Q&A: Turkey’s Epias (Exist) eyes gas futures trade launch

Author Eleni Charisi, Reporter, Argus European Natural Gas, and Bilal Muftuoglu, Deputy Editor, Argus AgriMarkets

Turkey’s energy exchange, Epias (Exist), will soon launch gas futures trading, following on the launch of power futures trade at the start of June. It has also launched Yek-G, a platform for trading renewable generation certificates.

Epias chairman of the board and deputy minister of energy Abdullah Tancan spoke with Argus about these developments and their implications for the Turkish gas and power markets.

Argus: Is Turkey’s gas futures market still on track to be launched on 1 October?

The software is largely complete. We are progressing module by module and we have reached the testing phase of our completed modules. Currently, there is no change in the project timeline.

Argus: How is the futures market expected to affect the structure of Turkey’s natural gas market?

We see that a significant part of global gas trade is done through futures contracts. Based on this, we can say that the futures platform is a very important step for our market. With futures contracts, our market participants will be able to manage their portfolios more flexibly and benefit from greater price visibility. Given these advantages, I believe that the already existing interest in the sector will continue to increase.

Argus: What futures contracts will be available when the exchange launches?

We have reached a consensus with the industry and decided to start with three contract types – monthly, quarterly and annual. Our aim was to start with a set-up that is simple and easy for market participants. We can consider plans to introduce seasonal and semi-annual products at a later stage, depending on market interest.

Argus: Will it be possible to sell Black Sea gas using futures contracts?

Turkey’s energy ministry aims to supply Black Sea gas to the market by 2023 and its trade will be available on our platform. Companies holding locally extracted gas in their portfolios will be able to trade on Exist as long as they register with us, EPDK and Botas Transmission. The sale of domestic gas on our platform should support competition among supplies from different origins and contribute to reliable price formation.

Argus: How do you expect Turkish futures prices to evolve? Could they follow Brent or European gas hub prices?

When we look at Exist’s gas reference price since the inception of our spot platform, we notice that there has not been much correlation with European gas hub prices. I think the main reason for this is that our country has long-term contracts that are indexed to Brent prices. Therefore, we may not see a futures market shaped by European hub prices in the short term. However, we could expect further correlation in the medium term as Turkey’s long-term contracts expire, further LNG enters the country’s gas mix and the unbundling of Botas gathers pace.

Argus: Could Exist’s gas price be included in Turkey’s new long-term import contracts?

Gas prices formed on our platforms can be added to price formulas. Exist is the gas market with the highest potential in the region. The gas reference price formed on Exist will undoubtedly strengthen our country’s hand when discussing new import agreements.

Argus: Exist prices play an important role in the Turkish gas market. Could they play a role in the regional market once domestic production starts?

Turkey can play a role in a regional market even without domestic production, once liberalised market conditions have been fully established. Domestic production will further bolster this process. At the same time, Turkey has strengthened its natural gas infrastructure in recent years through pipeline route diversification and new FSRU ships, with storage capacity now expected to reach approximately 10bn m³ by 2023. These elements combined should help Turkey achieve its goal of becoming an energy trading hub in its region.

Argus: Exist’s power futures market and the Yek-G green certificate platform were launched on 1 June. What are your expectations in terms of futures liquidity? Can we expect large-scale utilities such as EUAS to take on a market-maker role?

We aim to reach high volumes and liquidity as a mid-term objective. Participants that are active and meet their trading targets on the platform will receive a discount on transaction fees. At the same time, no transaction fee will be charged on any trade on either platform throughout 2021. As for the market maker, participants that comply with the conditions set forth in our legislation may apply to take on such position.

Argus: OTC market liquidity over the past three years has been thin. Could the futures market supplant it?

Futures and OTC markets are seen as rivals, but we do not expect trading on our futures platform to adversely affect OTC volumes. Participants can separately conclude deals based on bids-offers on their order books and log their bilateral OTC trades on the platform through a “special transaction notification”. Exist will provide central counterparty services for deals logged through such notifications, protecting both the buyer and seller and allowing participants to clear their positions. For instance, a participant that is long on the futures platform could log its OTC sale through a special notification and will carry this transaction to VEP. This will allow them to readjust their long-short status on VEP and the deposit they must provide will be calculated accordingly. This readjustment should lead to lower deposits. Meanwhile, Exist will publish a daily index price at the end of each trading session, which we expect will serve as a reference for the OTC market and facilitate price formation.

Argus: Renewable generation certification trading platform Yek-G will initially operate on a voluntary basis. What are your expectations in terms of participation and liquidity? Will there be any incentives to support trade on the platform?

Liquidity and price levels will be entirely determined by supply and demand as Yek-G remains a voluntary platform. Nevertheless, we observed a strong participation on the platform when it was launched virtually on 15 April. We expect increasing end-user demand for Yek-G, which will become Turkey’s renewable energy certificate network.

Argus: How will Yek-G operate differently from the existing IREC market? Can Yek-G be attractive to participants already trading IREC certificates?

Yek-G certificates will be created based on meter readings at renewable energy plants. This implies that there will be perfect accuracy with regards to each Yek-G certificate corresponding to 1MWh of power generation, which should set them apart in the certificates market. The Yek-G mechanism was designed using blockchain technology, which means that each 1MWh certificate will be assigned a unique code with this technology. This should allow an easy and transparent tracing of certificates’ generation and consumption.

Argus: Can Yek-G help Turkish market participants seeking to export to the EU as the latter is considering introducing a carbon duty on its imports?

There are public considerations in Turkey regarding the introduction of a domestic carbon pricing mechanism either through an allowance trading system or a carbon tax as part of a carbon adjustment mechanism on the EU’s borders. At Exist, we closely follow such considerations.

Argus publishes daily price assessments for Turkey’s over-the-counter power and gas markets, as well as assessments of the price of gas delivered to the country under long-term contracts from Azerbaijan, Iran and Russia. These assessments are accompanied by news, in-depth analysis and market commentary explaining the dynamics of the energy markets.

This blog is part of series of pieces focusing on southeastern Europe, which includes a white paper on Bulgaria’s stalled gas market liberalisation and a series of interviews with Greek energy experts about Greece’s hopes to become southeast Europe’s gas trading hub.

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