The Institute of Energy for South-East Europe (IENE) announced the results of a major research project on the conditions and prospects for establishing a Regional Gas Hub for Southeast Europe in Athens on November 4. The European gas sector is facing major challenges affecting the way natural gas is traded and priced. Oil indexation is the dominant pricing mechanism, but is currently under increasing pressure as trading is gradually shifting to indexation on hub market prices. Gas hubs are virtual or physical locations where buyers and sellers of gas can meet and exchange gas volumes. In other words, gas hubs are marketplaces for natural gas. At present, as IENE notes, there is neither a market mechanism to buy or sell gas in an efficient manner in Southeast Europe, nor a price discovery mechanism to determine spot prices, and gas exchange is based on bilateral agreements. Today, there are nine natural gas hubs operating across Europe. Oil-indexed gas prices have been associated mainly with long-term contracts while hub prices have been associated with spot or short-term contracts. Oil-indexed long-term contracts prevailed in the gas sector because they were considered to ensure investment security for the producer as well as security of supply for the consumer. On the other hand, a gas price mechanism which reflects the market value of the product should be considered as a natural evolution for the pricing of a commodity. Indeed, long-term contracts with prices linked to a gas market would ensure a price level reflecting the balance of supply and demand of the product in addition to security of supply. As the IENE study emphasises, Europe sees an important opportunity to meet its energy needs by developing the Southern gas corridor, at the core of which are gas supplies from the Caspian area, including Azerbaijan and most likely in the far future from Turkmenistan, Kazakhstan and Iran and possibly from the Middle East - Iraq. Southeast European countries - Greece, Croatia, Bulgaria, Romania, Turkey and Serbia - have well established gas markets, with supplies coming primarily through imports from Russia and, in the case of Turkey, from Iran and Azerbaijan also. Greece and Turkey, which have LNG terminals, also import from Algeria, Nigeria, Qatar and from other LNG suppliers. Two countries have a significant proportion of their demand met from domestic supplies - Croatia, Romania - and three others cover small percentage shares from domestic gas - Bulgaria, Serbia, Turkey. According to IENE forecasts after 2018-19 some marginal gas quantities will become available in the Southeast European region which could be traded and therefore, as far as trading is concerned, the need will emerge for market prices to be determined. Turkey is already a major gas importer from Russia, Iran and Azerbaijan. In the future Turkey is likely to get gas also from Kurdistan, and most likely from Iraq. In addition, LNG will be another important player in the market, as there are plans for new LNG import terminals in the region. Already two FSRU[1] units are planned to be based in Kavala and Alexandroupolis in Northern Greece, with the prospect of feeding gas quantities into the Greek, Bulgarian and Turkish natural gas systems. The Trans-Anatolian Pipeline or TANAP, whose construction is due to start in 2014, will be connected to Greece through the Trans-Adriatic Pipeline (TAP) pipeline. In addition to Azeri gas, TAP could be used to transport North African gas to Southern Europe and Turkey via reverse flow. There will also be a connection between Greece and Bulgaria and Bulgaria to Turkey via new interconnector pipelines. The immediate result of all of this is that there will be certain gas quantities available for trading outside long-term contracts. Consequently, the establishment of a natural gas trading hub initially to enable trading between Greece, Bulgaria and Turkey, will ensure the determination of market prices through the exchange of marginal gas volumes. The IENE Study Project was sponsored by a number of companies and organizations, including Greece’s Public Gas Company SA (DEPA), the Hellenic Gas Transmission System Operator SA (DESFA), the Hellenic Exchanges Group, the Gastrade Co, partner of Prometheus Gas SA, and the Operator of Electricity Market SA (LAGIE).
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