Wingas Interview: Markets, Policies and Regulations
Russian-owned Wingas was, until last year, jointly owned by an upstream oil and gas company – Wintershall, the subsidiary of German chemicals giant BASF – and Gazprom.
They set it up as a gas pipeline, storage and supply business to overcome obstacles erected by Ruhrgas, which in the early 1990s denied it economic access to pipelines and hence customers. The two went into business, and forced Ruhrgas to slash its prices to retain market share.
But after over two decades, BASF and Gazprom went their separate ways downstream last year, leaving Wingas with its Astora storage business and the Swiss WIEE subsidiary wholly-owned by Gazprom, but with BASF still retaining a stake in the existing Nord Stream 1 pipeline and the Nord Stream 2 pipe project, and exploration and production in Russia, Norway and the Netherlands. BASF and Gazprom still jointly own Gascade, a German gas transmission system, and run the Opal and NEL pipes onshore Germany into which Nord Stream flows gas.
Wingas, as of October 1, is now a wholly-owned subsidiary of Russian exporter Gazprom and no longer competes with Gazprom Marketing & Trading, which also supplies gas and power end-users.
Wingas's head of sales Ludwig Mohring spoke to NGE in early May about the company’s approach to markets and policies. “We are co-ordinating our activities as subsidiaries of Gazprom,” Mohring said. “Gazprom supplies us at a relevant market price. Roughly half the gas we sell (2015: 63bn m³/yr total, including churn at hubs) is Russian and we are one of the buyers of gas from Nord Stream 1.” The company posted a gain of almost 27% in sales of natural gas in 2015 and sales were €14.4bn, up 14% on 2014.
He believes the second Nord Stream strand will go ahead. “Nord Stream 2 is not only privately financed and adds to security of supply in Europe, but it is also in full compliance with the relevant laws. And it provides potential for gas down to Baumgarten, as well as to the Netherlands and the UK where gas is needed,” he said. Baumgarten is the delivery point for Russian gas supplies to Italy among other countries, meaning pipeline extensions will have to be built to bring gas down from the German coast.
Being owned by Europe's lowest-cost producer Gazprom – a company with a lot to take care of at home as well with clients in Europe and the far east – does not eliminate customer churn.
"As a midstream company we would struggle to earn a reward without taking risks; we have to take price risks, create a margin and support the customer. As a midstream company you have to be close to the customer. A fully owned Wingas Group allows a major producer like Gazprom to get a lot closer to the customer – which was not the case in the early 1990s. But there are limits to how low the seller will go to retain business,” he says.
“Over the last few years our customer portfolio has changed a lot. Business relations vary more than ever. This is the stage of competitiveness. If someone makes a price we cannot match, we may lose that customer. As far as new sales contracts are concerned, in principle, we don’t have long-term contracts with our customers any more, but of course we do have long-term relationships with many of our customers; when we have rolling two or three year contracts we keep in regular touch with them to ensure we meet their needs and they then renew.”
Energy transition: the road to nowhere?
Germany, with its so-called ‘Energiewende,’ has “embarked on its own way in the transition of the energy landscape. And it is clear that not a lot of nations will follow this way. It is too costly and there has been no major progress in the fight against CO2-reductions – in short: Germany is not delivering on key aspects of how to manoeuvre an energy-heavy economy effectively and efficiently into the low carbon world,” Mohring told NGE.
Moreover, the transition to a low-carbon world will not work without gas, which is already subsidising renewables. “At a political, an association or a customer level, I hope for a more integrated approach as we move to a low-carbon world. It is not enough to claim that all sectors, including heating and transport sector, will become electrified by the middle of the century. This claim is not underpinned by realistic facts – on either the technological or the economic front. Stating that “the end of the fossil fuel world has come” is simply not enough.
