Brussels against TTF: why the EU does not want the main reference in the gas market


Times of crisis call for desperate measures. The President of the European Commission, Ursula von der Leyen, devoted much of her State of the Union speech to the energy crisis the community bloc is experiencing. Between the summaries of the measures and good intentions, with many still awaiting technical details, one acronym slipped to the bewilderment of most Europeans: TTF, the reference index in the gas market. The Community Executive has called for its reform, which is a step forward in greater state intervention in energy markets.

What does TTF mean and why is it so important to Europe?

TTF, which stands for Securities Transfer Facility, is a Dutch index used as a benchmark for the price of gas in Europe. The choice is not accidental or arbitrary: 73% of the total amount of gas coming into Europe in 2021 was negotiated in the Netherlands. This was not always the case until 2015-2019, when it overtook the UK market (NBP) as the continent’s leading stock.

The popularity of the Dutch market has a lot to do with the technical foundations that place it at center stage today. “TTF became the most liquid and trading reference in Europe, thanks to Abundant infrastructure with adequate available capacity on all interconnectorsEasy access to the global market for liquefied natural gas (LNG), solid underground storage capacity and gas pumping from Groningen (the largest reserves of this hydrocarbon in Europe)”, highlights International Energy Agency analyst Greg Molnar.

It is a “virtual” market, not physically located in one location, unlike its US counterpart Henry Hub. In the United States, futures contracts are settled in addition to price and location: supply travels through a series of interstate connections that are located in the state of Louisiana east of New Orleans. TTF, on the other hand, takes into account the gas that enters the 50 access points of the Dutch interconnected system. These gateways allow entry from pipelines, LNG carriers and local stores, but do not have a single central point.

What’s the problem with TTF?

Regardless of the interest of buyers and sellers, The price of TTF has tripled in the past year. Von der Leyen’s main criticism is that TTF is called a . not designed for The European gas market that has “changed significantly”, Data backs it up: Blocks received by August 65% more LNG supply Which reach the continent by sea. This increase seeks to compensate for the decrease in Russian gas arrivals through gas pipelines, which accounted for 35% of total imports in 2021 and reach only 20% today.

The Dutch infrastructure is operating at maximum levels, by changing the sources of supply reaching the European Union, and in particular the Netherlands. especially, Has local LNG regasification potential over 90% of its capacity. Since the TTF only considers the supply already in the network in the Netherlands, any limitation directly affects the available supply and, therefore, the price across the block,

Area sources in Spain, The country that has 35% of European LNG storage capacity, uncover this bottleneck and its effect on the entire block. “The index is weighed down by the current congestion for gas transport in Middle-Eastern Europe,” he says.

Naturgy’s president, Francisco Reyens, also criticized the Dutch TTF earlier in the month because it only represents a portion of the total European gas market but its volatility affects the entire bloc. “This is at the historical peak and already does not respond to supply-demand balanceA,” Raines said.

The problem is that, despite the lack of infrastructure available in other EU countries, the dominant position of the TTF prompts LNG carriers to use the TTF as a reference index or to link their prices to it, even if they There is a need to give gas at other places. have their own local markets in Europe, 62% of LNG trading contracts use TTF as a variableAccording to data from financial agency S&P Global Commodity. In other words, what happens to this index has a direct bearing on the ships visiting the area.

Are there other options?

In 2021, 73% of the total amount of gas coming into Europe was negotiated in the Netherlands.However, this does not mean that there are no other options on the continent. Trade in the Dutch market far exceeds this country’s domestic demand, which represents only 1% of the total turnover, but there is also European demand in general, reaching only 10% of the traded volume.

SEDIGAS, from the Spanish Gas Association, they state that TTF “It only responds to a reduction in internal demand in Central Europe and encourages sanctions.The employer considers that the index is different from international LNG prices, such as the JMK index of Asian markets, as well as the Spanish PVB, French PEG, and other European indicators.

The Oxford Energy think tank states that beyond the indices of the Netherlands and the United Kingdom, There are 9 other relevant markets in the regionIt does however differentiate between “active” and “poor”.

Although with little liquidity, low bidders and little incentive to participate, smaller markets like Spanish have come to register a strong price gap with TTFs. Sources in SEDIGAS suggest that this ‘spread’ can reach up to 100 euros in both the cash market and one-month futures.

What other options can the EU try?

The European Commission is planning to create a Benchmark for Liquefied Natural Gas (LNG) to determine fair, market-based prices for gas imports, according to several international agencies. The decision seeks to reduce the price differential between the various gas centers in the block, reduce market volatility, and better capture the 27’s available infrastructure.

Brussels intends a “parallel and more harmonized” parameter, which brings together “different EU indices for wholesale transactions”. The decision would “better represent the realities of the markets.” This would not require creating new indicators, but would give more relevance to existing indicators.

European Commission documents emphasize that nothing obliges operators to interact in the Netherlands virtual market, however. Exchange reliability and stable performance It has made it possible to provide a certain stability to the system even in times of crisis. A hasty change in the rules of the game could turn various segments of the market towards OTC (over the counter) operations, but at the risk of reducing transparency.

SEDIGAS explains that “it is necessary to find an alternative, another market index that is liquid and is representative of the world price of LNG”. On behalf of the organization they warn that “nor we can’t have anything”, as this would lead to arbitrarily setting the prices.

Other sources in the energy sector suggest that the creation of one or several new indices may be a solution, but only in the medium term, and warn that this should be analyzed in detail with industry.

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