What a Difference a Day Makes- to Gas Trading Profits

What a Difference a Day Makes- to Gas Trading Profits

March 30, 2015

Anyone trading physical gas in the UK is well aware of the fact that the gas day runs from 6am to 6am, not from midnight to midnight. That is written down in the Gas (Calculation of Thermal Energy) Regulations 1996, but has been the case since the first GB gas fields came onstream. It is stated in the Uniform Network Code (UNC) for the national transmission system (NTS) and is mirrored in supply agreements and trading agreements, including the ICE Natural Gas futures contract.


The European Gas Day Change

If Brussels gets its way, Article 3(7) of the European Capacity Allocation Mechanism (CAM) network code will change the gas day across Europe to a harmonised day of 5am to 5am Coordinated Universal Time (UTC) for winter time and from 4 am to 4am UTC when daylight saving is applied. This will happen on 1st October 2015, i.e. the next gas year, because gas years run from 1st October to 30th September. The UK is bound by CAM. European firms will have to update their software systems to reflect this change.  So far, so annoying.


Where the fun begins is that Brussels does not have the power to change the gas day definition in contracts that relate to gas upstream of the NTS, i.e. offshore.  Europe cannot mess with commercial agreements put in place by groups of joint venture partners many years ago before the gas fields were developed and brought onstream. So in the UK we face the prospect of having to abide by the European gas day deadlines in the NTS, including at the entry points for offshore gas, while upstream the nomination and balancing of volumes of gas and capacity booking will proceed according to the old 6 to 6 timetable.


That crucial hour between the entry into the NTS being completed with the onshore NTS operator and the upstream gas flow being finalised between the field operator and its joint venture partners is a source of potentially divisive trading gains and losses. And since many entry points are accessed by different fields, all with differing operators and differing joint venture partner shares, this timing mismatch has the potential to set not only partner against partner, but field against field. This is because for technical reasons pressure has to be maintained in the NTS and shippers who do not flow the gas they have promised, or flow more gas than they have promised are subject to imbalance charges. Those charges are set according to the flow position at the end of the day. So what constitutes the end of the day takes on a financial significance.


Gas Balancing

To flow gas in the UK NTS a shipper must first have booked the right amount of capacity in the system and secondly must have produced, or otherwise traded, the same amount of gas that the shipper has committed to flow during the course of the day. Any shipper that is out of balance must correct that imbalance at the system marginal prices. In other words if a shipper flows too much gas it is deemed to have sold the excess at the lowest price of the day.  If a shipper flows not enough gas it is deemed to have bought the shortfall at the highest price of the day.

Introducing an hour between the closing of the gas day in the NTS and the closing of the gas day offshore presents an opportunity for some entity, field or company, to buy or sell gas during that hour to its own advantage armed with the certain knowledge of whether the NTS entry point is over or undersupplied when the NTS gas day ended.

Back in the old days, when the norm was for joint venture field partners to enter into joint gas sales contracts together, the impact of this timing mismatch would have been dampened: any trade “finessing” carried out by the operator in this new twilight hour would have benefited all joint venture partners pro rata to their equity interest in the field. But today it is routine for joint venture partners to have different gas sales arrangements and consequently different balancing positions. Even where joint sales contracts are still in place, if the operator has a different equity share in another field using the same entry point, then a potential conflict of interest exists.


JOA Issue

UK gas producers would be well advised to consider this issue with the JOA close at hand. A “good and prudent operator” in theory does not take advantage of its partners. But in practice would an operator who uses its detailed, real-time knowledge of the system balance situation to trade to its own advantage be in breach of the JOA, particularly if its minority partners were not active traders alive to the possibilities that this timing mismatch represents?  Would the smaller less active partners ever be in a position to analyse the financial impact even if they suspected that they were being disadvantaged?

As with most trading opportunities, the more volatile the market price, the bigger the potential gains and losses involved. Thanks, Brussels!