IEA to study European gas market liberalization effect on supply safety

The Paris-based International Energy Agency is undertaking a survey to determine the impact of liberalization of the European natural gas market on the supply safety of its 26 member states.

Dec 6th, 2002

By an OGJ Online correspondent

PARIS, Dec. 6 -- The Paris-based International Energy Agency is undertaking a survey to determine the impact of liberalization of the European natural gas market on the supply safety of its 26 member states.

"The gas industry is moving from a situation where gas operators balance supply and demand using flexibility tools such as supply swing, storage, and interruptible contracts to one where supply and demand are balanced by market mechanisms," Olivier Appert, IEA's director, told a press conference.

Over the years, the European gas industry has developed a variety of tools to help match its relatively rigid supply of gas to seasonal demand, which fluctuates with temperature and price. The Netherlands' Groningen gas field has served as the swing producer for Continental Europe.

There also is ample underground gas storage capacity among European members of the Organization for Economic Cooperation and Development, but it is as unevenly distributed as in the US and Canada.

Hourly or daily peaks in gas demand currently are addressed through a "line pack" process by which the amount of gas in a pipeline network is increased by temporarily increasing or diminishing pressure at different points.

Interruptible contracts and fuel switching among big industrial customers and power generators help shave demand peaks when supply is tight.

Long-term gas supply contracts also are an important element in satisfying demand for gas, but depend heavily on economic considerations. Generally, import contracts for LNG in the European Union provide for a flexibility allowance of 90-110% of contracted volumes, compared with swings of 104% in the US and 106% in Canada, reflecting the economics of long-distance transportation. In Japan the swing factor of LNG imports averaged a low 113% in 2000.

New tools
Liberalization has introduced into the European market new flexible tools that are no longer based on volume. Experience in North America and the UK, where gas markets have been opened for some time, shows that competition and third party access to the transportation grid encourage development of hubs and spot markets where the balance of supply and demand is achieved through pricing mechanisms. These lead, in turn, to flexibility services priced independently from the gas itself, officials said.

The Zeebruge Hub in Belgium was the first gas market hub developed in Continental Europe and is linked to the UK, France, the Netherlands, and Germany through large pipelines. Bunde Hub, being developed in Germany, is the crossing point for three important pipelines transporting Dutch, Norwegian, and Russian gas.

Other trading hubs are being considered at strategic points in Austria, Slovakia, Germany, France, Spain, and Italy, where several pipelines interconnect and there is proximity to storage and demand.

Price volatility is changing aspects of the European gas market, particularly storage, which is increasingly used for price optimization rather than to manage volume. IEA officials said storage might eventually compete with other traditional tools such as swing supplies, interruptible contracts, and both spot and futures markets in helping to balance supply and demand. Gas companies also are offering unbundled services.

In areas where both gas and electricity markets have opened up, opportunities for price arbitrage are emerging where gas is used for power generation. Such arbitraging provides a complete new flexibility instrument.

New flexibility options are also appearing in LNG markets because of increased worldwide LNG spot trade. Demand is moving away from long-term bilateral contracts to a more flexible system responsive to market signals, officials said. This is helped by cost cutting along the LNG chain and to a greater number of independent methane carriers, as well as more spare LNG capacity available in the Middle East and Africa.

IEA said it sees a role for governments in ensuring proper functioning of the working of the growing and increasingly complex gas market to preserve the flexibility needed by non-interruptible customers that lack switching capacity and to monitor investors.

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