Infrastructure and Trading in a Common European Gas Market The traders vision Copenhagen, 14th May 2004 Eric Bensaude Member of the EFET Gas Committee

Table of content EFET vision and roles Access to infrastructure Regulation Hubs The EFET standard trading contracts Conclusions

Members APT - Atel - Avenis - Barclays - BG International – BHP Billiton - BKW FMB – BP – BNP Paribas - British Energy - Cargill - Centrica – C.N.R. - Dalkia - Delta – Deutsche Bank – EconGas - EdFT - Edison Spa – EDP Energia - E.F.T. - EGL - Electrabel- El Paso - Elsam - Elyo - EnBW- Endesa - Enel Trade - Eneco - Enipower - Entergy-Koch - E.ON – ESB - Essent - E&T- GS - Fortum - Gaselys – Gas Natural – Getec - GEW Rheinenergie - Glencore - Goldman Sachs - H.S.E. – Hydro - Hidroelectrica - Iberdrola - Innogy – Kelag - Kom-Strom - Morgan Stanley – Magnox – Mark-E - MVM Rt. - MVV Energie - Nuon - ONS Energy – OstElektra - PowerGen – PSE Electra - Inter RAO UES - RWE Trading - Sempra – Shell Energy - Stadtwerke Hannover - Stadtwerke Leipzig - Statkraft – Statoil - Sydkraft – Syneco - Tiwag - Total – Trafigura - Trianel - Union Fenosa - Vattenfall – Viesgo - West LB - Zarubeshgaz represents more than 80 energy trading companies in 19 European Countries

Members

EFET - Roles To promote energy trading in Europe ( to increase market efficiency) Analyse barriers & obstacles for trade Lobby for removal of obstacles & barriers Promote standardisation

EFET – Vision Promote the development of a transparent and liquid European market in energy commodities & related products, achieved through : - Access to gas networks and storage infrastructures - Confidence in regulatory decisions - Confidence in the traded markets, not hindered by national borders or other barriers

Fair and non-discriminatory access to networks and storage is achieved through: Non-discriminatory access to information Third party access rules (negotiated or regulated) Promotion of secondary trading of capacity or a Use It Or Lose It (UIOLI) mechanism Promotion of the resolution of cross-border, entry, exit congestion issues

Role of regulators – EFETs position Promote fair and non-discriminatory access to networks and gas storage Regulators must - ensure tariffs are based on efficient incurred costs - oversee unbundling and development of competition - manage transition to market-based mechanisms (eg. Balancing versus penalty regime) and full competition

For an efficient and liquid traded market there needs to be sufficient harmonisation: Transparent Information Data exchange Products and Procedures Laws Regulation Tax European Contracts Organised Markets e.g. Exchanges or Hubs

What is a Gas Hub? A contractual point where buyers and sellers execute transactions for gas Hubs can be: Notional or physical Trans-regional (1 or more TSOs) or within-country (1 TSO) Hubs generally, consist of: Hub Services Agreement - Hub Operator own/draft Standard Trading Contract - Traders own/draft

Interconnection of transmission systems Multiple buyers and sellers Deliverability/Back up & down (storage) Standard trading contract Title transfers & matching system Price reporting Forward trading Infrastructure Systems & Commercial Arrangements Liquidity Low transaction cost Hub services Price transparency Risk Management Some basic requirements need to be in place for the existence of successful hubs Key Requirements Independent hub operator Impact Firmness

European Gas market ( past ) Transmission industry Consumer Distribution Supplier - marketer Producers LNG Storage No Customer Choice

European Gas market (near future) industry Consumers Distribution Energy traders Energy traders Suppliers - marketers Producers LNG Storage HUB unbundled Suppliers - marketers Contractual flows Producers Physical flows Customer Choice Independent Network Operators Transmission

The trading activity is supported by the existence of hubs and vice versa Hubs promote : A liquid source of supply, balancing, flexibility The pricing of flexibility Gas-to-gas competition Arbitrage between regions A forward trading market and the development of risk management tools End-user choice of supply Trading offers : Sourcing Liquidity Flexibility supply and pricing Price risk management Geographic arbitrage Time value arbitrage Asset optimisation Hubs enable a natural disconnection point between the upstream and the downstream, and allow the development of an efficient and competitive industry

Characteristics of notional hubs Contained within an entry-exit tariff regime Directly related to transportation access terms, although independent exchanges can still develop Can be influenced directly by a single regulatory authority Possible under a multi-node model (e.g. France) but with risks of fragmented liquidity without the ability to net back imbalances to a single node Provides natural location for a balancing market and market-based imbalance charge signals, and as location for cash-out and imbalance trading Short term physical trading can lead to a reliable price index for longer term indexed deals and risk management products

Characteristics of trans-regional hubs Pipeline interconnect and/or cross-border, preferably within reach of storage or other flexibility sources Reflects longer term supply/demand fundamentals resulting in longer term transparency generating longer term investment signals Provides flexibility for selling into adjacent local notional hubs Hub operator must want to develop services to attract counter-parties / shippers and promote trading Have access to capacity to provide wheeling across pipeline systems Provide platforms for secondary trading of services Suited to longer term contracts as long as access regimes allow flexibility in onward transportation

The Traded Gas Market in Europe Zeebrugge Hub 55 Counterparties NBP 80 Counterparties TTF 27 Counterparties Eynatten Small number of traders with physical access Zelzate app. 7 counterparties Baumgarten 8 Counterparties? Wallbach 10 Counterparties Emden/Oude Flange Trading > 12 Counterparties PSV ? Counterparties Balancing Zones GasPool ? Counterparties Eurohub Gmbh 15 Counterparties

Cross Border Hub Confluence of pipelines Multiple sources/outlets Access to storage Proximity of markets Spot trade Deliverability services Title transfers Notional or Trans-Regional Hub Title tracking system Standard trading contract Financial trades Firm deliveries Price discovery Screen-based trading Forward trading Initial phaseDeveloping phaseMatured phase Bunde/Emden PSV NBP Henry Hub Baumgarten PEG Nord Zeebrugge TTF EXAMPLES The European hubs have reached various degrees of maturity

Gas Hub Development Group & Standard contractual terms qEFET has established the Gas Hub Development Group (GHDG) to foster the development of successful Gas Trading Hubs qGHDG membership is from companies actively trading the existing Hubs and individuals who have been actively involved in their development qThe GHDG is working on standard trading terms at the same Hub and where possible consistency across Hubs In the longer term convergence of trading terms is both desirable and achievable.

EFET Standard Master Agreements Designed for Physical Trading physical delivery as settlement Download from free of charge Negotiation-Friendly Format Similar Structure to Principle Trading Agreements used in other Markets and for Other Commodities and Commodity Derivatives A truly Pan-European Contract, acceptable for common law and civil law

EFET Master Agreements A beneficial framework neutral basis to start negotiations time saving on negotiations modular approach gives flexibility standardisation of procedures (less mistakes) Less credit necessary (netting) better risk control (close out netting) BIG savings on legal costs

Conclusions qEFET promotes the development of efficient markets throughout Europe qAccess to infrastructure is key to market development qThe development of hubs is also key to the evolution of markets qEFET would welcome a new Danish Gas Hub with effect of enhancing the customer choice

Thank you for your attention :for position paperswww.efet.org - Key principles for the development of European gas market - Creating successful transparent & liquid gas trading hubs - Gas market information requirements