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How To Establish A Proper Working Gas Hub? Bilbao – 24th June 2014 HUBERATOR - Laurent Remy

AGENDA

INTRODUCTION

BELGIAN TRADING LANDSCAPE

OPERATIONAL REVIEW

CONCLUSION

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INTRODUCTION

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WHO IS HUBERATOR?

A non-regulated company established in 1999, with a strong shareholder base

The operator of both Zeebrugge Beach (physical trading point) and Zeebrugge Trading Point – ZTP (notional trading point)

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Fluxys is a Belgium‐based, fully independent gas infrastructure group with assets in gas transmission, gas storage and LNG terminalling throughout Europe

HUB DEFINITION

A hub is a point (physical/local or virtual/notional) at which title to gas can be transferred between buyers and sellers

In a physical hub, the contractual place where the gas is exchanged corresponds to a specific and well identified geographical point on the transmission system (Zeebrugge Beach)

In a notional hub, the contractual place where the gas is exchanged is being defined as a group of entry and exit points belonging to a whole transmission system or balancing zone (e.g. ZTP, TTF, NCG, GASPOOL, NBP)

Both types must ideally allow OTC transactions (either bilaterla or preferably through brokers) and Exchange trading (on anonymous platforms).

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Infrastructure

Systems & Commercial Arrangements

Convergence of Pipelines & Available Transmission Capacity

Many Buyers & Sellers with Available Commodity

Access to Tradable Gas, End-Users and Storage

Easy Transport to/from Hub

Hub services Agreement (& Ops rules)

Market Maker

WHAT DOES IT TAKE TO DEVELOP A HUB?

Standard Trading Contract

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COMMERCIAL REQUIREMENTS

The hub operator has a standard hub agreement in place with its hub customers (Hub Services Agreement - HSA)

The HSA is supplemented by Operating Procedures (exchange of messages, matching rules, curtailments…)

The main components of the HSA are: - Tariff (Fee structure) - Services - Liabilities, FM, amendments…

Hub customers (as the case may be assisted by the hub operator) jointly develop or abide by a standard trading contract to trade at the hub

- Initially ZBT 2004, followed by ZBT 2012 - ZBT gradually overtaken by EFET General Agreement (vast

majority of transactions at Zeebrugge Beach are EFET based) with a specific ZBT annex.

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OPERATIONAL REQUIREMENTS (1)

The hub operator must be a separate legal entity from customers at the hub, so all participants should be treated on a non-discriminatory basis

Standard hub terms and conditions are published No market dominance by a single market participant Title transfer services are provided by the hub operator

- Nominations - Title tracking (tracking the change in ownership of gas volumes) - Matching - Confirmation - Allocation - Monthly reporting

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OPERATIONAL REQUIREMENTS (2)

Hub operator provides firmness through back-up and offtake services with transparent and market-based charges (to make traded quantities firm in case of physical disruption up- or downstream the hub)

For physical hubs, hub operator needs to ensure a high level of interoperability in cooperation with the operators of the adjacent systems (e.g. renomination lead-time)

Ideally, hub prices are used in the settlement of transportation imbalances, in order to foster liquidity

Robust IT system is needed for - Handling of incoming and outgoing e-messages - Matching and balancing calculation EDIGAS messages exchanged by Fluxys dispatching: ± 11 000 (daily)

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HUB INDICATORS (1)

Liquidity: - increases when number of customers, volumes traded, number

of trades and price transparency all increase - A market is said to be liquid when trades of normal size can at

any time reliably be transacted at prices that will approximate those being reported at that time as being market prices

Churn factor (re-trading ratio): is the ratio between the traded volumes and the physical throughput. It points to the number of times gas volumes change hand within the hub.

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HUB INDICATORS (2)

Level of concentration: the Herfindahl-Hirschmann Index (HHI) is a measure of the concentration factor in a particular market.

