HydroWingas is a relatively new entrant to the UK gas supply market, having been active since spring 2004. The company has a clear focus on the provision of a high-quality customer service to add value to the gas that it markets. After a steady start, HydroWingas is now poised to establish itself as an increasingly important player in the market.
HydroWingas is an independent UK company, which was established as a 50-50 joint venture between Norway’s Norsk Hydro and Germany’s Wingas. Norsk Hydro is a producer of oil and gas and a manufacturer of aluminium. As a result, the company has experience in both the upstream and downstream segments of Europe’s energy markets. It will have offtake rights to 18pc of the output from the giant Ormen Lange gas field when it comes online next year, most of which is likely to be transported to the UK via its share of capacity in the Langeled pipeline. Wingas is itself a joint venture between BASF subsidiary Wintershall and Russian gas producer Gazprom. It has capacity rights on the UK-Belgium Interconnector and the soon-to-be-commissioned UK-Netherlands BBL, as well as the NEGP, which will bring gas from Russia to Germany. Given the UK’s increasing reliance on imports to meet demand over the coming years, establishing an operation to market gas in the UK makes sense for both companies, HydroWingas managing director Marten Turksema tells ‘UKEF’, and they believe they can benefit from entering the market together. A diversity of supply sources will ensure the security of supplies for the company’s customers in both the wholesale and the retail market. But Turksema is also keen to stress HydroWingas’ independence from its parent companies – Gazprom’s decision to establish its own, direct sales subsidiary in the market is independent of the activities of HydroWingas, he says, and will not interfere with the company’s marketing activities, meaning there is a possibility the two will be competing for market share.
CREDIBILITY
As an independent UK company, part of HydroWingas’ challenge is to establish a degree of trust with potential customers. Turksema is confident that the company’s business model is robust, reliable and well-suited to the retail market. “Our track record is building up, especially with end-users that require a high level of interaction with their supplier and this is now feeding through to potential customers” he says.
A GATEWAY TO THE MARKET
The operation that HydroWingas runs centres around the provision of portfolio management services for consumers, in order to add value as a gas supplier. Rather than a consumer having to set up its own trading operations, it is able to use HydroWingas as “a gateway to the market”. And rather than HydroWingas limiting its activities to the wholesale gas market, as some of the larger gas operators do, the company believes it can provide a quality service for industrial and commercial consumers in order to minimise the cost of gas supplies for its customers and to manage related risks. “Only that will allow and enable customers to pay us a reasonable margin for our services. In a very competitive market segment where margins are thin, it is crucial to offer a high-quality service,” Turksema believes. This is what can differentiate the company from its competitors, and is crucial to its marketing strategy. Rather than competing with others on so-called “management fees”, HydroWingas believes it will compete by being able to help consumers achieve lower overall gas contracts by offering such a portfolio management service.
The company offers customers transparent access to all available traded and indexed market products, with the flexibility to lock and unlock prices, to fix or to float. It also believes in providing customers with purchases at or below the prices available on screen. But it is not simply a question of providing a consumer with a range of ways to procure gas, Turksema adds. It is crucial that the service the company offers includes an educative element and detailed information in order for the consumer to be able to make the best possible decision at a given moment in time – what Turksema describes as “decision support”. To this end the company enables the energy buyer to speak with the trading team so that they understand the issues at stake and are able to take decisions quickly if necessary. HydroWingas also provides daily reports on price activity and is currently working to develop tools that provide a variety of reporting options related to the customer’s value at risk.
EXPANSION
At present HydroWingas has a staff of 14, and has already contracted 0.5bn m3 to consumers in the UK, although its annual supply base is currently less than half of that. Its initial target market comprises a total of 6.5bn m3/yr, of which it hopes to capture as much as 25pc in the future. The company is close to completing and commissioning a web portal, to provide its customers with detailed information on their portfolio and how market movements can impact costs. Further systems to handle customer metering and billing are due to be delivered at the end of 2006. It has had the advantage of designing these from scratch, so there are no legacy IT systems limiting flexibility to adapt invoicing to customer specifications, but there is the capability to adapt to new products and indexes, says Turksema.
