Gas market: Saint Petersburg Mercantile Exchange sets new trading rules

Experts on what is missing in gas exchange trade

Gas market: Saint Petersburg Mercantile Exchange sets new trading rules Photo: weller.ru

It was 10 years since the on-exchange trading of diesel fuel and jet fuel in Oil Products section started at the Saint Petersburg International Mercantile Exchange last autumn. Over this time, the exchange has become the largest platform of the commodity market in Russia. Today, its participants are more than 2,100 organizations, and the number of traded instruments of commodity and derivatives markets exceeds 2,000. Realnoe Vremya investigated how Natural Gas section functions on the platform where the new rules of tendering has recently taken effect.

Parity principle in exchange sales did not work out

In 2014, the exchange launched gas trading. This was to serve to enhance the development of the Russian gas market and to provide the basis for market pricing for this product. For 3 years, the technical and regulatory framework was created, equal conditions for access to trading were provided, exchange instruments were introduced with gas supply for a month, a day, a non-working day.

The discussions on the need to reform the Russian gas market have been going on for decades. At the same time, despite many unresolved key problems (state regulation of wholesale prices, transparency of the tariff for the use of gas transport infrastructure or underground gas storage facilities), in a number of other areas progress is evident in departure from state regulation towards market-oriented industry.

“At the initial stage, various manufacturers rejected exchange trading mechanisms. But now the attitude has seriously changed — great support from Gazprom in particular. For the gas market, the exchange has become an important mechanism of competition for consumers, for entire regions and has made it possible to launch a real liberalization of pricing in this industry. It has been created a mechanism that works, and the increasing role are played by the factors of economy, efficiency, competition,” said president of the Saint Petersburg International Mercantile Exchange Alexey Rybnikov in an interview with Vedomosti.

Photo: theco.ru
For the gas market, the exchange has become an important mechanism of competition for consumers, for entire regions and has made it possible to launch a real liberalization of pricing in this industry

At the stage of launching the exchange trading, it was planned to observe equality in terms of gas supply volume to the exchange market between Gazprom and independent suppliers (Novatek, Surgutneftegas, Rosneft, Lukoil). However, the declared parity principle in exchange sales did not work out. If in 2015-2016 the share of Gazprom in trading ranged from 50% to 65%, in recent years it has grown to 90%. The current situation is significantly affected by the lack of sufficient volumes of contract-free gas from independent producers. For example, Novatek directs additional volumes of gas to the production of liquefied natural gas (LNG) to Yamal LNG for subsequent export; Rosneft signed a contract for the purchase of 5 billion cubic metres from Gazprom in 2018 to fulfil its contracts. As a result, the potential for further growth was exhausted.

Exchange market still lacks sales volume

For clarity, we can compare the performance of previous years. For example, the trading volume of Natural Gas section in 2018 amounted to only about 15,1 billion cubic metres, which is by 25,6% less than in the previous year (out of which contracts with the supply “for the next month” accounted for 12,5 billion cubic metres, and contracts with the supply “for a day” — 2,6 billion cubic metres). At the same time, since 2016 the volume of exchange gas from independent suppliers has been steadily declining, and the number of purchasers has been increasing.

In 2018, the demand for exchange-traded gas significantly exceeded the supply. First of all, this was due to a decrease in the volume of gas sold by Gazprom itself, as well as a reduction in the volume of supply and the departure from trading by independent producers.

To solve this problem, the Federal Antimonopoly Service of Russia (FAS) sent draft regulations on the liquid market parameters and on exchange balancing to the ministries for consideration. It is expected that the documents will be met with objections, as the issues of balancing and amending the rules of gas supply will affect the entire population, all consumers. The new regulations describe, among other things, the approaches to ensuring market liquidity: instead of the requirement for Gazprom and independent suppliers to sell equally 17,5 billion cubic metres of gas a year each at the exchange, Gazprom will be required to sell at on-exchange trading at least 6% of the produced commercial gas, and other suppliers — at least 10%. Thus, the share of permitted volumes of Gazprom will be increased from 17,5 billion cubic metres to at least 35 billion cubic metres.

