A recent study by Cassa Depositi e Prestiti (Gas Naturale, March 2013) outlines an accurate analysis of the major changes taking place in the international and Italian energy scenario and relaunches the project to create a gas hub in Italy for southern Europe. The idea is not new, it was hypothesized by Edison more than five years ago, and is now among the qualifying projects of the National Energy Strategy document (Sen) presented by Minister Passera in autumn 2012.
In fact, for some time now, the gas market has been trying to equip itself with flexible instruments to regulate the balance between supply and demand and therefore to determine the price. But let's take a step back, to the very beginning of the development of the gas market. The infrastructures needed to bring gas from the production markets (essentially Russia and North Africa) to Europe were planned by the national oil companies (in Italy by ENI) on the basis of forecasts of increased consumption in each country. Forecasts that in those times of constant growth in consumption and predictable energy mix were confirmed with great regularity by the actual market demand data. The adoption of take or pay contracts with very limited flexibility (usually 10%) was therefore justified and reasonable, and the price formula linked to oil trends was the only practicable one, since there is practically no spot gas market.
Today this world has profoundly changed. There is no longer the certainty of constant growth: after 50 years, in 2007 methane consumption fell sharply following the economic crisis, and it is not expected to return to the pre-crisis level until around 2020. And also the predictability of the mix energy has suffered a severe blow: just think of the cancellation of the Italian nuclear program and the boom in renewables.
In Italy, 2007 MW of photovoltaic plants have been built since 12000, thanks to a particularly favorable incentive, which have reduced the production of combined cycles precisely during peak hours (the most profitable ones), thus further contributing to the reduction in demand for gas. And the geopolitics of the producing countries has also changed. With the development of liquefaction techniques, new producing countries such as Qatar have forcefully entered the scene, offering with LNG tankers an alternative to the intrinsic rigidity of gas pipelines. And more recently, with the development of shale gas exploitation techniques, the United States has transformed itself from a net importer to a self-sufficient country and, in perspective, to a net exporter.
Decline in demand on the one hand and increase in supply on the other have caused quite a few upheavals on the market. The price of methane until 2007 was almost identical on the American, British and Japanese hubs, equal to about $6 per Mbtu. In 2011 in the USA it had fallen to $2, in Great Britain it had remained around $6, while in Japan it had risen to $12. In Italy the average market price was between the English and Japanese prices. It is clear that such a market needs to be reorganized in order to arrive at the same price of the commodity throughout the world, except for the different cost of transport to the final consumer.
With this in mind hubs come into play: physical trading posts, where gas from various sources flows together to then be sorted to the consumer markets. Hubs already exist in Northern Europe, serving the production areas of the North Sea. But they do not exist (Southern Europe) or are scarcely liquid (Eastern Europe) where gas production is marginal compared to consumption and the requirement is met to a large extent by gas pipelines from Russia and North Africa. A Hub in Southern Europe (and Italy would be in an ideal geographical position) and one in Eastern Europe (making the existing hub in Austria more liquid), combined with those already operating in the Northern markets, could constitute a formidable integration tool between the various markets.
Naturally, the three poles should be connected to each other with adequate transport capacity both on the north-south axis (as today) and in the opposite direction (the so-called reverse flow), left available to allow operators to make the appropriate arbitrage price and make the markets converge on a single parameter. This price would end up influencing that of take or pay contracts, gradually unhooking them from the price of oil.
Is this a realistic project or is it an idea confined to an unspecified future? Let's say right away that the producing countries do not welcome the creation of hubs that generate a "gas to gas competition" with long-term contracts. The current situation of oversupply on the markets has led to a downward renegotiation of the prices of long-term contracts, and any measure that further increases market liquidity is frowned upon by the producer countries. Moreover, the consuming countries would have everything to gain by creating a redundancy of supply to bring down prices. But to do this, free import platforms should be created for all operators to access and not bound by long-term contracts.
Indeed, the SEN (National Energy Strategy) envisages the possibility of building a new regasification terminal that is totally open to access by third parties, and regulated through the transport tariff. It is clear to everyone that, in the current Italian economic situation, a new regasification terminal is not justified, as it is redundant with respect to national needs for the next 10 years. Its realization must therefore be linked to the creation of a system of interconnected European hubs, to create a large European market. And it must be accompanied by a drastic revision of the existing take or pay contracts, in the sense of a lowering of the withdrawal obligations for importers, to free them from unsustainable commitments in an increasingly liquid market.
However, the move to reduce take-or-pay commitments could not be without dangers for consumer countries. In fact, gas could be permanently diverted to the East (China will become an ever increasing importer) generating supply security tensions in the medium term. Furthermore, any missing gas, no longer covered by price formulas, could reach punitive levels. The road to creating a gas hub in Italy is therefore still long and complex. It is necessary to choose among the various existing Italian projects which new structure to build. Once built, the new terminal needs to be connected to the network of gas pipelines and European hubs, ensuring the reverse flow from Italy to northern Europe. A European physical gas and futures market needs to be developed. At the same time, the structure of existing medium-term contracts must be changed, being careful not to fall into the gas shortage trap.
In short, the hub is a good project, but how much work there is to be done by so many actors with opposing interests! Without strong patronage from the European Commission, which aggregates the not always converging interests of the operators and faces a common front towards the producing countries, the European gas market will hardly see the light of day. And without a European market, a new regasification terminal located in Italy risks increasing the stranded costs of our energy system rather than creating the conditions for greater competitiveness.
