Guest article: The birth of the ESGM and the Heren Index

The Heren Index and European Spot Gas Markets (ESGM) were launched this week 20 years ago and in a guest article, Patrick Heren, the founder of ESGM, provides a personal history to the origin of the report and the Heren Index.

I had been publishing spot gas prices since January 1994, but the reports were either monthly through European Gas Markets, or weekly via newswires. Until the winter of 1994, they were of some interest to participants in Britain’s newly liberalised gas industry, but not vital: many thought the whole thing a bit of an irrelevance, and few understood that accurate and timely price reports were essential for competitive markets to function.

However, the entry into the market of Accord Energy, a 50:50 joint venture between British Gas and the US Natural Gas Clearinghouse, signalled that at least one company was prepared to make a market, and some of the oil companies, like BP and Texaco, began to assign experienced professionals to the British market.

Over the 1994 winter, trading seemed to pick up. Where a few months earlier, one or two deals a month were being discovered, we were now discovering three or four a week. British gas prices were also becoming more consistent – around 19p/th – although there was a lot of confusion about what contracts participants were actually trading. On the whole they seemed to be trading months or quarters, but some were reporting flat gas and some were reporting flexible delivery: the favourite was 135/90 (135% daily swing, 90% take-or-pay).

There was some demand among some experienced oil market traders for a volume-weighted gas index. For example, in December 1994, John Browne, the former BP chief executive and then head of exploration and production at the UK-headquartered oil and gas major, told me that he personally welcomed the creation of a British gas index.

The emerging gas trade did not have long to wait. Accord Energy had privileged access to British Gas’ Morecambe Bay fields, designed for high swing and capable of meeting 20% of UK peak day demand. They began to sell increasing volumes into the market, feeding the widespread demand for gas to compete on the industrial market with their own 50% shareholder British Gas.

As the winter drew on, prices came under pressure and the requirement for more regular pricing information from market participants increased. One question, which remains pertinent, was whether the market needed a price assessment or a transaction-based index. Large producers generally preferred an index, while trading entities preferred an assessment, provided it was accurate.

In early March several companies told me that the situation was about to get urgent: prices were sliding as temperatures rose, and the market needed more transparency. Where a few months earlier prices were much the same from month to month, now they were changing weekly.

Despite major resourcing constraints I took the decision to launch and that the first edition would be put together on Friday 17 March.

As far as pricing went, I preferred the time-honoured method of bid-offer assessments. At this stage, a year before the introduction of the network code, there was no virtual National Balancing Point (NBP), and gas was physically delivered and traded at the beach before entering the National Transmission System. There were six beach terminals, and I began with a table showing all six, though in truth there was only ever price information for the most important, Bacton and St Fergus. Of course a lot of liquidity came from Accord at Barrow, the terminal for Morecambe, but as only British Gas had entry capacity there, Accord swapped volumes to other terminals, mostly Bacton.

To satisfy the requirements of all market participants, in addition to the assessment, I decided to launch an index of forward month deals, assuming I could get at least ten qualifying transactions. In the event, eleven trades for April delivery were discovered, with a volume-weighted average of 14.1 p/th.

We did nothing much to prepare the market for what was about to hit it, other than casual remarks to market participants. Email was in its infancy and we did not have a website. The report, all two pages of it, was going to be faxed. We did have a fax machine, and despite attempts to automate the process, I spent the whole weekend in the office, manually faxing the report to the 400 or so numbers on our contact list.

The first edition’s impact on what was still a pretty small gas market community was profound. Years later, a trader for a big gas producer recalled:

“I came in Monday at 8:00 as usual, and there was this grubby report on my desk. I read it very carefully. Clearly everyone else was doing the same, because the phones were unusually quiet until about 10:00, and then all hell broke loose.”

There was a lot of confusion at first. Some people were astonished by the prices we were reporting (14 p/th and falling): “I’ve just paid 18 p/th for 300,000 th” was one irate response – to which I could only suggest that he subscribe to the report. As the spot price fell below 9p/th, the subscriptions rolled in and we finally automated the delivery of the report.

But I only knew that we had arrived a few months later, when I was invited to a London Energy Lawyers Group reception. I knew few lawyers, but as the evening went on, I began to realise that they all knew me, or at least my name: “So you’re the Heren of the Heren Index? I’ve been writing it into so many contracts recently.” Patrick Heren