The HHI is calculated as the sum of the squared market shares and has a maximum of 10,000, where higher values indicate a greater level of market concentration, i.e. the market is divided amongst fewer market participants

Depth: significant volumes can be traded without resulting in excessive price moves

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BELGIAN TRADING LANDSCAPE

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SWITZERLAND ITALY

EASTERN COUNTRIES

SPAIN SWITZERLAND ITALY

Gascade

GERMANY

Open Grid Europe

SOTEG

GRTgaz FRANCE

UNITED KINGDOM

National Grid

NORWEGIAN GAS FIELDS

Zebra

NETHERLANDS GTS

OVERSEAS LNG sources Zeebrugge Beach

Zeebrugge Trading point

NBP

PEGs

TTF

GASPOOL

NCG

PSV VTP

BELGIUM: A UNIQUE LOCATION TO REACH MAJOR MARKETS ÀND THEIR TRADING PLACES

AOP

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FROM ZEEBRUGGE AREA ONLY (1999)…

ZEEPIPE TERMINAL (ZPT)

INTERCONNECTOR ZEEBRUGGE

TERMINAL (IZT) & ZEEBRUGGE HUB

LNG TERMINAL

Interconnector IUK

Zeepipe

Borders IZT, LNG, ZPT: Total annual delivery capacity of around 50 bcm

ZEEBRUGGE – A BRIEF STORY OF TIME (1)

October 1998: IUK starts commercial operations, linking the UK gas market to the Continent for the first time. Flange trading develops in Belgium at several IPs, but most market players wish to exchange gas in a more structured way on a unique trading point

Zeebrugge Hub is officially launched in November 1999 by Huberator after intensive stakeholder consultation

The 6 “founding fathers” were a perfect mix of - UK/US producers - Continental vertically-integrated players - Trader (spread trading)

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ZEEBRUGGE – A BRIEF STORY OF TIME (2)

Huberator and the founding fathers jointly wrote, under the umbrella of a Focus Group, a Hub Services Agreement (HSA1999) and its Operating Procedures (OP)

In December 2001, a new HSA is drawn out in order to increase the firmness level (IUK switch from forward to reverse mode brings along many curtailments, leading to hub reductions), and to that effect services are added to the initial offer:

- automatic Back-Up/Off-Take for a period of 5 hours (Huberator temporarily substitutes for the hub customer impacted by the curtailment)

- Nominated Back-Up/Off-Take after 5 hours (by the hub customer)

- Rounding (to cover for small differences between counterparties)

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ZEEBRUGGE – A BRIEF STORY OF TIME (3)

In October 2004, HSA 2005 is launched in order to foster liquidity and further increase firmness (Nominated Back-Up/Off-Take services didn’t prove satisfactory, resulting in hub reductions):

- Additional Back-Up/Off-Take for a unlimited period of time after 5 hours of automatic Back-Up/Off-Take

- Creation of an Exchange Platform in cooperation with APX (anonymous screen-based trading)

In October 2012 finally, launch of the HSA2012 in order to integrate the newly created notional services at the Zeebrugge Trading Point, a new notional hub where Fluxys Belgium’s shippers can perform balancing operations

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ZEEBRUGGE – CONCLUSION

When developing a hub, it is paramount not only to be a first mover (becoming the reference for a given area) but also to stay ahead of the game by listening to (and evolving in parallel with) the market needs

Listening to your customers is essential!

A well functioning market place, with a great track record of meeting its customers requirements, will not lead a regulatory or national authority to completely revamp it

The success story of the Zeebrugge Hub has caused the Belgian regulator CREG to further carve the Belgian trading landscape (2012) based on the existing building blocks

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… TO WHOLE OF BELGIUM (October 2012) Main principles

Zeebrugge Beach (Physical Trading Services) is an entry point to the system and stays connected to IZT, ZPT and LNG through ZeePlatform services Zeebrugge Trading Point (Notional Trading Services) is automatically accessible through bookings in the entry/exit zone

Transmission inside Belgium + border to border: annual capacity of around 120 bcm

