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Flexibility will be a key word for gas markets in 2021

In spite of an expected gradual recovery in 2021, the COVID-19 crisis will have long-lasting impacts on natural gas markets. Market players have to adjust their strategies to a highly volatile environment and the repercussions of the pandemic could trigger fundamental changes in business as usual.

As the natural gas industry faces the two headwinds of the pandemic and its disputed role in the EU’s decarbonised energy system, in Central and Eastern Europe 2020 also brought several gas projects to completion. The new year started with the launch of the Krk LNG terminal in Croatia, which is a huge step for the whole region’s supply diversification, but new challenges are already visible. Market players and policy leaders reviewed the past year and shared their expectations regarding the future of gas in an online discussion organised by the Regional Centre for Energy Policy Research (REKK).

From a policy perspective Péter Kaderják, Hungary’s Minister of State for Energy- and Climate Policy* highlighted two crucial aspects, supply security and the competitiveness of pricing. Considering these aspects he compared the past year to the Golden Age of gas: Hungary managed to rediscover its storage capacities which provided flexibility and supply security and several major infrastructure development projects of the last decade have been finally completed, including the LNG terminal in Krk, which was launched on 1 January, opening the gates of the global LNG market to Hungary. Looking at pricing, the Minister of State underlined that Hungarian households still pay the joint-lowest natural gas prices in the entire European Union.

However, there were already some dark clouds which casted shadows on the bright future of gas in the long term. In the past year, there have been heated debates between EU institutions and Member States about excluding natural gas projects from further EU financing. According to Mr Kaderják, gas will continue to play an important role in the CEE region at least in the mid-term. On the long-term, the future of gas in the energy mix will depend on the stringency of the EU’s decarbonisation policies.

“I believe that gas will play a highly important role in Hungary’s energy supply in the next 20 years,” said Mr Kaderják adding that the two major competitors of gas will be clean electricity and carbon-free hydrogen. As there is increased pressure to phase-out lignite-fired power generation and the construction of the new blocks of the Paks nuclear power plant could only start at a later stage, natural gas has the potential to act as a safety net for Hungary’s supply security.

Pál Ságvári, vice president for international affairs of the Hungarian Energy and Public Utility Regulatory Authority (HEA) also highlighted that the past year confirmed the status of natural gas as a bridging fuel in our energy system. He pointed out that EU carbon prices – which surged to historic high amid the political push for green recovery – also benefitted the gas market, at least on the short term, as it put increased pressure on the operators of coal-fired power plants. In addition, the integration of the growing shares of renewables into our power system requires more flexibility, which can be provided by gas power plants.

“The pandemic underlined the importance of flexibility in another sense as well, and market players who were not able to react and adapt quickly to the new realities had a hard time to cope with the challenges,” said Mr Ságvári.

2020 brought significant changes to the LNG market as well. The commissioning of Krk LNG Terminal and the start of LNG supply cold open a new chapter of the region’s gas supply. Hungarian Gas Trade Ltd. (MFGK), a subsidiary of state-owned MVM Hungarian Electricity had successfully booked 1 billion cubic metres (bcm) of capacity annually, over a period of almost seven years.

László Fritsch, CEO of MFGK underlined that this is a big step for the company since from the beginning of this year Hungary has direct access to natural gas sources and market players previously unavailable in the Hungarian and regional markets. However, he pointed out that we shouldn’t overestimate the significance of the terminal neither, as it won’t change the major trends, such as the dominance of Russian gas in the CEE region. Nevertheless, it will have a positive impact on the overall position of Hungary and facilitate access to LNG for the whole region.

“What we learn is that we cannot think only within the borders of Hungary, we have to think on a regional level and we would like to continue our expansion,” said László Fritsch.

MET Croatia, a subsidiary of European energy company MET Group, also submitted a binding offer to book capacities in the Krk LNG terminal for a three-year period, amounting to 1.3 bcm overall. According to Gergely Szabó, Regional Chairman of MET Central Europe, the past year confirmed the key role of LNG in the global energy market as it brings much-needed flexibility, enabling quick adjustments in a highly volatile market environment triggered by the pandemic.

For Hungary, last year already brought some shifts in the state of play but this year is also expected to be quite eventful. Hungary’s current long-term bilateral gas supply agreement with Russia is set to expire in October, from approximately the same time gas could begin arriving in Hungary from the direction of Serbia as the new Serbian-Hungarian interconnector with 6 bcm capacity should also be ready by October.

Looking at the development of the regional gas infrastructure, Szabolcs I. Ferencz, CEO of Hungary’s Natural Gas Transmission FGSZ also emphasized that several long-running projects were completed in 2020 such as the establishment of the virtual interconnection point (VIP Bereg) on the Ukrainian border or increased import capacity from Romania and Croatia which all contributes to increased flexibility.

However, the question is whether 2021 will bring a sobering future as major gas infrastructure projects from the South are coming online. The CEO of FGSZ said that the Hungarian transit volumes will certainly drop, the question is how big this decline is going to be, but at this point, it’s still hard to tell.

“We believe that if the infrastructure is flexible enough then the market can follow price movements, thus seizing transit opportunities, which could contribute in a way to a more moderate decline in transited volumes,” said Szabolcs I. Ferencz.

Dániel Garai, the CEO of CEEGEX, Central Eastern European Gas Exchange also emphasised the importance of integration. He also highlighted that it was a very positive sign that last year the European Agency for the Cooperation of Energy Regulators (ACER) upgraded the Hungarian gas market from the illiquid- to the emerging hub category.

Mr Garai highlighted that now the futures market should follow suit, the first signs of this uptake are already visible but the recent enterance of many new sources and players into the regional market complemented with appropriate market design can give a further push to this.

It seems like 2021 will bring many new challenges for the gas industry.

*as of the day this article was published, Péter Kaderják will no longer serve as Hungary’s Minister of State for Energy and Climate Policy.

Photo: GIE.

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