This flexibility could help HydroWingas target customers at the next layer down in the market, extending its portfolio management services to multi-site consumers, based on the company’s existing supply model. The company has the benefit of timing in this respect – consumers are continually becoming more aware of the benefits of flexible purchasing arrangements, and HydroWingas believes its focus on this sort of arrangement will stand it in good stead to attract new business. But the company does not intend to move into the electricity supply market at any point soon – this would not make sense for it at present as it has no electricity assets or power trading set-up, Turksema says. Likewise, energy management services are not a priority for the company, although it does stress the importance of energy efficiency, stating that this is a matter of behaving responsibly. Hydrowingas provides access to various organisations to help with efficient practises as well as encouraging and sharing benefits in accurate customer forecasting and data recording.
Winter gas prices have been on a downward trajectory for several weeks and prices are now looking increasingly attractive for end-users. But there still remain a few “ifs” and “buts”, mainly on the supply side, which could potentially trigger “freak” days of high prices this coming winter, the trading team at HydroWingas believes.
At the time of writing the winter contract was trading as low as 69.45p/th with a noticeable drop in price volatility. Looking at the performance of the individual months of the winter contract over the past year, there are noticeable ceilings above which buying interest drops. If we look at the January 2007 contract, it has tried a few times to go over the 100p/th mark but prices above that level were unsustainable. From an end-user point of view, other fuel substitutes such as gas oil prices come into play when gas prices touch these high levels. European long-term contracts, which are mainly oil indexed, will also play a role in setting price floors and ceilings.
There was a lot of interest in exactly who was buying winter gas earlier this year at 88p/th – could it have been utilities, or positions taken on the back of spark spreads? From HydroWingas’ experience, I&C customers saw no commercial viability in buying at those levels. With levels currently sub 70p/th, I&C customers are finding prices more attractive and are seriously looking to hedge some of their winter exposure, which is why we should see increased buying interest in the next few weeks. Volatility has diminished as the risk premium in the forward contract has dropped due to positive developments announced on the supply side. No-one is denying that we will see high prices on certain days as the supply-demand balance on very cold days will be very tight – last winter, we experienced a severe cold snap as early as mid-November, which resulted in prompt prices spiking as Rough storage started seeing withdrawals. But the Met office has forecast that we will have a relatively mild winter this year.
It’s probably going to be a winter of two halves and prices will be highly dependent on the arrival of new supply infrastructure. Norsk Hydro has announced that Langeled will be online ahead of time, which will be an important pipeline due to its flexibility in being able to divert to the UK some gas that would normally have been destined for continental Europe, depending on which market has the higher gas price.
The big question mark still lies with the BBL and its forecast commencement date of 1 December. The BBL Company’s last announcement indicated that the deadline was tight but that it was confident that it would adhere to the start date. On certain days where demand could go above 400mn m3/d, supply will be tight and therefore, should additional volumes not arrive via new infrastructure such as the BBL, IUK and LNG, the market will remain bullish. The Interconnector’s further reverse flow expansion is certainly a positive step in providing additional import capacity but last winter, when NBP prices spiked above 100p/th, continental gas via the Interconnector failed to arrive at the levels forecast by National Grid. Additional capacity does not necessarily mean extra gas. The Interconnector exports have strengthened in the past two weeks but we’re still not seeing huge demand from the continentals, suggesting their storage facilities are already fairly full.
Last week we read conflicting views from energy minister Malcolm Wicks, who said that we would witness a very tight winter, and the chairman of Ofgem, who said that we would have a much better winter this year than last year. A large proportion of portfolios (including those of I&C consumers, utilities, and power generations etc) did not fully hedge their position going into winter 2005-06 and got severely burned by the price spikes. Lessons have been learned and portfolios entering this winter will be hedged to a much greater extent, which could reduce some of the volatility encountered last year in the prompt contracts. There is no denying that the coming winter will provide a tight supply-demand balance, although the fundamentals are looking better than they did six months ago. But should we encounter infrastructure outages on fields, pipelines or storage facilities during the winter period then we could certainly see a repeat of last year’s prices on certain “freak” days.
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