Transmission Services Consolidation of net trading position

in Grid User Balancing Position

ICE ZTP Exchange Platform

OTC Market

Registration & facilitation of OTC/exchange trading

Net trading position

Commodity Market Physical & Notional Trading Products

Single-side nomination

Notional Trading Services & Zeebrugge Beach Physical Trading Services

ZTP, ENHANCED WHOLESALE COMMODITY MARKET

ZTP - the Belgian Gas Market combining liquidity of existing

Zeebrugge Beach with new notional trading services

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ICE

Belgium

A NEW BALANCING REGIME

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Thresholds to limit the aggregated market imbalances, sized to domestic market needs

No Fluxys Belgium action intra-day and no impact on market parties as long as market imbalance is within market threshold

Residual action initiated by Fluxys Belgium on the exchange when market position goes beyond market threshold, with cash compensation for causers

Residual end-of day imbalance settled in cash

Daily Market Based Balancing

Time

Market threshold

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3

Fluxys reaction zone

Exce

ss

Shor

tfall

Time

1

12 18 24 6 Day

6 Day+1

Market Balancing Position

Grid User Balancing Position

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4 Comprehensive hourly information provision to the market In line with EU Balancing Framework Guidelines

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WHAT’S NEXT (1)?

PEGAS (Pan-European Gas Cooperation) is a trading platform (set up at the end of May 2013 as a cooperative venture between the German company European Energy Exchange (EEX) and the French company Powernext)

PEGAS offers its 140 members both outright products and spreads

Implementation plan in Belgium - July 2014: Day-Ahead and Forward Month ZTP

- Autumn 2014: Zeebrugge Beach products (TBD)

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WHAT’S NEXT (2)? ZIGMA (Zeebrugge beach Interconnector Gas Market Area): cross-border entry-exit zone bringing together the Interconnector Pipeline, Zeebrugge area and Zeebrugge Beach.

Zeebrugge Beach becomes the virtual trading point within the cross-border EE zone, which:

- Provides gas sourcing possibilities from Norway (Zeepipe pipeline)

- The UK Continental Shelf (SEAL pipeline) and the ZBG LNG terminal;

- Connects the GB, Dutch and Belgian gas trading places (NBP, TTF, ZTP)

- Links into the GB, Dutch and Belgian downstream markets. (Consultation on-going - Launch date November 2015)

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BELGIAN TRADING LANDSCAPE – MORAL OF THE STORY

Heraclitus of Ephesus:

“The Only Thing That Is Constant Is Change”

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OPERATIONAL REVIEW

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HUB MEMBERS (84) Alpiq Suisse Antargaz AXPO Trading AG AXPO Trading UK BASF Barclays Bank PLC Belgian Eco Energy BG International Ltd. BNP Paribas BP Gas Marketing Ltd. British Gas Trading Ltd. (Centrica) Cargill International Citigroup Global Markets Limited ConocoPhillips (U.K.) Limited Danske Commodities Delta Energy N.V. Deutsche Bank AG - London Branch DONG Energy A/S DufEnergy Trading SA EconGas GmbH EDF Luminus EDF SA EDF Trading Limited Electrabel EnBW Trading GmbH Eneco Energy Trade B.V. Enel Trade S.p.A. Energy Logistics and Services GmbH Eni S.p.A. Enovos Luxembourg S.A. ENOI S.p.A. E.ON Global Commodities

ENERGYA VM European Energy Pooling ExxonMobil Gas Marketing Europe Limited Fluxys S.A. Freepoint Commodities Europe LLP Gas Natural Europe Gas Natural Aprovisionamientos SDG GasTerra BV Gazprom Export Gazprom Marketing & Trading Limited GDF SUEZ GDF SUEZ Trading GDF SUEZ Trading EM GETEC Energie Glencore Energy UK Ltd. Goldgas GreenEx s.r.o. Gunvor International B.V. Iberdrola J. Aron & Company JPMorgan Securities Ltd Koch Supply and Trading Sarl Lampiris SA/NV LDH Energy Merchant Europe Sarl Macquarie Bank Limited Mercuria Energy Trading SA Merrill Lynch Commodities (Europe) Limited Morgan Stanley Capital Group Inc Natgas Noble Clean Fuels Ltd Novatek Gas & Power GmbH Vattenfall Energy Trading Netherlands N.V.