In 2018, the demand for exchange-traded gas significantly exceeded the supply. First of all, this was due to a decrease in the volume of gas sold by Gazprom itself, as well as a reduction in the volume of supply and the departure from trading by independent producers. Photo: dp.ru

According to market experts, such step can lead only to a weakening of competition: in fact, the dominance of Gazprom will increase, and independent producers will have no incentive at all. Gazprom, being also the sole owner of the gas transportation system, can use the exchange as an instrument of non-competitive struggle.

We may, for example, recall a relatively recent move, when at the end of September — beginning of October last year Gazprom unreasonably stopped the supply of gas volumes on a daily exchange. Given that Gazprom provides about 90% of sales, the company's withdrawal from trading actually meant their termination. At that time, Gazprom justified this by the need to fill underground gas storage facilities before the start of the heating season and by that all planned volumes had already been sold at trading for a month ahead. However, experts assumed that in this way Gazprom reminded of its importance to the government, which attempted to support independent producers.

The exchange market still lacks sales volumes, both on “monthly” and “daily” trading. The basic realization of the exchange-traded volume at the moment is on the basis of KS Nadym, and on the basis of supply Lokosovo the market price has been virtually unabated for the past several months.

Experts have formed the assumption that Gazprom enters the exchange both as a buyer and as a seller, and consistently concludes transactions with itself, trying to avoid price lowering for everyone. In fact, the exchange becomes a tool for “pumping” gas by Gazprom from the regulated sector to unregulated one.

Specialists of Tatarstan TGC-16 JSC energy company tracked sometimes not quite logical flow of exchange trading sessions. Photo courtesy of the press service of TGC-16

The specialists of the Tatarstan energy company TGC-16 JSC tracked sometimes not quite logical flow of exchange trading sessions. At the daily trading with a half-hour time limit of the trading session, the bulk of transactions was sometimes made in the first 10-20 seconds, and in the remaining time the offered price did not change and, accordingly, did not satisfy the requests of buyers. On the monthly exchange, the price offered by suppliers at on-exchange trading has not changed over the past few months, and in conjunction with the transport component is even higher than the price offered by the FAS, which does not allow TGC-16 to buy exchange volumes, experts of the company note.

Plans for further development of trading

The previous strategy for the development of SPIMEX was approved for a three-year period. Over this period, a full-fledged holding has been built, including the exchange, clearing organization and electronic trading platform.

Now a new document has been prepared — a long-term strategy designed for 5 years. It is planned that the multi-industry digital platform will bring together all products for the spot, derivatives and OTC markets. This should primarily help traders to find the best solutions for all issues related to the sale, purchase, movement, insurance of goods and other related services.

Photo: iz.ru
Gas is now traded in the realities of the existing regulations. To move forward, we need to change a number of government resolutions, amend the joint orders of the ministry of energy and the FAS, and take strict administrative measures

President of the Saint Petersburg International Mercantile Exchange Alexey Rybnikov noted:

“Gas is now traded in the realities of the existing regulations. To move forward, we need to change a number of government resolutions, amend joint orders of the ministry of energy and the FAS, and take strict administrative measures. If at one time the state did not hesitate to do it in the oil product market, then why hesitate in the natural gas market? Specific actions regarding the development of gas exchange trade are also stated in the national plan and in the roadmap for the development of competition in Russia, nothing needs to be reinvented. We only need the political will to implement all this.”

Commercial balancing

The talks about the need to create a commercial gas balancing have been going on for a long time.

Commercial gas balancing involves the sale of deficiency gas or the purchase of short-delivered gas volumes under the exchange or OTC contracts. It is planned to create a system of secondary resale of the volumes unused under exchange contracts. It concerns selling out the resold or unused volumes of gas in the mode of direct contractual relations.

