Gas balancing rollout in Italy and Spain sees liquidity moving in opposite direction

On October 1 2016, new gas balancing schemes were rolled out in Italy and Spain to align the two countries' gas hubs with European standards.

Following the first month of implementation, liquidity seems to have been effected in different ways, with the Italian PSV hub seeing a boost in OTC spot trading and the Spanish PVB gas hub seeing volumes picking up on the official exchange, the MIGAS platform.

New balancing scheme pushes OTC intraday volumes higher in Italy

Traders polled by S&P Global Platts said the new balancing setting in Italy has boosted liquidity on the within-day OTC market -- many participants seem to prefer balancing their positions OTC so far.

Among other issues, participants pointed to a lack of integration between the balancing platforms run by GME (MGAS and PBGAS) with the main trading platforms used by traders. They also believe that the guarantee system required by GME is more expensive than the guarantees required by counterparties in OTC trading.

As for the role of Snam, an Italy-based trader said "Snam [in its role as market maker on the balancing platforms] should take additional steps to enhance liquidity on the MI-GAS [intraday spot market] and on the MGP [storage balancing market]," referring to the lack of liquidity on those platforms. Snam is responsible for incentivizing participants to balance their portfolios in the new setting through the use of short-term standardized products trading and the use of balancing services.

In the MGAS, the title products are traded in the MGP day-ahead gas market and the MI-GAS intraday gas market. On the new PB-GAS platform, the location product market, known as MPL, replaced the G-1 session while the storage product market, named MGS, replaced the G+1 session.

Data released by GME provided evidence to support the shift of volumes from the exchange to OTC.

Gas traded on Italy's gas exchange totaled 2.2 TWh in October following the implementation of the new MGAS and PBGAS regimes. This resulted in a steep fall of 50% from October 2015 when 4.4 TWh was traded on the exchange, according to GME data.

Nearly all of the volume traded in October were via the GME's intraday spot market MI-GAS.

In the new MGS storage market, 537 GWh were exchanged. Of this volume, 415 GWh were traded directly among PBGAS participants while Snam offered to sell 86 GWh and buy 36 GWh on the MGS market during October.

The other balancing platform run by GME, the MPL location session, which replaced the G-1 platform, was never activated during October.

In contrast, during the month of September on the G-1 market, 2.2 TWh of natural gas were exchanged, according to GME figures.

Spain's gas balancing regime yet to integrate the Portuguese gas hub

In Spain, the new balancing rules were implemented by the Spanish TSO ENAGAS on October 1 with the aim to align the Iberian gas hub to European standards and increase liquidity, with volumes since rising on the exchange.

MIBGAS became the platform for Enagas to officially balance the gas system. Punto Virtual de Balance (PVB) participants now have new requirements that impose stronger penalties for imbalances. Furthermore, shippers will no longer enjoy the "shock absorber" of storage flexibility that was permitted in the previous system. Shippers will now rely on near real-time steering information provided by Enagas.

The rollout of the new regime has also led to the official integration of Portugal into the system, a formality since both countries have been linked since 2006, when the PVB -- previously known as AOC -- was established.

MIBGAS has operated as an exchange for gas in Spain and Portugal since December 2015 and has experienced higher volumes contracted.

However, the lack of government in Spain is delaying the two gas hubs from taking further steps into integration, possibly limiting improved liquidity in both markets. Portugal still requires a resolution between the Portuguese and Spanish governments to be able to operate in MIBGAS.

Until MIBGAS has the authority to publish Portuguese products, there will be a transitory phase where auctions will be held when the system needs to be balanced. These auctions will be performed by OMIP in Portugal, MIBGAS told Platts.

In terms of liquidity, market participants surveyed said that they are utilizing MIBGAS more and more with most traders looking at MIBGAS prices to get a sense of spot prices. There is however a small premium of 10-20 euro cent to use MIBGAS compared to OTC trading so, depending on the volume needed, participants still trade OTC.

Brokers have noticed the increase in liquidity also with the Iberian Gas hub, which is a broker group specializing in further dated contracts. They said although volumes in forward contracts are still at the same level as the previous year, they have noticed less activity in prompt contracts as these are being done in MIBGAS.

Listen to Dalila Ouerghi and Mario Perez discuss the issues surrounding these new gas balancing regimes in the S&P Global Platts Energy Spotlight podcast: One month after the implementation of gas balancing schemes in Italy and Spain