"This will be a heaven for traders"

January 23, 2012 | 00:00

The ambitions of Gottfried Steiner, CEO of Austria's Central European Gas Hub

"This will be a heaven for traders"

Austria's Central European Gas Hub (CEGH), situated at the crossroads of gas routes between East and West, wants to become one of Europe's major trading hubs. In an interview with European Energy Review, CEO Gottfried Steiner reveals CEGH's strategy to expand the hub's spot-market trading, raise its liquidity and diversify the supply lines to the physical hub at Baumgarten that is connected with the CEGH. 'There will be a lot of gas from different sources all coming to Baumgarten. It will be like heaven for traders.'

'You will have gas from a lot of different sources all ending in Baumgarten, and this is like heaven for the traders'

The European gas market is, slowly but surely, undergoing a radical transformation. Traditionally it has been dominated by a few large, state-owned suppliers (notably from Russia and Norway) who had long-term contractual relationships with a limited number of large buyers, e.g. German utilities like Eon and RWE (who also used to be state-owned).

This Ancien Régime is now slowly falling apart. From the mid-1990s, the European Commission has begun a long process of liberalising European gas (and electricity) markets. The ultimate aim is to have a competitive, integrated European market in which a lot of different suppliers, traders and buyers are buying and selling gas on a day-to-day basis. In this scheme long-term contracts, such as Russia’s Gazprom offers, still have a place, but a significant part of the action will take place on spot markets.

In fact, the Commission’s dreamed-of gas market model already exists, namely in the United Kingdom. The UK’s National Balancing Point (NBP) is by far the largest spot gas market in Europe. On the Continent, things are moving more slowly, but Continental spot markets are catching up, in particular the TTF in the Netherlands, Zeebrugge in Belgium and the Central European Gas Hub (CEGH) in Austria.

Liquidity

The CEGH is unique among trading hubs in that it is intimately connected to the physical gas hub at Baumgarten an der March in Austria, which is the most important node for gas transit through Europe. A third of Russian gas supplies go through this distribution station operated by Austria’s energy company OMV. Two major planned pipelines – Russian-backed South Stream and EU-backed Nabucco – will (if they get built) also go to Baumgarten.

In response to the dynamic developments on the European gas market, OMV established the CEGH in 2005. Its aim: to become a key player in the newly evolving liberalised market. Responsibility for carrying out this task lies in the hands of the CEGH’s new management team with Gottfried Steiner as CEO and Bernhard Seiberl as Chief Operating Officer.

Gottfried Steiner is a young, charismatic professional who joined the company in May 2011 and now occupies an office on a high-up floor of the Floridotower, one of Vienna's tallest office buildings. In a conference room overlooking the city, he speaks in soft, measured tones of his plans to bring the Central European Gas Hub to the same level of liquidity as the Title Transfer Facility (TTF) in the Netherlands or NCG in Germany, Continental Europe's two largest gas hubs by liquidity. In the coming years, Steiner and Seiberl will oversee an expansion of the CEGH’s spot-market and futures trading, the introduction of a within-day market and the consolidation of Austria's fragmented flange-based trading points into one single virtual trading point (VTP).

Steiner knows Austria has one very important asset: some 50 kilometres east of the Vienna headquarters is the physical hub at Baumgarten an der March, a sprawling facility adjacent to a tiny village with only a few hundred residents. The station took up operations in 1959, and since 1968 most

'We are close friends. This is a historical connection that we value very much' (on Gazprom)
of the gas that flows through its pipes has been traded via long-term contracts with Russia, the hub's main supplier. This friendship with Russia has enabled Baumgarten to become the largest physical hub for natural gas in Central Europe with an annual transport volume of 90 billion cubic meters (bcm). Steiner makes it clear that this relationship is not about to change. ‘We are close friends’, he says of his Russian colleagues at Gazprom. ‘This is a historical connection that we value very much.’

Entry/exit system

At the same time, though, Steiner is well aware that the gas market is changing. The European Commission wants to reduce Europe’s dependence on Russian gas. It wants to see spot markets appear and supplies to be diversified. Enter CEGH, a market-based trading platform jointly owned by OMV Gas & Power GmbH (80%) and the Vienna Stock Exchange (Wiener Börse AG, 20%).

CEGH has been taking steps to broaden market participation and increase the “liquidity” at the hub. (Liquidity is the degree to which an asset can be bought or sold without affecting its price, which is the case when there is a high level of trading activity.) But first it has to take one “internal” hurdle. Currently there are still a number of different “physical trading points” (i.e. over-the-counter spot markets) in Austria, including Baumgarten, Oberkappel, Überackern, Weitendorf and Murfeld. CEGH is set to integrate all these locations together with its “Integrated Trading Area Baumgarten” into a single Virtual Trading Point Austria by 1 January 2013. ‘We are quite confident that CEGH will be nominated to become the virtual trading point for Austria in 2013’, Steiner says. ‘We have all the provisions in place to fulfill this task accordingly.’

