Stop gambling, you can choose fixed gas prices

Zombor Smaraglay, Pricing Team Manager, MET Hungary Ltd.

We  all know the symbols of the traditional stock exchange, the bull and the bear are part of our investment life, in which you have several choices. Besides real estate portfolios or insurances, you can opt for bonds or stocks. Investing in bonds is more predictable, buying stocks can be a choice with lots of profit, but with a higher risk of losses as well.

These seem to be obvious statements; however it is not so evident that the same rules apply to gas procurement. Either you choose the safe way with fixed gas prices with foreseeable costs, or you decide for a pricing model based on oil, or other indexed formulas that have a higher risk with all the up- and downsides.

Gas, as a commodity, has a long history and so has the pricing of this good.

The awakening of a dynamic market

The international gas industry, affected by countless factors, has been changing radically throughout the last decade, reflecting the natural development of maturing markets. The acceleration of trading, rising competition, steep climb of liquidity and most importantly the business requirement to cover customer needs can all be observed – not only in the surrounding countries, but also in Hungary.

However, to understand what exactly we mean in gas trade by finding the right solution in order to satisfy customer needs, we need to reach back to the end of the previous century in order to see where the development started. It is hard to imagine that even such a seemingly plain product as fixed-price natural gas carries the whole market evolution of the past decade and can comprise complex hedging structures.

One of the main sources of Hungarian gas supply has been arriving indirectly from Russian GAZPROM through the Russian–Hungarian joint venture Panrusgaz since 1996, a company that has exported 6 to 11 billion cubic meters of natural gas each year. The price formula of this long-term contract – expired with a make-up possibility this year in July – was mainly indexed to oil derivatives (fuel and gasoil).

Initially natural gas was a replacement product for fuel oil and gasoil as most of the power plants and even households functioned – or were able to function – with these resources as an alternative. The market of natural gas was undeveloped and pricing was unclear, while oil had a rather transparent market. Therefore Gazprom linked natural gas to oil in order to mitigate the risk of those who decided to consume gas as an alternative to oil.

Booming market with booming competition

Since the early 2000’s, virtual trading points (gas stock exchanges), driven by demand and supply, have been popping up like mushrooms all over Europe: such as the Netherland-based Title Transfer Facility (TTF) in 2003, or five years later the Germany-based natural gas hub NCG, and the Italian GME (Gestore Mercati Energetici), accelerating competition and easing the access to a wider range of resources.

Close to Hungary, the Austrian Central European Gas Hub (CEGH) was established in 2013, where CEGH operates a Virtual Trading Point (CEGH-VTP) or VTP. On this platform, a whole variety of natural gas sources are traded every day up to 5 billion cubic meters per month.

Fixed gas price as a form of risk management

In the gas business, similar to other businesses, we at MET face a very strong customer need: the need to minimize risks and to completely avoid unnecessary ones.

What kind of risk is a company usually willing to take? Typically, they accept the risk of demand or operational related threats, but usually do not undertake the risk of activities that fall out of the scope of the company. Companies prefer mitigating risks over generating them, leading us to believe that most companies seek opportunities to match their cost structures with their revenue streams in terms of both price formula and denomination.

As trading has accelerated during the past couple of years, liquidity shot up and spread between markets has shrunk; hedging and risk management have become more and more effective. As a result of this process, fixed gas prices could become highly competitive, and no wonder many of our consumers tend to prefer them over indexed formulas.

So opting for fixed prices instead of indexed formulas is a decision over risks which you probably do not want to take.

About us

MET Group is an innovative, Switzerland-based group of companies, focused on multi-commodity wholesale and trading with activity in natural gas, power, oil and power generation. Our success is built on our commitment to understand our partners’ needs and to structure attractive tailor-made business solutions. MET Group’s mission is to become a leading market player by implementing innovation in the traditional European energy markets.

For more information:
www.met.com