Italy should let the market loose

European energy traders association Efet has called for more flexible Italian gas storage rules, and September could be a good time to test this idea.

Italy could struggle to meet consumption during planned Tag pipeline maintenance on 25-29 September, unless LNG imports are high or storage withdrawals are permitted.

System operator Snam is considering making temporary withdrawal capacity available, although the firm has said that a net stockdraw in the summer is unprecedented in Italy.

This would be a great time to let the market do its thing, providing adequate sources of flexible supply are made available.

There are two ways the Italian system could balance, even when Tag halts for 4.5 days.

Physical withdrawal capacity being made available would allow prompt prices at the PSV hub to move to a premium to the first quarter 2018 contract and encourage drawing on storage.

Or PSV prices for delivery on 25-29 September could climb enough to encourage booking capacity at the OLT LNG terminal and bringing in a cargo. The Italian system could balance even without storage withdrawals if sendout from all three Italian terminals is high.

Either of these solutions would be fairly common for other hubs. The Zeebrugge-NBP basis market regularly trades for delivery around maintenance on the UK-Belgium Interconnector. NBP prices for delivery during Interconnector maintenance are usually at a discount to other periods because UK exports to the continent are unavailable.

There has so far appeared to be little interest in trading PSV gas for delivery on 25-29 September. And the boat may have been missed in terms of being able to bring in an LNG cargo as the deadline to request September capacity was 9 August.

European hubs have also become competitive with LNG prices before, most notably in southern France last winter. TRS prompt and near-curve prices climbed to become the global premium market in the first quarter of this year, as higher LNG imports were required to meet strong demand when storage stocks were low.

The TRS functioned well in the first quarter, with LNG supplies arriving quickly in response to the southern French hub’s premium.

The PSV has become more liquid than the TRS and there are few reasons that Italy could not attract an LNG delivery to provide supply on 25-29 September, providing prices are right and adequate capacity is available.

Balancing security and commercial concerns

Italy’s economic development ministry has tried to maintain a trade-off between the commercial attractiveness of the PSV and security of supply.

Italy would still be vulnerable to an unplanned disruption to supply from other sources during the Tag maintenance, even if some withdrawal capacity is made available.

But the TRS in the first quarter showed that supply will meet demand if the price signals are correct and there are adequate sources of flexibility. And the UK NBP was able to cope in March-April 2013 during a late cold spell with low stocks and a short halt to the Interconnector.

More lenient storage rules, such as allowing physical withdrawals in the summer, would go some way to ensuring that the PSV gives the correct signals. And it would raise the value of capacity.

How flexible storage capacity can be largely depends on the facilities. Italian storage operator Stogit sensibly uses injection profiles to ensure that its facilities function properly, but there could still be room for more innovative storage products to allow firms to capture the full value of capacity.

That’s not to say the market is perfect. The economic development ministry is right to insist on maintaining security of supply.

Gas has negative externalities — such as emissions — that need to be taken into account. But it is also a crucial commodity that at many times is a need rather than a want.

People may not be able to survive without gas to heat their homes during winter in the same way that they could get by without other products, for example marmite.

The government should keep pushing to maintain security of supply, but there is still some room to let market forces loose.

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