Liberalisation of gas markets in Europe and security of gas supply

Speaker: Pierre Gadonneix, President of Gaz de France and of Eurogas

The EU Gas Directive is under implementation in the Member States since 10 August 2000. Which are the differences between Member States in real terms of market opening?

The Directive creates a framework of objectives while leaving the responsibility of establishing the national laws to the Member States. The implementation is being closely monitored by the European Commission in co-ordination with the European Gas Regulatory Forum.

Does growing pressure towards accelerated liberalisation and competition require further harmonisation approaches towards a single market and new EU legislation?

The Commission is about to publish a “green paper” on security of energy supply after having issued recently a communication on security of gas supply. What are the consequences of the developing importance of gas in EU energy mix under this aspect?

The European directive imposes a minimum range of basic measures. Some countries have already opted to go further than this minimum, either by making provision for opening up the market completely (as is the case, for example, in Germany), or by providing for a legal separation between transport and supply activities (Italy and Spain have chosen this path), or, finally, by imposing particularly binding conditions of transparency for access to the network (as is the case for the United Kingdom and France.)

It is thus both logical and in line with the way the European Union operates that the rules in force within the Fifteen should be substantially different. These rules will converge over the coming years and the European market will gradually unify.

Three months after the effective implementation of the Directive, virtually all of the companies have taken steps that go beyond the « letter » of this text, either in accordance with national requirements, or on their own initaitve.

The regulators’ forum, whose third meeting was held in Madrid at the end of October, highlighted an important task of collecting, comparing and sometimes benchmarking information which had been carried out thanks to a major contribution from the representatives of the gas industry through a body representing the gas transporters, the GTE (Gas Transmission Europe), which was set up this summer at the Commission’s behest.

A complex procedure that is bringing many forces together is underway to meet the requirements of liberalisation.

Security of supply

Security of gas supply is primarily determined by the question of the distance between the point of production and the point of consumption. Europe is dependent on distant sources for its gas supply and will become increasingly so.

Investments in the energy sphere are considerable and call for visibility in the medium term.

Geopolitics sometimes takes precedence over the market.

The proportion of natural gas in the consumption of primary energy in the European Union should increase from over 22% in 1999 to around 28% in 2020.

Total consumption should increase by 40% over the same period from 324Mtoe to 458Mtoe.

On the offer side, the European Union’s dependence on imports should rise to 50% as of 2005 and could increase to 70% in 2020.

The question of security cannot be looked at independently of that of competitiveness. From this point of view, it is imperative to bear in mind one of the characteristics of this form of energy, i.e. its high transport cost. Transporting a barrel of oil 5000 kilometers costs around 1 dollar; transporting its gas equivalent over the same distance costs 10 dollars.

Conclusion

The European Commission, which has played its role in moving forward the process of liberalising the European energy markets, is aware of the need for not reducing the Union’s gas policy to the problem of opening up markets.
That is why it is looking at the the appropriate management of geopolitical risks and the security of trade and international transit.
However great the benefits expected from liberalisation might be in cost terms, they could be more than offset by a failure to come to grips with the aspects linked to geopolitics.
The debate made it possible to clarify a certain number of aspects.
• From the point of view of the reliability of supply, diversifying sources reduces the risks; more gas is being discovered every year, but there are also considerable « potential reserves », including those in producer countries such as Russia.
• The gas-tightness – or rather the poor level of gas-tightness – of the Russian infrastructures has never led to failure to deliver. However, it is such that it should require substantial investement and the idea whereby a foreign investor, such as Ruhrgas, would be paid from the energy saved is realistic. (The average rate of leakage in Europe is less than 0.7%, compared with around 3% in Russia.)
• The countries with no intrinsic supply security were the pionneers in opening up markets the others were reticent because an open market is beneficial to short-term solutions and consequently penalises technological research.
• Natural gas as a fuel for road vehicles is well suited to urban public transport.
• The question of ascertaining how much Russia intends to export is very sensitive because the Russians need a great deal of money. The Minister for Nuclear Industries, Yevgeny Adamov, is proposing to extend the life of Russian nuclear plants to be able to export more gas.
• At present, the link between the price of gas and the price of oil is still very direct. However a price reference is needed for long-term contracts and that reference is the oil price.
• The largest prospective gas market is Asia where prices are very high.
Closing the debate, President Rolf Linkohr recalled that the European Communities adopted a directive in the middle of the 70’s banning the use of gas in electricity production and that this directive had remained in force for some fifteen years. How times change!