Petrochina International (London) Co

Petroineos Manufacturing France

Petronas Energy Trading Limited

POWEO Direct Energie

Progress Energy Services

RWE Supply & Trading GmbH (Essen Desk) RWE Supply & Trading GmbH (UK Desk)

ScottishPower Energy Management Limited

SEGE

Shell Energy Europe Limited

Société Générale

Spigas S.r.l.

Statkraft Markets GmbH Statoil ASA

SVS Securities PLC Total Gas & Power Limited

Vattenfall Energy Trading GmbH

Vitol S.A.

VNG – Verbundnetz Gas Aktiengesellschaft WINGAS GmbH & Co. KG

SPREAD OF NOMINATIONS 2013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

2%

4%

6%

8%

10%

12%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73

Percentage per Member Cumulative Percentage

22 Hub Customers

80% of the traded quantities

Shar

e pe

r Mem

ber

Cum

ulat

ive

shar

e

HHI Concentration factor = Σ Sharei2

YTD 2013 = 437 << 10 000 no dominant player

Ranking in % of trade nominations

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28

0

10

20

30

40

50

60

70

80

90

0,00

500,00

1 000,00

1 500,00

2 000,00

2 500,00

3 000,00

3 500,00

4 000,00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Daily Average Physical Throughput Daily Average Net Traded HHI Hub Customers

GWh/day

STRONG LIQUIDITY GROWTH

EE2012

March 2013

Change in IUK Ops Rules combined with strong LNG deliveries and ZeePlatform

New HSA

New HSA

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GWh/day

LIQUIDITY ON THE ZTP (Launched October 2012)

0,00

0,50

1,00

1,50

2,00

2,50

3,00

0

50

100

150

200

250

300

350

Daily Average Physical Throughput Daily Average Net Traded Churn (right-hand axis)

223% increase

KEY FIGURES Traded quantities in 2013: 827,7 TWh (73 BCM)

BE consumption amounting to 183,2 TWh (17 BCM)

Churn rate 4.5 (even 6+ when considering HCG only)

Highest traded quantities

- Zeebrugge Beach

> Daily: 3021 GWh (267 Mio m³(n)) on 8th February 2012

> Monthly: 80.2 TWh (7 BCM) in March 2013

- ZTP: 382 GWh (daily) and 9.5 TWh (monthly)

Active players:

- Zeebrugge Beach: 53 (or 63% of the Hub Customers)

- ZTP: 26

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WHAT ABOUT THE COST OF TRADING?

Industrial customers are incentivized to source their gas on the ZTP:

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-200

-100

0

100

200

25/12/2008 1/01/2009 8/01/2009 15/01/2009 22/01/2009 29/01/2009 5/02/2009

GWh

32 -200

-100

0

100

200

25/12/2008 1/01/2009 8/01/2009 15/01/2009 22/01/2009 29/01/2009 5/02/2009

GWh

-200

-100

0

100

200

25/12/2008 1/01/2009 8/01/2009 15/01/2009 22/01/2009 29/01/2009 5/02/2009

GWh

0

100

200

300

400

25/12/2008 1/01/2009 8/01/2009 15/01/2009 22/01/2009 29/01/2009 5/02/2009

GWh

ZEEBRUGGE HUB & UKRAINE/RUSSIA DISPUTE IN 2009 OR HOW A HUB CAN PROVE A RELIABLE SoS TOOL

HUB The Netherlands France

Germany Zeebrugge area In combination with interruptible transit offer

PRICE INDICATORS - EUROPE

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Strong correlation between EU market places

EUR/MWh

CONCLUSION

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CONCLUSION

Huberator has a proven track record of successfully developing trading hubs (both physical and notional), in close cooperation with its customers and industry associations (e.g. EFET)

A hub operator has to respond quickly to market changes

Industrial customers show a growing interest in sourcing their gas directly at a trading point

A well-functioning hub combined with the necessary gas infrastructure increases SoS

With our mother company Fluxys, and in cooperation with industry associations, we can help you put in place a successful hub in Spain

Any further question? Laurent Remy +32 2 282 7450 laurent.remy@fluxys.com

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