At the first stage, it is planned to balance the volumes traded on the stock exchange, but unused, because there is a certain share of non-fulfilment under exchange contracts in the gas market. The next stage is the transition to a full-scale balancing system, for which it will be necessary to solve the issue of guaranteeing suppliers and buyers. The project of commercial balancing of gas trading is planned to be completed in 2020, which will make the exchange price of gas a more liquid indicator than it is now.

In general, the action programme has been worked out quite well, but a number of fundamental issues will need to be resolved. Including the introduction of a balancing buyer and seller into the technological scheme of trading, so that at any time unbalanced volumes could be sold to someone or bought from someone.

In addition, the Bank of Russia is expected to issue a regulatory document. Photo: vladtime.ru

In parallel, a necessary condition is the creation of a commodity supply operator in the natural gas market, which should be Gazprom Group.

In addition, the Bank of Russia is expected to issue a regulatory document defining that the commodity supply operator can operate not only on the basis of storage contracts, but also in other cases, taking into account the peculiarities of natural gas supply.

The principal point related to the effect of commercial balancing is one hundred per cent performance of supply contracts and the reduction of costs for producers and suppliers to manage unused volumes, the abolition of the “take-or-pay” principles. The same applies to the principle of extra volume or shortage of gas, when the buyer can buy by 20% more gas than the planned daily rate or buy by 10% less gas without penalties. This principle leads to an excessive statement of volumes in the gas transportation system, violates the market balance, affects the gas deficit for exchange trading.

It is planned that the balancing system will work with the volume of exchange trading at at least 10% of consumption in the industry and electricity generation. This level of sales by manufacturers is provided by the draft regulations.

Gas market development

Last August, the government of the Russian Federation approved roadmaps for the main industrial commodity markets. In particular, a road map containing measures for the systematic development of on-exchange natural gas trading, the formation of market prices, the involvement of economic entities to participate in exchange trading was approved.

The plan provides for increasing the availability of gas transportation infrastructure of main gas pipelines, ensuring non-discriminatory access of independent organizations to gas transportation services. It is planned to improve the order and form of information disclosure by gas distribution organizations, establish a single tariff for gas transportation for all gas suppliers. It is also planned to increase the volume of natural gas sales at on-exchange trading.

The roadmap for the development of competition in the field of gas supply consists of three blocks. The first concerns issues of access to natural monopolies, including the improvement of the tariff system. The second is devoted to measures to develop on-exchange trading of natural gas. The third is the measures that are necessary for the development of the domestic gas market relative to the current state.

Now the issue of improving the methodology of tariff formation for gas transportation services is under discussion, in which the key condition is the equality of working conditions of independent companies and Gazprom PJSC. Photo: teknoblog.ru

In this regard, the draft resolution of the government of the Russian Federation on the development of market principles of pricing in the domestic gas market has been developed and is under discussion with interested departments and organizations. The document provides:

  • abolishment of state regulation of wholesale gas price (except for the population and groups equated to it), implemented by Gazprom PJSC and its affiliates;
  • establishment of a single tariff for gas transportation through main gas pipelines for independent gas producers, as well as for Gazprom PJSC and its affiliates.

As a result of the FAS's proposals for deregulation in the gas supply market, the price of gas for industrial consumers should consist of the unregulated wholesale price of the gas supplier (Gazprom, Rosneft, Novatek, etc.), the tariff of Gazprom PJSC for transportation through the unified gas supply system, the tariff for transportation through independent trunk taps (for companies not affiliated with Gazprom PJSC) and the tariff for transportation of gas distribution organizations.

Also, the issue of improving the methodology of tariff formation for gas transportation services, in which the key condition is the equality of working conditions of independent companies and Gazprom PJSC, is currently under discussion.

FAS Russia has also developed a draft resolution of the government of the Russian Federation, which includes changes to the existing rules of non-discriminatory access. In particular, there will appear a new section related to the technological connection to the trunk systems. This issue is of great importance for the development of both gas companies and gas consuming organizations. The regulation also introduced a new section on access to UGS (underground gas storage) systems.

