LTCs: Reality of Margins Distribution on EU Gas Market Sergei Komlev and Alexey Gnatyuk Contract Structuring and Price Formation Directorate Gazprom Export 2 th Meeting of the EU-Russia GAC s Work Stream on Internal Market Issues Vienna, July 1, 216
LTCs Set Ceiling for Prompt Prices which Creates Tension in Relations of Suppliers with Midstreamers Leading to Contract Price Downward Revisions Hub prompt prices are derivatives of the LTC prices although with a negative premium embedded in them 6 $/Mcm $/MBTU 16 5 14 4 12 1 3 8 2 6 1 Seasonally diverged Systematically diverged Convered 4 2 Contract price range in Europe TTF 1st Month Making contract and hub prices comparable simply by lowering contract prices leads to a new cycle of downward adjustments in the hub prices. Current hybrid pricing system is a kind of magic circle: adjusted LTCs prices shape hub prices, which in turn settle below contract and initiate a new round of renegotiations. ZMB 2
Convergence of LTCs and Prompt Prices Gives Relief in Relations with Clients but It Could Be Short-Lived as Negative Premium Reemerges 3 12 25 1 2 8 15 6 1 4 5 2 Brent, USD/bbl., right axis BAFA TTF DA aver. Oil 9m MA, right axis ZMB 3
There are Several Reasons Why Calls to Lower Contract Prices to Prompt and Below Prompt Levels are not Justified Hub prices represent product of inferior quality compared to contract prices as LTCs provide security of supply and flexibility Classic activities of selling gas to end-users offer utilities/ midstreamers positive margins compared not only to hub but to import prices as well Despite growing margins in selling gas to end-users that activity is loosing in prominence to trading for utilities/midstreamers Comparison of prompt and contract pricing does not reflect realities of the EU gas market: contract prices should be compared to historic futures/forward prices which fundamentally determine profitability of utilities/midstreamers Historic futures/forward prices tend to be higher than contract prices offering positive spreads to the buyers ZMB 4
Price of Imported Pipeline Gas Versus End-user Prices, Germany BAFA compared to end-user prices by category, in USD/mcm without taxes Price difference to BAFA, in % Source: BAFA, Eurostat ZMB 5
Price of Imported Pipeline Gas Versus End-user Prices, France BAFA compared to end-user prices by category, in USD/mcm without taxes Price difference to BAFA, in % Source: BAFA, Eurostat ZMB 6
Price of Imported Pipeline Gas Versus End-user Prices, Italy BAFA compared to end-user prices by category, in USD/mcm without taxes Price difference to BAFA, in % Source: BAFA, Eurostat ZMB 7
Trading Overshadows Classical Activities in the E.On Group 18 16 14 12 1 8 6 4 2 Bcm 167.3 +16% 13.4 118.5 112.9 17.6 113.8 123.8 6.2 59.9 47.5 47.5 69.4 32.1 24. 29.5 32.4 22.9 21.8 17.8 17.1 17.9 14.7 11.7 11.4 13.2 12. 12.2 11.5 9.7 1.3 21 211 212 213 214 215 Other countries (non-eu) Wholesale Segment/Energy Trading Sales Partners Industrial & Commercial Residential and SME Source: E.On s Annual Reports ZMB 8
Trading Volumes by Utilities/Midstreamers are Higher than Gas Consumption in the EU Countries 18 16 14 Bcm 167.1 12 113.6 1 8 6 4 78. 4.9 46. 35.7 8.6 8.6 63.3 43.7 58.4 36.2 84.7 84.7 2 8. 8.6 Engie OMV VNG Uniper Engie OMV VNG Uniper 214 215 Total Sales Indigenous Consumption Source: IEA, Companies Annual Reports ZMB 9
Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Forward Year-Ahead Prices Traded for Three Years Prior to Physical Delivery Tend to be Higher than Prompt and Contract Prices 7 16 6 14 5 4 3 2 1 12 1 8 6 4 2 Brent, USD/bbl., right axis BAFA TTF DA aver. DY 21 DY 211 DY 212 DY 213 DY 214 DY 215 DY 216 DY 217 DY 218 DY 219 Oil 9m MA, right axis ZMB 1
Due to Monetization of Firm Delivery Obligation under LTCs, Historic Forward Prices Determine Profitability of Utilities/Midstreamers rather than Prompt Although spread between contract and prompt prices widens utility turns a profit Although spread between contract and prompt prices contracts utility makes losses Δ 1 LOSSES Forward Price Forward Price Δ 2 LOSSES PROFIT PROFIT Δ 2 Δ 1 ZMB 11
USD / mcm Disappearing Mirage : Prompt was Lower than Forward Prices for Winter Gas in 8% of Cases (1) 6 5 4 3 2 1 Average forward and prompt (actual) TTF prices for winter gas Discount -44,4% -4,4% 15,3% -13,% 1,9% -4,% -25,7% -47,3% Winter months 8/9 9/1 1/11 11/12 12/13 13/14 14/15 15/16 Forward price for winter season Prompt price for winter season Average forward price for winter season, 28-216 Average prompt price for winter season, 28-216 Number of observations Number of cases, when % of cases, when prompt was lower than actual price was forward lower than expected Number of observations 8/9 127 1 127 9/1 127 1 127 1/11 17 13 127 11/12 122 96 127 12/13 68 54 126 13/14 92 72 127 14/15 127 1 127 15/16 126 1 126 8-years total 86 79 114 In 28-216 actual prices in winter seasons were lower than expected in 86 of 114 cases (79%). As winter comes hub prices settle below historic forwards ZMB 12
