Gas sector sees beginning of new era – MET seeks leading role in Europe
Once again, Europe’s natural gas sector witnesses the end of an era. A classic consolidation is taking place in the market, based on, besides commercial portfolios, a growth competition including physical assets as well, and the process forces energy dealers to a steady growth path. Accordingly, the strategy of MET Group focuses on intensive growth, that is, we have to outgrow the market, MET Hungary CEO Gergely Szabó told Portfolio.
Today, businesses pursuing only commercial activities find it extremely difficult to survive in the European natural gas market, which now needs integrated energy companies. “We are returning to the original conditions, where the market was dominated by giant firms, with the huge difference that market distortion effects are eliminated now as a result of unbundling regulation," says Gergely Szabó. The world of integrated energy companies is about portfolios and optimization; an energy trader deals with a variety of items, so there is no point in talking about certain deals or separate transactions.
The company announced on Wednesday that managers took over MET ownership. The new majority shareholder of the group is Benjamin Lakatos through the newly founded MET Capital Partners AG. The former owners of the company have divested their holdings. The group plans further acquisitions in Europe and raise capital for the expansion.
To understand the current situation of the gas market, we should take a look back in time. At the beginning of the 2000s, the market was quite different, it was very monopolistic, with high entry barriers and, as a result, with a low number of mainly state-owned players. Pipelines, storage facilities and trading were owned by enormous gas businesses. Entering the market required billion euro initial stakes. Nevertheless, a lot has changed in the European gas market in the past 15 years.
Changes were induced by the EU’s regulatory process, which was aimed at lowering entry barriers and intensifying competition in the market. The first step was to separate the operation of infrastructures from trading. This decision proved to be a real game-changer, although many players failed to understand its significance at first. The industry then came to be in a similar situation in which the market of smartphones and smartphone applications is today. Now you do not have to manufacture smartphones (which has enormous investment and R&D needs) to be able to sell applications. You only have to invent the best applications, because the hardware environment is already available. Moreover, entry barriers in the gas market have dropped practically to zero, just like in case of a mobile application developer.
Traders can now decide for themselves how much money they want to put in their businesses. In fact, you should only finance your working capital, which is nothing compared to the costs of building thousands of kilometres of pipeline or operating storage facilities. A key element of the first EU energy package was the ‘use-it-or-loose-it’ principle, which eliminated the practice of booking capacities only to boost prices on the market by creating artificial scarcity.
As a result, about 800-1000 new companies were founded across Europe in only a few years, and all of them wanted to conquer the new opening market. MET was one of these ambitious companies. Mol quitted the gas business in 2004, not least because of the losses caused by regulated domestic gas prices and oil-indexed Russian gas prices, and it sold its trading company and storage facilities to E.On. The EU’s first regulatory package was not the only thing that helped the company at the beginning. E.On did not insist on a non-compete clause, which is usually included in these kind of transactions.
Then came the idea of returning to the gas market (although MET did not exist at that time, the people eventually launching MET still worked at Mol). “The team in charge of launching the company did not even count on the possibility of creating something that big. We got more and more involved in the story as we went ahead,” Gergely Szabó recalled.
Another fundamental change that took place at the same time played into the hands of MET as well, namely the transformation of the power balance of the energy market’s value chain. The only question in the golden age was who would be able to access competitive resources, selling was not a problem. However, it was becoming clear at that time that the market should be approached from the sales side. According to the new recipe, having a lot of consumers makes it easier to obtain cheaper gas resources, and size matters in case of customer relations and other services as well.
A completely new approach
As a result of these changes, the large, traditional players were continuously losing their markets to small trading companies. They would have needed a completely new approach, because while they continued with their old trading methods, many small companies appeared and they focused on serving consumers.
The new developments resulted in a competitive advantage for MET, as the company entered the current market after it was launched on the natural gas market, which concentrates on sales, as opposed to, for example, the oil market. “The whole energy industry is shifting the focus towards convincing consumers to choose a company for the long run,” says Szabó. This already obtained attitude helps a lot in case of other products as well. This is a significant difference compared to previous times, moreover, serving consumer needs to the fullest has become a top priority not only in the energy industry, but in the banking sector and in telecommunications as well.
In the meantime, the traditional, big players of the market were still suffering from the economic crisis and the resulting 50% drop in European demands. Since the long-term gas supply contracts with Russia had been drawn up based on the volumes before the great crisis, they had to take over 30-40% more gas than they could actually sell. There was a time when the difference between long-term Russian sources and spot prices was huge. Meanwhile, small businesses obtained part of the incumbents’ portfolio and acquired the gas liquidated by the incumbents at half price on the spot market.
Quickly come, quickly go?
It took a few years until the incumbents were able to give adequate answers to the new situation. But until then, the rest of the market players achieved unprecedented margins at the beginning of the 2010s. Nevertheless, the giants finally responded: competition was boosted by a constant horizontal expansion (all businesses started to operate in all countries), while they tried to squeeze out their smaller competitors by taking advantage of their size. These steps triggered a consolidation process, the number of active energy trading companies, as well as the profit-making capability of the market, has continuously declined.
Nowadays, an awful lot of the hundreds of companies created a few years ago have already closed shop, gone bankrupt, they are facing bankruptcy or they have been purchased. The main reason behind this is – besides significantly reduced margins compared to fixed costs – that profitability cannot be sustained. So, the trend defining optimal company size reversed for the second time within the past decade and now it favours larger players again.
Cherishing European ambitions
Having recognised this process, MET Group started to expand horizontally (geographically) and vertically (by trading with more and more products) in 2012 and 2013. Besides natural gas, the company added electricity, oil and LNG (liquefied natural gas).
“We seek to lead consolidation first and foremost in the European market, and while our efforts may involve assets as well, we plan to focus on end-consumer portfolios and markets. Especially because being able to access a vast pool of consumers will be one of the most important features of integrated energy companies. It will also serve as a basis to integrate many other products later on,” said the CEO of MET Hungary.