1 – What does TTF mean after all?
TTF stands for Title Transfer Facility, and it is an establishment in the Netherlands for virtual trading of futures, physical and exchange trades of natural gas. It was established by Gasunie Transport Services B.V, a subsidiary of Gasunie in 2003 as an alternative to the United Kingdom’s National Balancing Point (NBP), the facility allows for gas to be traded within the Dutch Gas Network. The trading currency is in euros per megawatt-hour. And it is the ICE – Index Exchange (Amsterdam) which handles the short-term gas and futures.
2 – Why was the TTF created?
The Dutch government was quick to notice the changing climate during the early stages of natural gas market liberalization during the early 2000s, investing a lot in the infrastructure surrounding the market like pipelines etc. The Dutch government made sure to make the country a viable and attractive option as a world trading platform by providing open access to its gas infrastructure and enforcing transparent rules for trading. The location at which the country is located also played a natural role in its advantage, the presence of Germany, France which are both residential and industrial players helped in the growth of the entire system. TTF being a gas trading platform is enjoying the pipeline investments that the country made in the early 2000s as they allow bi-directional flow of gas, so the system works even when the country is a net exporter and an importer. The pipeline up-gradation project with the UK was completed in 2019 which allowed the TTF to absorb gas coming from the UK as well and became a roundabout for North-West Europe.
3 – How does the trading mechanism work?
One of the reasons for the rise in popularity of TTF as a gas trading platform is relatively high liquidity and price relevance. The natural gas markets in Europe have been moving away from Long-term contracting and the coming up of TTF directly correlated with that. The other hubs for trading in northwest Europe are less liquid and the TTF maintains a positive natural gas price correlation as compared to them. In recent times, the entire European market has increased the import of natural gas from Russia and Norway and its effects can be seen on the total number of outstanding contracts relating to natural gas futures open interest. It has surged in recent times and is at an all-time high as seen in the graph below.
4 – Has it become a global trading standard?
The surge in the volume of futures trading over the TTF has catapulted its value in the global natural gas trading market. The volume according to ICE increase by about 24% in 2020 after witnessing a 100% growth over the last two years. Why TTF has increased its dominance is because of the simultaneous decline in the volume traded over the US’s Henry Hub Benchmark which started declining from its 2018 peak. For a long time, the US market was seen as the dominant standard in deciding the price of trade but the emergence of the Dutch Market enabled the shareholders to take a more regional control over the import of billions of euros worth of gas every year. It can be seen more frequently these days that LNG (Liquefied Natural Gas) deals are also referring to TTF, even Asian markets are using TTF for trading.
The emergence of TTF as the Global Standard has led to other regional markets either declining or becoming stagnant. Take the example of the UK’s National Balancing Point hub and Germany while being the bigger market in terms of consumption has much lower trading volumes. The JKM or the Japan-Korea Marker being the benchmark in North Asia for LNG prices is not traded nearly as much as TTF even though its liquidity has increased over the past few years.
5 – Ironical growth?
The TTF has become a reference point for LNG market participants. The consumers have the flexibility in terms of optimizing cargo of un-contracted volumes to both Asia and Europe. What is interesting about this growth is that it doesn’t correlate with the domestic scene in the Netherlands. The US has been in the headlines in recent years because of its push for local production and reducing extraction costs for increasing its exports across the world, this should be increasing the relevance of US benchmarks. Meanwhile, the situation in the Netherlands is quite the opposite. In recent years the domestic production capacity has reduced and the country went from being a net exporter to become a net importer. Half of the country’s gas output comes from the Groningen Mega field which had to reduce its production because of recent seismic activity most probably because of human activity.
This decline in local production was balanced by the pipeline flows and LNG imports. The TTF has offered the right tools and technology needed to manage risks and opportunities in this world of ever-connected gas markets.