Disappearing Mirage : Forward Prices for Winter Gas were Higher than Contract Prices on Many Occasions (2) 4% 2% % -2% -4% -6% 4% 2% % -2% -4% Relative differential TTF- historic forward and TTF-LTC prices for winter gas, 28-216 8/9 9/1 1/11 11/12 12/13 13/14 14/15 15/16 TTF(F) minus OIC Average deviation, TTF(F) minus OIC 8/9 9/1 1/11 11/12 12/13 13/14 14/15 15/16 TTF(F) minus QOIC Average deviation, TTF(F) minus QOIC TTF(A) minus OIC Average deviation, TTF(A) minus OIC TTF(A) minus QOIC Average deviation, TTF(A) minus QOIC Monthly expected and actual prices for winter gas TTF(forward)> LTC (actual) Number of observations Typical long-term contracts Oil indexed Quasi-oil indexed 27 52 93 93 Share (%) 29% 56% TTF(actual)> LTC(actual) Number of observations 2 8 48 48 Share (%) 4% 17% In third to half of months observed (depending on a contract) forward prices for winter gas were higher than actual contract prices. Monthly average actual TTF prices in winter were typically below contract prices due to arbitrage opportunities. ZMB 13
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Disappearing Mirage : Forward Market Compensates Negative Spread between Prompt and Contract Prices for Winter Gas (3) Average relative TTF forward and actual prices compared to LTC prices, 28-216 4% Forward Fact 2% % -2% -4% TTF - Quasi-oil TTF - Oil-index Over the last eight years, forward prices for winter gas for consequent year were as a rule in line with contract prices and resolutely higher that prompt prices when physical deliveries start off. Expectations for high winter prompt prices were disappearing as mirage in the desert as winter comes. Trajectory of average relative prices for the last 8 years (28-216) points to the highest relative TTF prices for the last six month prior to forward contract expiration and physical deliveries kick off. Relative price contraction starts a month before forward contract expiration and resumes in the winter months. ZMB 14
Disappearing Mirage : Comparison of Expected and Actual Prices for Calendar Year Delivery Period (1) USD / mcm Deviation of expected and actual prices for delivery period (TTF Calendar Year, Day Ahead) * Year of delivery % of cases, when actual price was lower than expected Number of cases, when actual price was lower than expected Total number of observations 21 1% 253 253 211 87% 218 251 212 54% 136 252 213 1% 25 253 214 94% 239 253 215 1% 253 253 Total 74% 1124 1515 38 36 34 32 3 28 26 24 22 2 21 211 212 213 214 215 Average day ahead price Average forward price 6-year average day ahead price 6-year average forward price Estimated average of forward TTF prices which are traded daily for 36 month (3 year) before the period of delivery (1 year) is compared to actual Day Ahead prices during the period of delivery Factual evidence shows that in 21-215 forward TTF prices were higher than actual prices in 74% of observations, or 1124 out of 1515 Источник: BAFA, Bloomberg ZMB 15
Disappearing Mirage : Comparison of Expected and Actual TTF Prices for Calendar Year Delivery Period to Contract Prices (2) Deviation of expected and actual prices in the delivery period (TTF Calendar Year, Day Ahead, BAFA average import price) * Forward (first 32 month) Number of observations 184 TTF>LTC 9 % 49% 1% % Forward (4 months prior to delivery) Number of observations 24 TTF>LTC 5 % 21% -1% Fact Number of observations 72 TTF>LTC 1 % 14% -2% 21 211 212 213 214 215 216 Forward 32 minus LTC price Average deviation 21-216, Forward 32 Forward 4 minus LTC price Average deviation 21-216, Forward 4 Prompt minus LTC prices Average deviation, Prompt 21-215 Daily observations for 36 months of trading (before delivery period) and 12 month of delivery period. Trading period was split into two intervals: Last 4 month of trading (close to delivery) Previous 32 month (distant to delivery) Distant to the deliveries monthly average forward prices exceeded contract prices in half of the observations. BAFA prices stayed higher in only 21% of cases within four months prior to delivery start off. In 1 cases out of 72 prompt prices were higher than BAFA. Источник: BAFA, Bloomberg ZMB 16
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E.On Group Volumes of Gas-Related Derivatives 8 7 Nominal value (euro in millions) 6 5 21948 4 5413 9724 12344 3 2 1 1585 111 3213 53 45231 35156 1 2871 21947 23914 2288 3762 34697 12932 27 28 29 21 211 212 213 214 215 Gas forwards Exchange-traded gas forwards Gas options Gas swaps Source: E.On s Annual Reports ZMB 18