The Henry Hub in North America is the most successful natural gas market in the world. Its success has stimulated discussions in other natural gas markets about the creation of new natural gas hubs to emulate Henry Hub’s operations. The question is: how can countries who want to create a hub in theory actually establish one in practice?
Creation of a natural gas hub is perceived in international quarters as a way of meeting national goals for competitive natural gas supply and delivery, providing market prices adequate to inform producers and consumers, and creating a security of supply based on diversification of sources.
This US hub trades the third-largest commodity futures contract in the world by volume and the price has become a national benchmark for natural gas with growing global reference. The US’ Henry Hub provides the example of a hub which delivers reliable and transparent price signals and liquid contracts. This success is measured in terms of increasing trade volumes, a large pool of customers trading standardized natural gas products, and services at adequate churn rates.
Discussions are underway in places like the European Union (EU), Singapore, and Turkey about creating new natural gas hubs on the Henry Hub model. These new hubs would:
- Provide pricing points for spot markets transactions and gas futures trading.
- Facilitate gas purchases and sales at specified points to enable financial trades.
- Provide a recognized location point for published natural gas price and transparency.
However, to do so, the new hubs would need to have in place:
- Adequate infrastructure in terms of natural gas pipelines and natural gas storage.
- Access to diversified gas supply available from a competitive market.
- Natural gas deliverable to the hub by third party/open access to pipelines operating under acceptable regulatory conditions.
- Establishment of tradable transmission rights on pipelines.
- An operating liberalized natural gas market with no governmental price controls on the natural gas commodity.
- An established hub operator and exchange (IT) system.
Currently, these preconditions for successful new natural gas hub operations are a tall order to fulfill. The EU may have the most difficult barriers to overcome in establishing a competitive gas hub, given the nature of internal gas markets and the lack of a central regulator to enforce uniform policies across all member states.
The EU may have sufficient supply diversity in natural gas from its four principal suppliers, Norway, Algeria, the Netherlands, and Russia, together with more than a dozen operating liquefied natural gas (LNG) receipt terminals and gas storage at many market areas. In addition, the EU may obtain additional future supplies via Turkey from the Middle East, Eastern Mediterranean discoveries, and fields in the Caucasus.
On November 8, 2017, the EU moved another step towards an integrated gas market with the issuance of a proposed amendment to the existing Gas Directive (2009/733/EC).
The new amendment will “clarify that the core principles of EU energy legislation (third-party access, tariff regulation, ownership unbundling and transparency) will apply to all gas pipelines to and from third countries up to the border of the EU’s jurisdiction.”
However, the amendment does not address the current situation in the EU, as noted by Jeff D. Makholm in The Political Economy of Pipelines, with its concentrated and state ownership of pipeline assets, lack of transparency in capacity availability, inability to trade transmission rights, and other factors which make the imminent prospect of improved market performance and market hub development unlikely.
As one researcher noted, “achieving a state of a fully liberalised market with fair competition rules and totally liberalized market of gas trade is a lengthy and complicated procedure. Because of all the aspects that need to be considered and 27 different situations of the market of gas in the EU, the common internal market is a very high goal to be achieved, but not impossible.”
While there remains much work to be done to get there, the EU’s continued progress in slowly moving towards an enhanced internal natural gas market is a positive development. At this point in time, it is clear that the EU recognizes that implementing the changes necessary to create a true “natural gas hub” will be difficult. Even the November amendment to the gas directive allows member states “certain derogations” from the directive as long as these derogations are “not detrimental for competition.”
This is a reminder that as long as the EU cannot implement a single gas pipeline policy and have it enforced the same way in every member state, ideally by an EU wide regulator, the goal of an efficient and competitive single natural gas market will be elusive—and the dream of building an effective gas hub even more so.
Branko Terzic is a senior fellow with the Atlantic Council Global Energy Center. You can follow him on Twitter @BrankoDuTerzic