What will help gas exchange trading

As the main measures to improve the exchange gas trading, SPIMEX experts of the market distinguish:

  • abolition of parity principle. For the formation of full-fledged indicators on the exchange gas market there should be sold at least 20% of the volume of supplies to the domestic market (or 10% of the production level), that is 70-80 billion m3/year. Therefore, the first step should be the adoption of decisions abolishing the parity principle and increasing the permitted volume of exchange sales of gas produced by Gazprom and its affiliates from 17,5 billion m3/year to 35 billion m3/year;
  • minimum volume of sales. It is necessary to adopt a regulatory legal act establishing a minimum amount of gas sale at on-exchange trading, which is mandatory for Gazprom and independent producers;
  • eliminate uneven selection. To amend the rules of gas supply changes, eliminating the unevenness of the selection by days within a month without penalty, and to provide gas consumers with the possibility of selling unused volumes/purchase of short-delivered volumes at on-exchange trading of gas;
  • formation of equal conditions for the transportation of gas supplied under OTC and exchange contracts. Changes in the system of tariffs for gas transportation, providing for the application of tariffs for gas transportation services through the main gas pipelines under the “input-output” scheme, focused on trade at virtual balance points;
  • simplified procedure of access of sellers and buyers of exchange gas to gas transportation services via main and distribution pipelines, as well as informing traders about free capacities at the points of entry and exit from the gas transportation system.

Summarizing, we can conclude: the government of the Russian Federation, the Federal Antimonopoly Service of the Russian Federation and SPIMEX JSC attempt reforming the natural gas market, development of competition in the gas sector. Whether the further development of the gas market with the adoption of new rules and regulations will be able to move from the dead point or everything will remain only on paper — it will become clear in the next 2 years.

TGC-16 JSC, one of the leading consumers of natural gas in the Republic of Tatarstan, is seriously concerned with the question of development of the stock market.

“TGC-16 buys exchange gas sold on the delivery basis of Lokosovo and Nadym. According to the results of trading on the commodity exchange in Natural Gas section, held in the 1st half of 2019, we can note the trend of increasing the number of buyers while the reducing volume of gas sold by 19% compared to the first half of 2018,” says head of the department of heat and fuel supply at TGC-16 Fyodor Kosurov. “From the trading held in May with the delivery a month ahead, it is clear that the volume of unsatisfied demand of buyers amounted to 1,068,100 thousand cubic metres, in comparison, at the trading last May, the volume of unsatisfied demand was fixed at the level of 505,400 thousand cubic metres. At the same time, in May 2019 the volume of gas sales amounted to 915 500 thousand cubic metres, and in May 2018 — 962 200 thousand cubic metres,” the interlocutor adds.

According to the TGC-16 specialist, the decrease in gas sales volumes, the increase in demand from consumers and the high price reduce the interest in the commodity exchange in Natural Gas section. Photo: Maksim Platonov

According to Kosurov, there is also a significant increase in the price of gas on the exchange, which does not allow TGC-16 to purchase fuel due to the lack of a positive economic effect.

“Let’s look, for example, at the trading held in May 2019 with a delivery period for a month ahead. The price on the delivery basis of Lokosovo amounted to 3454 rubles including VAT. Taking into account all components of the price (tariff for transport services, payment for supply and sales services, etc.), the total price of exchange gas for 1 thousand cubic meters was 4,778,75 rubles without VAT, the total price of 1 thousand cubic meters of gas supplied at the price of FTS at current rates in the Republic of Tatarstan, for TGC-16 at the moment is 4,620,2 rubles without VAT. Thus, there is a significant difference in the prices of exchange gas and gas supplied at FTS tariffs. In this case, the difference was 158,73 rubles without VAT for 1 thousand cubic meters, which makes the purchase of gas on the exchange economically unprofitable and impractical for TGC-16,” the expert admits.

All these factors (decrease in gas sales volumes, increase in demand from consumers and high price), according to the expert of the energy company, reduce the interest in the commodity exchange in Natural Gas section.

By Alina Gubaydullina