In line with this plan, the Austrian gas market will become organised as a single entry/exit system as of 2013. This means that traders will pay an entry/exit fee for the transport of the gas between the entry and exit point regardless of the distance the gas travels. This allows traders to trade the gas in the system on the “virtual” market without physical limitations. Steiner says the new entry/exit system “is not only good for Austria and the gas markets, it is also good for CEGH.”

Indeed, CEGH has already seen improvements in several key indicators commonly used to measure liquidity. For one, the “churn rate” has increased steadily to almost 3.5 in August 2011 from just under

'I don't think South Stream is Russia's answer to Nabucco. I truly hope that both of them will come, as this would bring a lot of opportunities for the markets'
2.5 in 2006. This means that every unit of physical gas is traded an average of 3.5 times before leaving the hub. Membership has increased from some 20 registered members in mid-2006 to 130 in 2011, and hub nominations have risen to over 4,300 per day – up from roughly 300 in 2006. The market has also become progressively less concentrated (more competitive) since it started in 2006.

In a final step, CEGH plans to introduce a cross-regional balancing platform. Steiner believes that with these steps and with new pipelines coming to Baumgarten, ‘we will have reached at least the same liquidity parameters as for the TTF’, currently the most liquid gas hub in Continental Europe.

Nabucco and South Stream

For the future, the Austrians are hoping to see new major sources of gas connected to Baumgarten, in the form of the by now famous (but yet to be built) pipelines Nabucco and South Stream. ‘We have a big interest in the success of the Nabucco pipeline’, Steiner says. Nabucco would transport gas from the Caspian Sea region (Azerbaijan, Turkmenistan) and the Middle East (Iraq) through Turkey, Bulgaria, Romania and Hungary to Baumgarten. The 3,900-kilometer pipeline was conceived in 2002, and the first phase of construction is expected to be completed in 2017 – if, that is, sufficient gas is sourced to allow the partners to give the green light to the project. The pipeline, which is to have a transport capacity of 31 bcm (billion cubic metres) per year, is a joint venture between RWE, OMV, BEH (Bulgaria), Botas (Turkey), MOL (Hungary) and Transgaz (Romania), who each own an equal share. ‘The Nabucco pipeline will give the producers the possibility to monetize their gas, and we will provide the marketplace for them to make this happen’, says Steiner.

At the same time, Russia launched its own project in 2007, South Stream, which is commonly viewed as a competing pipeline, as it will transport Russian gas along partly the same route: through the Black Sea and then through Romania, Serbia, Hungary on to Baumgarten. But Steiner believes the Nabucco and South Stream pipelines can coexist. ‘I don't think South Stream is Russia's answer to Nabucco’, he says. ‘I truly hope that both of them will come, as this would bring a lot of opportunities for the markets.’

As Europe's own gas production dwindles amid growing demand, Steiner believes there will be enough appetite for natural gas to support both pipelines. ‘You will have gas from a lot of different sources all ending in Baumgarten, and this is like heaven for the traders.’

Storage options

In addition to its central location, the CEGH and Baumgarten have yet another ace up their sleeve that increases their attractiveness to suppliers and traders: a lot of storage capacity. In 2010, OMV could make use of a storage capacity of 2.4 bcm, enough to cover Austria’s winter-time demand for three months. The storage reservoirs are located between 500 and 1,500 meters beneath the surface, and are spread across three stations in Austria: Schönkirchen, Tallesbrunn and Thann.

In addition, another Austrian energy firm, RAG (a joint-venture of Eon and EVN, among others) owns an equal amount of storage capacity in Puchkirchen and Haidach. The storage at Haidach is a joint-venture between RAG and Gazprom.

OMV has plans to expand its overall capacity with the addition of new storage capacity near Baumgarten an der March. The reason is clear: ‘Storage allows us to offer physical flexibility to our customers’, says Steiner.

The market decides

So who will win the race to become the biggest Continental European gas trading hub? Or is it conceivable that the existing hubs will merge into one big trading hub, serving the entire European market? Steiner doesn't believe that will happen anytime soon. ‘The evidence indicates that there will be no single gas hub in continental Europe. There are still too many physical obstacles within the pan-European pipeline infrastructure. So this has to be a long-term goal.’

Until then, he says, the European gas market will remain fragmented with ‘regions defined by the regulators and by the markets’. And who will be the biggest? Steiner: ‘This is something that, at the end of the day, the market will decide.’

This article was first published as part of EER's sponsored E-World special supplement. You can find it here on our website.

 

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