A new gas benchmark for southern Europe
New lease of life is raising the profile of a once-moribund hub
The Italian PSV gas trading hub was once something of a backwater in terms of regional trade, but rising activity over recent years means it is fast becoming a possible regional benchmark for natural gas trade.
PSV, launched in 2003, reached a record high in traded volumes in January 2019, bringing a once illiquid, non-competitive market to levels of maturity similar to those of Austria, France and Germany.
"Since 2014, the PSV has grown from strength to strength not only in volumes but also in the number of participants, including non-industry financial participants, and in 2018 had its best year ever," says Patrick Heather, senior research fellow at the Oxford Institute for Energy Studies. "PSV now has the potential to arise as the new regional benchmark for southern Europe, although it's still a long way to go to reach TTF levels of maturity." The title transfer facility (TTF) is the major northwest European virtual trading point hub (VTP) in the Netherlands.
Traded volumes on the PSV reached 10.2bn m3 in January, surpassing the previous monthly record of 9.7bn m3 set in December 2017, according to data from Italian transmission system operator Snam Rete Gas.
Between the start of the gas-contract year on 1 October 2018 to end-January 2019, traded volumes totalled 33.4bn m3, a six-fold increase compared to the same period a decade earlier. The churn rate — traded volumes as a multiple of physical gas consumption — also increased from around 2 to 2.9 in the same period.
In 2018, the PSV obtained a score of 16.5 out of 20 in the European Federation of Energy Traders (Efet) annual review, which rates hub maturity based on criteria such as transparency, market access, price reliability and concentration. That places PSV on the same level as the Austrian VTP, and just behind Germany's NCG/Gaspool and the French PEG. In 2014, PSV had only been rated 10.5 by EFET.
The arrival of new players in Italy, from large oil and gas companies to smaller trading houses, has been an important driver of growth, according to Heather. The number of market participants registered to trade on the PSV reached 195 in 2017, of which 160 were actively trading, nearly three times the number seen a decade earlier, Italian energy authority ARERA reported.
Contracts for delivery at the PSV can be traded either bilaterally, or through Italian regulated exchange platform Gestore Mercati Energetici (GME) and, since 2015, through foreign exchanges, providing a further spur to the market's development.
Italy's ultimate goal is to become an exporter into northern Europe
Also boosting the PSV role is the winding up of long-term supply contracts and the increased diversification of supply sources in recent years, including the launch in 2013 of Italy's third regasification terminal offshore Tuscany, according to Peter Crilly, head of Italy-based consultancy Alba Soluzioni.
Another significant factor, some analysts say, has been the increased involvement of Italy's dominant gas firm Eni in trading at the hub. It imported over half of all gas volumes to Italy and owned 77pc of domestic gas production in 2017. "Eni has become a much more active player in spot trading in Italy in the last two years," Crilly says.
Eni is more circumspect, telling Petroleum Economist that the company has "always been an active PSV operator — there is not really a change in our stance, it is more of a continuous and gradual support to the development of the PSV liquidity".
Growth in traded volumes has been accompanied by a reduction in spot price spreads between PSV and northwest European hubs, with the premium of PSV narrowing to around €1-3/MWh from €10/MWh at the beginning of the decade, Heather says.
Aligning Italian wholesale gas prices supports the country's ultimate goal to become an exporter into northern Europe. As part of that effort, grid operator Snam has developed reverse pipeline flow capability, with the potential to export up to 40mn m3/d through the Gries Pass interconnection point via Switzerland into Germany and France and then further north.
"Reverse flow confirms the political will of seeing the PSV become a more important gas reference in southern Europe," Heather says.
Furthermore, in 2020, Italy is due to receive the first gas from Azerbaijan through the Trans Adriatic Pipeline (Tap), further diversifying its gas supply. But "adding 10bn m3 of Tap gas will not change the fact Italy still needs to import gas from the north", says Crilly. "So even with Tap and [assuming] a big increase in flows from North Africa on existing capacity, the prospect of becoming a net exporter to the north is very far away."