“To give a more positive spin, we need to agree a common goal: we have to cut carbon dioxide. In Germany our goal is a 40% cut in CO2 against the 1990 level. And it will fail because coal use in power generation is greater than ever. We are spending €25bn/yr in Germany to support photovoltaics and wind turbines, by raising consumers’ bills," he said.
And, as an aside, that is on top of the cost to – often – gas-fired generators who have to step in to stabilise the grid owing to the intermittency of renewables. At the end of April, to remedy this, German generator Uniper went to court to seek compensation from the grid operator Tennet for costs incurred in 2013 and 2014 in re-dispatching energy. Using the experience of its 800-MW CCGT at Franken as a precedent, Uniper is asking the court to clarify what constitutes appropriate compensation for re-dispatching, as it believes Tennet has been consistently underpaying gas-fired generators, instead of investing in new transmission capacity.
Uniper has also chosen to file suit, it said, because the majority of the new provisions in the draft electricity market legislation either disregard the reimbursement principles established by the higher regional court or remain based on structurally insufficient compensation.
And the means to attract more needed gas-fired plant on to the grid – the capacity mechanism – needs remedying across Europe. The European Commission (EC) is consulting on how to stop these mechanisms, which vary from state to state, from distorting competition, or hinder electricity flows across borders, leading to higher prices.
The EC's competition directorate says that a number of EU states have voiced concerns that electricity supplies "may be unable to meet demand as a result of insufficient investment due to market uncertainties and regulatory interventions. An additional issue is that demand needs to be fully met by supply also in times when there is a shortfall from variable renewable energy sources (e.g. as a result of less wind or sun at a given time)."
Develop demand
Mohring also dwelt on the need to develop gas markets during a panel session of the Flame annual gas conference in Amsterdam. "We need to develop the gas markets further. Gas is coming increasingly under pressure politically. For many governments, gas is not the fuel of choice any more. How can we promote gas at an energy policy level? I see a very important role for midstreamers: we can push gas into the market. Policy makers understand that renewables need the right mix with gas. Who speaks up for gas? Many companies promote electricity and say we should electrify our entire economy! But this is not underpinned by a cost-benefit analysis but largely by ideology.”
Midstreamers must take some of the responsibility for the fact that gas has lost market share as a primary energy source: Life has become harder for midstreamers but that does not take away fundamental role for midstreamers. We need a new equilibrium between producers and midstreamers and have to find it soon. He told NGE that this meant the traditional equilibrium of (oil-) price risk with producer and volume risk with midstreamer/importer has undergone substantial change. New ways are being developed to make the partnership beneficial to both – this is a challenge for producers and importers to develop on an individual basis but there are various ways.
Gas has become much more political now, he says: “'I have seen the future, and the future is electric,' say the visionaries at municipalities, even though gas would be in best interest of consumers. Similarly the effect on Nord Stream 2 – let's avoid any new infrastructure for gas, as it doesn’t benefit renewables. As midstreamers we have to step up to this discussion," he said.
Energy Union
Some aspects of the energy union may help the gas market, such as the building of genuinely critical infrastructure, he told NGE, suggesting that some of the new capacity will be, as others such as the European Federation of Energy Traders say, merely tomorrow’s stranded assets. “I’m a supporter of rational attempts to fight climate change. But do they require an energy union? Might they not happen anyway? Projects of common interest and other infrastructure: are they all really required?"
And authorities are considering seeking the right to be notified of confidential contracts between external suppliers and buyers within EU markets. Mohring is concerned that those terms could leak out, if the EC has access to them. That approach might have been relevant in the early days of competition but not now, when there is so much competition, he says.
Second, member states are all keen on retaining their own national energy policies, which they are allowed to do. According to Mohring, there is tension between member states and the EC over this question, and yet “the gas market is functioning better than ever, it is part of a global market, and it should not be hampered by the EC or face other interference.”
William Powell
Are pipeline politics coming to an end? @FProedrou recent article provides some insight: https://t.co/yLqrXAbi2x
— Natural Gas World (@NatGasWorld) May 26, 2016