European gas firms complain about implementation of gas decontrol

Oct. 19, 2001
European companies complained this week at the Gas Executive Summit about the pace and direction of the European Union's gas market decontrol effort. They said the EU was not following the law and was restraining full deregulation in the short term.

By an OGJ Online Correspondent

PARIS, Oct. 19 -- European companies complained this week at the Gas Executive Summit about the pace and direction of the European Union's gas market decontrol effort.

The summit, now in its sixth year, was created to debate the deregulation process of the European Union's gas market. And over the years, one of the constant debates was on whether or not long-term take-or-pay gas supply contracts should still prevail.

All the company leaders said deregulation is necessary in a strongly industrialized EU market which imports 45% of the gas it consumes, a percentage that should rise to 70% by 2020, and which imports from three main countries -- Russia, Algeria, and Norway.

It is the way the EU commission is going about deregulation that gas operators in Europe object to. Some of its initiatives, such interference in long-term contracts through the so-called destination clauses which forbid long term supply contracts from being, in part deflected, to other parties than the signatories, or the commission's forthcoming second directive which aims to impose on member states as a minimum a legal separation between supply and transmission activities.

Dirk Bensdorp, managing director for gas purchases and sales for Gasunie of Holland, said that the gas regulator was not following the law and was restraining full deregulation in the short term.

"We are hindered by the regulation authority, not helped," he said.

Spain's Union Fenoza, which has signed a gas project with Egypt, and Italy's SNAM SpA, which has signed a gas extension project with Algeria, are complaining that the EU commission wants to vet these contracts to ascertain they do not infringe common market regulations. Domenico Dispenza, managing director of SNAM, insisted that "the commission should not interfere in commercial activitity."

Jean-Marie Dauger, deputy general manager of Gaz de France, said, "The foreseeable increase in European demand and the decline in European domestic resources mean that major infrastructure investments are essential and that long-term agreements must continue to occupy a central position in our supply portfolios. At the same time, however, it is feasible and even desirable to pursue the ongoing process of adapting these long-term agreements to the new context.

"For both partners in a long-term agreement it is, indeed, essential to know that they are able to cope with a situation marked by a large spread between the prices to which they are contractually committed and the prices paid on the spot market."

Petr Rodionov, first deputy chairman of Gazprom, complained that the EU Gas directive ignores the interests of gas suppliers, disintegrates the long-term "take-or-pay-contract system, and discourages new players from "preserving the market" as the price reductions expected from the liberalized market are achieved "at the expense of gas suppliers."

He said, "We cannot sign new contracts until we know the rules of the game at EU level before making the huge investments needed to bring remote Russian gas to new players." And he added, "if we can't anticipate, we will not move" beyond current long-term commitments.

Dauger said the commission has been too influenced by the UK's gas deregulation process. But as UK's Callum McCarthy, chief executive of the UK Gas and Electricity Markets Authority, said, over the years the UK "is now deregulating what was initially regulated," adding that "it is important to avoid over-regulation."

In Europe, the deregulation process, insisted Dauger, provides" for a strong regulation of the gas market for the benefit of independent regulators." While approving the need for the unbundling of corporate activities as one of the key components of the deregulation policy, he said the "tension between integration and unbundling lies at the heart of the current debate on gas market deregulation" for "at the same time, operators are deploying new integration strategies in the wake of market deregulation."

He explained, "While 'Chinese walls' were being erected between the different gas activities, operators were simultaneously launching new integration strategies to expand their businesses all along the gas chain, both upstream and downstream."

Downstream operators are moving into upstream activities but also downstream into the power generation especially, while there is an influx of power companies coming onto the gas market. "The European regulatory bodies should take these trends into account and avoid imposing a single model of market organization on European operators."

ExxonMobil Corp.'s John V. Genova, director of international gas marketing, said, "any changes to a market structure which has functioned well for 40 years need to be made with great care."

While supporting liberalization and competitive markets, he said, "in the last few years moving towards a deregulated market has not been in the best interests of producers, transporters, and consumers."