Gas summit highlights need for safe gas supplies in EU liberalized market.

Oct. 20, 2003
The "real" opening of the European Union's gas market will take place when the second gas directive comes into force in 8 months on July 1, 2004, targeting 530,000 industrial users. But the transitory period is fraught with uncertainties about the benefits to be expected from a liberalized market. Numerous doubts were voiced at the Eighth International Gas Summit in Paris Oct. 13-14, which covered issued related to the gas market opening process.

By Doris Leblond
OGJ Correspondent

PARIS, Oct. 20 -- The "real" opening of the European Union's gas market will occur when the second gas directive comes into force July 1, 2004, targeting 530,000 industrial users. But the transitory period is fraught with uncertainties about the benefits to be expected from a liberalized market. Numerous doubts were voiced at the Eighth International Gas Summit in Paris Oct. 13-14, which covered issued related to the gas market opening process.

Especially noteworthy during a "meeting of the minds" on the need to maintain long-term take-or-pay natural gas supply contracts—as moderator Nordine Aït-Laoussine, president of the Switzerland-based energy consulting firm Nalcosa put it—was the resurgence of the much-disputed theme of gas supply safety. Even the EU Commission, represented by Christopher Jones, head of the electricity and gas unit of the European Commission's Energy and Transport Directorate, confirmed what was described as the Commission's U-turn on its initial stand that the purchase and sale contracts were not to exceed 1 year.

Details on the regulatory framework are still being finalized, and in this interim period summit participants were particularly concerned that those regulations do not yet provide, in the words of Eurogas president Pierre Gadonneix, "the clear, efficient, and coherent market rules" required by industry players. A liberalized market, he warned, needs "an open and constructive dialogue between all stakeholders" in order to manage Europe's growing dependence on imports, because, in order "to meet growth in European gas demand between now and 2020 [a forecast increase of 60%], 250-300 billion euros must be invested in new gas fields and new infrastructure over the next 2 decades."

Unanswered questions
The fact that the UK is set to switch from being a major gas exporter to a major gas importer in 2006 also added to concerns about Europe's increasing dependence on imported natural gas. And the unsettling power blackouts that plagued a number of countries this summer, although involving electricity and not gas failures, sent out warnings that investments in gas supply and infrastructure were a prerequisite to safe supplies, begging the question of who would be held responsible for such dysfunctions in a liberalized market.

Would responsibilities also be "unbundled?" asked Aït Laoussine, who pointed out that "there is still a lot of confusion as to who is responsible for what¿the regulators or the operators." He added, nonetheless that "regulators cannot replace entrepreneurial decisions." Gaz de France Senior Executive Vice-president Jean-Marie Daugier voiced a view shared by many: "At the end of the day, security of supplies will be assumed by the operators themselves, providing rules and regulations are predictable and adapted to a liberalized market."

For International Agency's Executive Director Claude Mandil, responsibility called for another answer. An open gas market, he said, required intervention of the central governments to define the scope of the overcapacities that would ensure safe gas supplies. "The great news, therefore," he said, "and which some will find disappointing, is that liberalization does not reduce government intervention; on the contrary. But it makes it change its nature," for such intervention must be strictly limited to establishing the rules based on political objectives and be free from intervention in their application, he explained.

For his part, Jones took pains to reassure summit participants about the virtues of the second directive. The first directive, he admitted, "clearly failed" to achieve the objectives of creating a competitive integrated European internal market for gas. The second directive will introduce "legal unbundling, regulated and published transmission, distribution, and transit prices and clear rules on access to storage," and will provide "the foundations for a real internal European gas market" and "a real level playing field in all member states." Security of gas supplies will require "investment in terms of billions of dollars in the coming years," he said, adding "we all know that the biggest disincentive to such investment is regulatory uncertainty."

The veterans of liberated markets, such as BP Group PLC, ExxonMobil Corp., Total SA, or Tractebel SA, insisted that in addition to regulatory visibility, liquid markets enhanced security of supply because, said ExxonMobil's Steve Kirchhoff, manager of Europe joint ventures, they provide drive for the efficient balancing of supply and demand. In addition, a ready market encourages bringing new discoveries on stream faster, and price signals attract supply to areas with the highest need-incentives aligned.

For BP's David Fitzsimmons, group vice-president of gas, power, and renewables, liquidity of the market must be achieved through gas release "to enable new entrants to achieve critical size."

Reasonable returns
All summit participants insisted that tariffs must ensure a "reasonable" return on investments. For Yves-Louis Darricarrère, president of Total's gas and power division, "reasonable return" meant the group's stated 16% benchmark. He reminded participants that oil companies could provide the heavy investments needed for supply security (in a context of "future visibility,") because "liberalization means higher volume and price risk, especially in its present transitory stage. Oil and gas companies have a major role to play to see that reserves reach European markets," Darricarrère said.

This volume and price risk in a liberalized market also will be borne by the gas producers even in the framework of long-term take-or-pay contracts. For they are also caught in the spiral of change as well as the mid-stream players to a certain extent, noted ENI's gas and power deputy CEO Domenica Dispenza. "While they will have opportunities of entering the downstream gas market, they will be facing higher upstream price risks because of greater volatility," he said, explaining: "supply will be basically assured by long-term take-or-pay contracts, with short-term contracts or spot sales as market indicators."

In a move that will increase the gas market fluidity, ENI has just agreed with OAO Gazprom to drop the "destination clause" from its purchase and sale contracts, a move welcomed by the EU Commission but which considerably worries the executive vice-president of Algeria's Sonatrach, Ali Hached, especially insofar as LNG sales are involved. "Is scrapping destination clauses applicable to all suppliers," he wondered, saying that all Sonatrach LNG contracts are cif (cost, insurance, and freight)-based to offset risks.

He also expressed concern about the security of gas demand, arguing that gas needs to sustain its competitive ability but the advantages of gas have not yet been fully established. Hached pointed to the many new, ongoing, or planned gas projects, while wondering if the demand side was moving at the same speed. He was reacting to the consensus among the players that overcapacities all along the chain, from producer to final consumer, was required to maintain reasonable prices for gas in the same way as they were needed for the electric power and oil markets.

This consensus was bolstered by the view expounded by Gordon Shearer, a partner in Poten & Partners, that the LNG market was developing from a sellers' market to a buyers' market, driven both by volume and destination flexibility and by the very diverse groups of LNG projects and new countries entering the export business based on abundant supply. He pointed to the "reemergence of a North American market" which will be importing 80 bcm of LNG during 2015-20—as much as Europe is expecting—and the growth of the Iberian market along with the linkage that will be achieved between Pacific and Atlantic markets.

This linkage would be made by the Middle East acting "as swing producer for the world until Russia takes over," said Philippe Van Marcke, special advisor for the Suez Group's natural gas activities. Arguing that LNG is more competitive than pipeline gas over long distances, he sees the growing LNG trade as having a role in integrating a liberalized EU market into an LNG market driven from a regional to a global market through flexibility, "which," he said, "is the name of the game."

But to his own question as to whether "the importance of the US market will be sufficient to drive oil prices into impacting on European gas prices indexed to oil," he answered in the negative. This, however, remained a moot point at the summit in the event the opening of Europe's gas market should break the link with oil, a factor that could introduce higher price volatility.