Written on 11 May 2020 by Flame Conference 2016
The head of Russia’s Gazprom Export on Tuesday said that hub pricing in Europe was not a “panacea” for the gas industry and was at risk of a disproportional impact from speculation by financial players.
Elena Burmistrova told the Flame gas conference in Amsterdam that the ideal way to price gas in Europe was still a regime based on oil indexation with only elements of hub pricing.
“Are there reliable pricing signals from hubs that would protect consumers, suppliers and investors and that would protect the market from volatility and abuse?” she asked.
“Even the best spot market would not necessarily be a panacea for the gas industry,” she said.
For a large part of Continental Europe, Burmistrova said there was “no relevant spot exchange that is liquid, deep and well developed enough.” She said only the UK’s NBP and the Dutch TTF matched the “true criteria” of a liquid market.
Burmistrova argued that financial speculation in gas trading was becoming a principal market force and driver despite the fact that physical gas delivery was still the cornerstone of the industry.
“Do we need a price link driven by financial speculation? Do we really want to rely on a market that is interested in higher volatility? Is this something our customers would want?” she said.
Burmistrova said that for financial players, the main attraction was price volatility.
“That’s where they make their money.”
Burmistrova said that for gas producers, and for gas consumers, the contrary is true.
“It is predictability and stability that matter,” she said.
Gas producers need to make huge investments in production and transportation capacity, and without the guarantees of demand, those investments would not happen.
“Or it would cost a lot, lot more,” she said.
Burmistrova added that the correlation between the oil indexed price in Europe and the hub price was very high — above 80%. “So the hub index, as such, is not independent at all.”
She said that as far as Gazprom was concerned, the ideal price mechanism was a hybrid one.
It would, she said, “include certain hub-based components but be based on an oil-linked pricing formula.”
Stuart Elliott is Associate Editorial Director at S&P Global Platts.