ICIS View: the TTF gas benchmark is here to stay

Author: Daniel Stemler

2019/09/05

LONDON (ICIS)--The debate over the future of the Dutch TTF hub as Europe’s benchmark gas market has intensified in recent months, with the phase-out of the giant Groningen field gathering pace. But the closure of the continent’s largest onshore field alone is unlikely to threaten TTF’s benchmark position.

Groningen production has certainly played a key role in European supply as the continent’s biggest onshore gas development, and decreasing output from the field has been one of the most common justifications of Nord Stream 2 advocates on why Europe is in dire need of more Russian gas.

However, Groningen production has little to do with why the TTF hub has become the continental benchmark, luring liquidity away from the British NBP, which was previously considered the main European market.

“Historically, there has not been a strong correlation between Groningen gas production and the development of the TTF or even the price level on the TTF,” Gergely Molnar, a gas market analyst at the International Energy Agency told ICIS.

“In fact, whilst gas production halved in the Netherlands between 2013 and 2018, gas traded on TTF more than tripled during the same period of time and the net churn rate rose from a yearly average of 20 to above 50,” Molnar said.

In terms of price impact of the phase out of Groningen, Molnar pointed to the fact that whilst Dutch domestic production has been falling to record lows in 2019, which would normally drive prices higher, TTF contracts are currently changing hands at a 10-year low and below the US Henry Hub, which has been widely considered the cheapest gas market in world.

This quite clearly shows that the phase out of Groningen is not having a negative impact on the TTF, largely because the two key factors that played a vital role in the market becoming the benchmark hub in the first place are infrastructure and regulation.

“Even before it became clear that the flows from Groningen will come to an end sooner rather than later, the Dutch government realised that to keep its position as the main gas hub in Northwest Europe, the Netherlands needed to invest substantially in the gas sector,” Anton Buijs, a spokesperson at GasTerra, the exclusive purchaser of gas from the Groningen field, said to ICIS.

This resulted in the Netherlands investing heavily in new pipelines, storage facilities, quality conversion and the Gate LNG terminal, establishing the TTF on the global map.

On the other hand, the regulatory framework around the gas sector helped cement the market’s position as Europe’s benchmark hub, leading by example in terms of liberalisation, implementation of EU regulations or the unbundling of grid operator Gasunie.

It is not a question of other countries not doing or at least trying to do the same thing, it is more about the Netherlands doing it more efficiently.

Looking at neighbouring Germany, where the expected merger of the NCG and Gaspool hubs in 2021 has sparked speculation it could take over TTF in the coming decade.

But in Germany, there are a total of 16 grid operators (TSOs) each responsible for a different market area in the country.

The sheer number of TSOs alone is already creating various organisational and regulatory issues and following the merger the number of TSOs is set to remain the same.

Moreover, a merger alone does not necessarily increase hub liquidity and trading activity. Looking at France as an example, where the churn rate after the merger of the two hubs, PEG Nord and TRS, remained more or less the same, according to Molnar.

However, the eventual shutdown of the Groningen field will impact market participants such as GasTerra, which currently depends on buying and subsequently reselling gas from the field.

“Due to the planned closure of the Groningen field, the institutionalised Dutch gas system, the gas ‘building’ as we call it, inevitably will need to change. GasTerra is part of that system, so it will change too. How and when, will be decided by our shareholders. Until then, it is business as usual,” explained Buijs.

IMPACT ON LNG

TTF liquidity and benchmark position is also an important factor in the LNG sector, giving the Gate terminal a competitive advantage over other terminals in the region.

“Direct physical access to TTF is indeed an element that differentiates Gate from other terminals. It results in operations that are very much market driven by price signals,” Stefaan Adriaens, commercial manager at Gate told ICIS.

He added that all terminals, especially in northwest Europe, are in direct competition with Gate, while new terminals, such as the planned German facilities, will further increase competition. This will only encourage Gate “to remain alert to what the market wants,” he said.