The regulator acknowledges that the task of creating a new EU gas benchmark will be “challenging”.

The regulator tasked with developing a planned new EU benchmark for imported gas has acknowledged that the ambitious project will be difficult to put into practice.

Acer, the EU’s energy regulator, has joined traders and analysts in questioning Brussels’ plan for a new regional standard that would allow more accurate tracking of prices for liquefied natural gas supplied to the bloc.

The European Commission wants to create an alternative to the benchmark formed by the Netherlands-based transfer organization run by the US Intercontinental Exchange. Trading in this virtual hub for European gas buyers forms the backbone of the region’s benchmark, which has been volatile this year.

The reduction in supplies from Russia has spurred inflation and threatens to slide the eurozone economy into recession. war in Ukraine and record temperatures in Europe during the summer pushed TTF prices to €349 per MWh at the end of August, although prices have dropped to around €100 MWh in recent days.

But the commission says the TTF does not truly reflect supply and demand in international gas markets. In proposals published last month, he proposed a “more representative” alternative that included additional LNG supplies to the block to help replace the 155 billion cubic meters it previously received via pipes from Russia.

Unlike TTF, which is completely based on real transactions, its price will be estimated by the administrator. “The new benchmark will ensure stable and predictable LNG prices,” the commission said last week. It will work by “gathering real-time information on all daily LNG transactions.”

But Acer, which has been tasked with creating the new benchmark, admits it’s difficult because many LNG deals are bespoke and negotiated privately. This means that LNG contract data is more difficult to track and quantify than pipeline gas spot market prices, according to the regulator.

“We are looking at every possible opportunity to develop methodologies,” said Iztok Zlatar, head of market data analytics at Acer. He added that the creation of a new benchmark is outside the normal remit of Acer and is “an operationally challenging task.”

“It’s a big enough task. [and] so far we have not been provided with any additional resources for this activity. It’s quite a challenge,” he added.

He also said that Acer “can’t say” whether the new test will be accepted by the market. “It depends on the LNG market as it develops in Europe.”

Traders and analysts say the TTF reflects the reality of buying and selling. gas on the open market.

“The physical LNG market is highly illiquid; you’ll be lucky if there are a few deals a week,” said Neil Fleming, who leads global pricing and analysis at data firm Argus.

“On the contrary, there are thousands of trades per day in TTF. There is nothing structural that would indicate that the new LNG benchmark is cheaper or better than gas prices,” he added.

But even so, industry benchmarks and the futures contracts tied to them usually take years before they acquire the depth and reliability that make them indispensable in the market.

Acer can only start collecting data once the proposal has been approved by the 27 EU member states, which will not happen before November 24th. Despite this, the preparatory work has already begun, given the tight deadline set by the commission to establish a new benchmark. until March 31st.

However, the energy industry is concerned that the new pricing measure will divide already fragile liquidity and do little to address the fundamental problems of limited supply and rising demand that have driven prices to record highs.

This year, prices for TTF and spot LNG have diverged due to fluctuations in chilled liquid storage and processing capacity.

“In such a thinly traded market, you don’t want to split liquidity even more, creating a new benchmark,” said James Waddell, head of European gas and global LNG at Energy Aspects. “It’s really unclear what purpose that would serve.”

The difficulty is exacerbated by the fact that there is no single price for LNG. Last week, ICE said it would launch two new LNG contracts to help users hedge price differentials in northwestern and southwestern Europe. The two regions have different LNG infrastructure and the northern region was valued $1.73 higher on Thursday to $18.562 per million BTUs.

“The claim that an additional LNG reference model will be developed is commendable, but it remains to be seen if this is a valid solution,” said Ben Weatherall, director of energy market development at research firm ICIS.