Competing Gas Hub theories and the Europeanisation of Energy Politics

June 22, 2015 | 00:00
Competing Gas Hub theories and the Europeanisation of Energy Politics
Competing Gas Hub theories and the Europeanisation of Energy Politics
The EU’s revamped energy security strategy, combined with significant geopolitical and market developments in the Union’s south-east corner, have raised the regions significance on the EU agenda. New pipeline interconnection projects, LNG capacity extensions as well as the potential for domestic production have triggered discussions with regards to the potential establishment of a natural gas trading hub, with the European Commission notably alluding to a Mediterranean Gas Hub in its energy security strategy last year.

The regional governments’ desire for the establishment of such a hub within their territories has been exceptional, and countless discussions have taken place in various platforms on this precise issue. Nevertheless, an ingredient which has been largely missing from these discussions has been a clear definition of what a natural gas trading hub is, as well as the benefits and requirements for a host country.

Looking into the definition of a natural gas trading hub - which can differ depending on the maturity of the markets which it serves - a natural gas trading hub is a platform which facilitates the physical and/or financial trading of natural gas. The main pre-requisite for a natural gas trading hub to be able to function, apart from the necessary regulatory framework and a fully liberalized market, is the existence of multiple suppliers and buyers. This is because these actors will have the role of determining the market price through the process of bidding and offering, which leads to the issue of liquidity, as the traded volumes must be significant enough to maintain a market driven benchmark.

What kind of gas hub?

Typically, gas hubs can be virtual (balancing) and/or physical. In the case of virtual gas hubs the hub provides a trading platform for the entire country or a trans-regional zone, which allows all gas to be injected into the grid at any point within the zone through a tightly meshed system (the point of extraction matters less).

The physical hubs in turn are established at a physical intersection of pipelines, therefore the traded gas has to pass through a precise location. Although the virtual trading hubs offer more flexibility with their entry-exit system, an advantage of the physical gas hubs, is that it has the capacity to transport large volumes of gas.

Both formats deliver significant benefits for the host country, which apart from financial are also qualitative, as the functioning of a hub foresees the creation of jobs for a highly skilled work force. From a political standpoint, it is evident that a hub can also increase a country’s position on the geopolitical chessboard.

The South-East European markets are lagging behind compared to their western counterparts. This is due to factors restricting the demand and supply of these markets. On the one hand, the number of suppliers is limited; while on the other, the existing infrastructure networks are scarce, the lack of interconnectors is yet to be resolved and lack of adequate storage capacity does not help. Simultaneously, the issue of pricing transparency and liquidity also pose a restrictive factor which will have to be addressed along with the market culture which, at present, is not conducive to the trading of natural gas. Energy markets in South-East Europe remain largely under the control of state-owned entities operating in closed environments; thus the EU’s goal of inspiring market liberalization is an objective welcomed by energy players who aspire for a more competitive and open energy market environment.

Taking into account all the above, it is clear that the development of trading hubs in South-East Europe, be they virtual or physical, will be a long process; nevertheless, the first steps are clear as the construction of the physical infrastructure is a prerequisite in both cases, followed by diversified supplies from exporting countries, and also production of indigenous resources which is a game-changing factor for any economy.

State of play

One can name about half a dozen Projects of Common Interest (PCI) and other initiatives envisaged in Greece, Romania, Croatia and Bulgaria, which are certainly important for improving regional interconnectivity and energy security, along with the upstream initiatives in the respective countries. All of these projects are well known and have been fiercely promoted by the governments over the past years.

Nevertheless, the main question in people’s minds remains unanswered by the regulatory bodies promoting this wide number of projects: where will this new hub be based? This uncertainty has led regional governments into a race to the finish line. Competition could prove to have a positive effect in this process, as the sense of urgency might lead the governments to act more decisively. However, it might also lead to the unharmonious development of a region in which interconnectivity, coordination and regional cooperation with the aim of building an integrated energy market should be primary objectives. The reality of the energy industry is that it is never a sprint to the finish, but a marathon which is predicated on win-win scenarios. In this case, this is a process that will take time and effort, regional cooperation, investments from private and public actors with the backing of EU and independent financial institutions - and they would all have to see the ‘win’ before they buy in.

National approach vs. European approach

The future is unknown, but when it comes to energy markets, which are highly capital-intense, once a player secures market dominance, it is very hard for it to be displaced. The country that will manage to take the first decisive steps towards the development of the right projects and infrastructure will probably be the one which will manage to lead as a key player in the regional gas trading zone. But is this the optimal solution for the region?

Applying the theory of the recently deceased Nobel Prize winner, John Nash: cooperation between the countries in the region for the establishment of a regional solution would optimize the returns of all the actors involved, as it would prove central for lifting the trans-national projects, and it would be able to absorb the comparative advantages of each country involved. What is more, the political benefits of cooperation in the energy sector would be immense for a region, which has always been characterized by inherent political fragility and tensions.

The EU has the tools and policies to drive this agenda forward. Already, through the Energy Union, the EU is advocating for an increase in the powers of the Agency for the Cooperation of Energy Regulators (ACER) and a regional approach to energy policy decisions and combatting potential disruptions. Energy policy choices of one member state affect the choices of another and we expect that the aforementioned issues addressed in this article will be covered at length in the second meeting of the fledgling Central East South Europe Gas Connectivity Group (CESEC) on July 10th in Dubrovnik. Thus, an optimal solution to competing hub theories can be found through the Europeanisation of South-East Europe’s energy markets.

Dr. Angelos Gkanoutas-Leventis is Vice Chairman of the Greek Energy Forum. Constantinos Levoyannis, Daria Nochevnik and Christos Brakoulias are deputy heads of Greek Energy Forum in Brussels. The opinions expressed in the article are personal and do not reflect the views of the entire Forum or the companies that currently employ the authors.

This article is part of the knowledge partnership between European Energy Review and the Greek Energy Forum a group of energy professionals sharing common interest in the broader energy industry in Greece and South-eastern Europe.

Follow Greek Energy Forum on Twitter @GrEnergyForum.

Image: Gas Pipeline by Roger May. CC-license
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