EC gas liberalization plans could cause market 'disarray,' says BP Gas chief

BP PLC's group vice-president for Gas & Power Wednesday warned European Commission policymakers that allowing the transition to a fully open European gas market to drag out could lead to "disarray" -- and threaten security of supply. Steven Welch said failure to streamline the process from the EC's gas directive policy through to implementation risked alienating both established utilities and new market entrants.


By the OGJ Online Staff

LONDON, May 17 -- BP PLC's group vice-president for Gas & Power Wednesday warned European Commission policymakers that allowing the transition to a fully open European gas market to drag out could lead to "disarray" -- and threaten security of supply.

Steven Welch, speaking in Oslo at the European Gas Conference, said failure to streamline the process from the EC's gas directive policy through to implementation risked alienating both established utilities and new market entrants.

"The principal risk and my greatest fear is a protracted transition period and downstream markets in disarray -- a market that doesn't function well," said Welch.

He said gas supply to European Union member states could be left insecure during the transition to full market liberalization because neither "old incumbent utilities (nor) new entrants" would have the confidence to back the long-term development of gas resources.

"In the old (pre-liberalization) world there was no problem," said Welch. "Long-term contracts; take or pay; customers bearing the risk via cost pass-through; utilities frequently backed by the state -- it all hangs together.

"In the long run of liberalization, there will be no problem if the market functions well," he continued, stressing that large users and marketing companies with "diverse portfolios of customers and procurement needs" and access to markets would emerge over time.

A smooth opening of the market could be jeopardized during the transition period when "the old incumbent utilities are fretting about the uncertainty of their customer base, and the new entrants are moaning about the lack of ability to access customers to build a stable, viable marketing business," said Welch.

"Who is going to have the confidence to sign up long-term then?" he asked.

To preempt such anti-competitive foot dragging and clear the way for a "level playing field" to regulate national monopolies and encourage new entrants, he said, the EC would have to ensure four key elements were in place.

Welch said the "essential ingredients" to speed market opening were access to gas supplies for portfolio-building, access to downstream transportation services underpinned by a "network code," transparent regulatory procedures ruled by an independent regulator, and the development of "deep, liquid, and transparent" pan-European markets for gas and transportation services.

"The notion that liberalization is about a shift from a structurally stable business to chaos is unhelpful and far from the truth," added Welch. "But there is a risk for the industry, by which I mean the whole value chain including customers, in that if we do not emerge quickly enough from the transition phase to a new form of stability."

Meanwhile, Statoil AS Chief Executive Olav Fjell, also speaking at the conference, said the Norwegian oil and gas company was targeting the UK as one of "several new growth areas" as Statoil's hydrocarbon output shifted increasingly toward gas.

"Calculations indicate that demand will increase. At the same time, British production is expected to decline from 2004-05. We have reserves close to the market, and we are well established in the market through our wholly owned gas marketing subsidiary Alliance Gas," he said.

He said that Statoil has reached a production level of 1 million boe/d, with the natural gas proportion set to increase in the future as the group's international operations became more significant.

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