The operator of the UK-Belgium gas interconnector believes its new capacity booking process -- named "implicit allocation" -- will ensure the pipeline remains competitive, boosting its economic viability in the longer term.
* Allows capacity booking at any time, outside of PRISMA auction
* Capacity more likely to be 'in the money' and traded
* IUK to offer a wider ranges of contract, seasons included
The implicit allocation process set up by IUK in early 2018 allows shippers to buy capacity and a matching volume of gas at the same time -- outside of the PRISMA capacity auction system.
The key benefit of the new system is that it allows traders to book capacity at any time, instead of being bound by the PRISMA auction schedule. This wider window should also make it more likely for IUK capacity to be "in the money" with respect to locational spreads between the UK and Belgium.
The new system will also offer a wider range of contracts, crucially summer and winter contracts, currently not on offer in the PRISMA platform.
The IUK's specific implicit allocation system is the first of its kind in European gas and could become a model for marketing capacity in other pipelines.
Sarah Cooper, IUK's commercial analyst, told S&P Global Platts the implicit allocation process requires a broker to handle the gas and a platform for buyers to see what is on offer.
The broker is HPC, while the platform is PlexHub.
"PleXHub is used as a communication platform - so it's not executable -- it is a shop window so shippers can see exactly what gas products are available and can calculate how much capacity they can match against a certain quantity of gas," Cooper said.
Simply put, the basic process is to put in a bid for gas and at the same time shippers are presented with matching capacity to then purchase alongside the gas.
"To execute that deal you have to contract the broker, by phone call or email, and they confirm the transaction at exactly the same time. That results in a contract for the gas and a separate contract for the capacity," Cooper said.
What the shipper does with that gas or with the capacity afterwards is up to them. Once the deal has been transacted, shippers can sell either the gas or the capacity on the secondary market without it affecting either of the other contracts.
IUK has a bulletin board on its website where shippers can post the capacity they want to trade. Shippers can also surrender capacity back into the PRISMA auction process.
IMPROVED FLEXIBILITY
The new system offers more flexibility in terms of offering IUK capacity by itself -- without the need to also buy capacity in the national grids at either end of the pipeline -- and is open to shippers almost all year round.
IUK -- which began flowing gas in 1998 -- has a capacity of 20 Bcm/year in the direction UK-Belgium and a capacity of 25.5 Bcm/year in the direction Belgium-UK.
It plays a key role in meeting UK gas demand in the winter and is able to help supply gas to the Continent in the lower demand summer months.
IUK introduced the new implicit allocation process in April this year as a way of making its capacity competitive ahead of the upcoming expiry of all the long-term capacity contracts signed in 1998.
From October 2018, legacy IUK gas shippers will have to factor in the capacity cost having previously considered the cost "sunk."
"Having a second method of selling capacity outside of PRISMA -- being able to offer unbundled capacity and to offer capacity at any time -- is particularly important," IUK commercial manager Danielle Stoves told S&P Global Platts.
"The PRISMA mechanism is sub-optimal for a number of reasons," Stoves said.
She said under PRISMA, shippers have to wait for scheduled auctions to buy capacity, which may not be advantageous in terms of the capacity cost being "in the money" at the time of the auction.
"The fact that in implicit allocation the shop is open at any time, shippers can take action when it makes sense for them to buy capacity," Stoves said.
Shippers can buy capacity under the implicit allocation process every day apart from the run up to when a PRISMA auction is due to be held and during the PRISMA auction itself.
Under implicit allocation, IUK can offer a wider range of products that are not available under PRISMA, most importantly seasonal capacity, Stoves said.
Under PRISMA, there is no tool for shippers to buy winter or summer gas -- only annual, quarterly, monthly, day-ahead and within-day.
Similarly, under PRISMA, shippers can only bid for capacity in the IUK for forward quarters at specific times, whereas under implicit allocation, capacity can be bought much further ahead.
50% LIMITATION
There are restrictions, however, as IUK can only offer 50% of the technical capacity on the pipeline for regulatory reasons. If it fails to sell during the open windows, capacity reverts to the PRISMA system.
In the process to date, 60% of the 50% of the capacity offered has been booked, with capacity booked in Q1 in the direction Belgium-UK and for the whole of the summer period in the direction UK-Belgium.
"We've been really pleased with the process so far," Stoves said.
All the legacy shippers on IUK with long-term capacity have registered to take part to the allocation process, including the likes of Shell, BP, Gazprom, RWE, Eni, Centrica, ConocoPhillips, Total and Uniper.
In addition, 10 new shippers are registered to buy capacity, nearly all of them trading houses.
They are: Axpo; Danske Commodities; DXT Commodities; Enoi; Ineos; Koch; Mercuria; Trafigura; and Trailstone.
"There have been 10 parties that have bought so far - a mix of original shippers and new parties," Stoves said.
The IUK is one of two interconnectors between the UK and the Continent, the other being the BBL pipeline between Bacton and the Netherlands.
For now BBL only flows in one direction toward the UK -- meaning it mainly only flows gas in the winter months -- but the operator is making it bidirectional from the autumn of 2019.
BBL does not offer capacity through an implicit allocation process, so the IUK sees this as at its advantage.
"People can buy our capacity when they want to thanks to implicit allocation, so we're pleased to have been able to do that," Stoves said.
