Wholesale gas market development will continue at a rapid rate in Europe, particularly after July 2007 when the markets fully liberalise. However, research indicates that the prospects for the development of these markets will continue to show enormous variation across the EU. As market liberalization continues, the importance of wholesale gas markets in Europe is set to grow markedly in the coming years. However, the development of these wholesale markets will continue to be at widely diverse rates across the EU. Factors such as new infrastructure development and current and future levels of market concentration will combine with the market opening process to drive forward the already established, and establishing, markets. Further to this, over the next decade, these factors create scope for the beginning of the emergence of wholesale markets in countries where they do not yet exist. The wholesale markets can be split into three groups the established grouping for markets that are both liquid and fully established, the emerging segment for markets with some, but limited, liquidity, and the nascent grouping for markets that exist but have little or no meaningful liquidity. Currently, there are only three markets in the established segment in Europe the UK’s National Balancing Point (NBP) (which accounts for around half of European established wholesale gas liquidity), the Title Transfer Facility (TTF) market in the Netherlands and the Zeebrugge market in Belgium. The NBP very much leads the way for European gas wholesale market liquidity and will continue to do so in the future. The NBP’s position as Europe’s most liquid wholesale market is largely attributable to the long history of market opening in the UK compared to elsewhere in Europe. With a number of players supplying both the residential and non-residential markets, the need for a wholesale market for players structurally short of gas to obtain supplies led to the development of the NBP. Other factors that have helped drive the development of the NBP have been the UK’s role as a gas producer, the variety of gas import infrastructure available in the UK and the presence of a strong financial services community willing to speculate on gas prices. While the NBP’s position as the leading wholesale gas market in Europe is undeniable, the role of Europe’s second most liquid wholesale market is less clear cut. In the past, Zeebrugge has taken second place to the NBP in terms of liquidity, although, increasingly, the TTF is challenging this position. Zeebrugge first emerged as a gas hub in 1999 and, whilst a liquid trading hub in its own right, relies on NBP arbitrages for a significant proportion of its trade. The TTF, which was launched in 2002, is seeing rapid growth in liquidity. Between 2005 and 2006, TTF traded volumes grew by around 80%, and, towards the end of 2006, the TTF edged past Zeebrugge in terms of liquidity for the first time. This pattern is likely to continue going forward. The growth prospects for the TTF appear to be stronger than those currently apparent for Zeebrugge. Liquidity at Zeebrugge continues to be curtailed by the dominance of Distrigas, while interest and counter-parties at the TTF continue to show continued growth potential. This continued growth in TTF liquidity will not come as a result of organic market growth alone. Various initiatives by both the Dutch government and the regulator all bode well for continued future development of the TTF.

There are currently two markets in the emerging markets category – the French Points d’Echange de Gaz (PEG) and the Italian Punto di Scambio Vitruale (PSV) markets. The PEG market began to emerge in 2004 with the creation of a number of notional trading zones. Initially, trading activity was extremely limited, although, more recently, there has been a renaissance in liquidity levels, with 25 registered users now trading. The creation of a standard trading contract by the European Federation of Energy Traders in December 2004 and the first brokered (rather than bilateral) PEG deal in April 2005 were both key developments in the maturity of the market. The PEGs are increasingly showing their ability to create market reflective pricing, rather than simply pricing relative to the TTF or PSV, thus making them more attractive to various market players. The PSV market came into being in October 2003 and, in common with the TTF, is heavily modeled on the UK’s NBP. After a lackluster start, traded volumes have developed rapidly, rising by more than 170% between 2005 and 2006. Going forward, both the PSV and PEG will grow strongly in liquidity. Growth in the PSV and PEG markets will see increased numbers of counter-parties seeking to source gas for their retail businesses. Further to this, there will be greater interest from speculative financial, rather than just physical traders. Within the short term, the PSV and PEG markets are likely to move out of the emerging segmentation into the established zone. In the nascent markets – Spain, Germany and Austria – the prospects for market development are much less clear cut. The Spanish Centro de Gravedad (CDG) market shows few, if any, prospects for meaningful liquidity growth in the coming years. While general market developments such as increased LNG capacity, spot LNG volumes and the arrival of new market entrants will help drive some added degree of liquidity, there is little to suggest this will be anything other than modest.

Similarly, the prospects for the Austrian Central European Gas Hub (CEGH) market also appear likely to remain modest. Despite a significant percentage increase in CEGH liquidity in 2006, absolute volumes remain modest. The gas release scheme will help drive liquidity to a limited degree, but meaningful liquidity growth remains a number of years away. The prospects for the CEGH are only likely to be significantly increased when a number of new infrastructure projects take place. Gas flows arising from projects such as a Croatian LNG facility or the Nabucco pipeline will help boost CEGH volumes, although these are much longer-term prospects, meaning that the CEGH will see only very limited growth in the short to medium term. The prospects for German wholesale liquidity growth are by far the strongest of all the nascent markets. Despite going back to 2002, wholesale gas trading in Germany only began to become recognizable in 2006 with the launch of a number of new hubs. The BEB hub, the three E.ON Ruhrgas hubs and the Gaz de France Deutschland hub have all shown considerable growth in a very short time period.

Changes to the entry-exit regime and a reduction in the number of pipeline zones will serve to facilitate easier pipeline access and thus give a fillip to German wholesale gas trading. Further to this, the planned launch of a German gas exchange by the EEX in October 2007 will serve to further boost liquidity. The short-term prospects for German wholesale gas trading are significant. It is expected to rapidly move out of the nascent segmentation and for liquidity levels to show significant, rapid and sustained growth in 2008 and beyond.

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