PEG Nord.

To help combat any supply shocks this winter, energy regulator CRE has granted grid operators GRTgaz and TIGF greater operational powers to ensure deliveries into the vulnerable southeast.

Plus, the French government has asked GRTgaz to build up stocks of 89 million cubic metres of gas at France’s southeastern storage facilities. This is on top of suppliers’ obligations and is designed to combat low levels of gas in store.

French authorities are pursuing a number of structural measures designed to reinforce the vulnerable TRS zone, and increase the capacity of the north-south link (click here to read story). But the bulk of these benefits will not be felt by the French grid until winter 2018-19.