Pricking the gas bubble

Two months after the European Union acted to enforce liberalization of natural gas markets, industry opinion about the directive is increasingly voluble.

Two months after the European Union acted to enforce liberalization of natural gas markets, industry opinion about the directive is increasingly voluble.

Proponents, among them Gaz de France SA Chief Executive Pierre Gadonneix, see gas at the heart of Europe's energy market and the Aug. 10 diktat as "essential" in defining the "specific markets rules and type of organization" needed to limit the impact of future energy price variations on the global economy.

Gadonneix believes natural gas will outpace both nuclear power and renewable energy in Europe, spurred on by the "brutal reminder" implicit in the present oil price spike that "Western economies cannot afford to slacken their efforts to reduce oil dependency."

The European "gas market of the future," he says, will be founded on long-term contracts, remuneration for gas transmission companies, and a market driven by a "concentration of supply and the growing demand of consumers."

Short supply

Supply is much on the minds of the directive's detractors, too. Among their chief fears, as suggested by George Verberg, CEO of NV Nederlandse Gasunie, is that European governments will lose sight of security of supply in the dash to open gas markets.

Verberg points to pitfalls encountered in California on its march toward electricity liberalization, noting the "importance of a well-balanced approach" in opening up an energy market.

"Liberalization," he warned, "[can result in] an aversion to making essential investment or to postponing necessary maintenance, as happened in California when investors lost confidence in their return as market demand swelled."

Shell Gas & Power Ltd. Director for NW Europe Renger Bierema echoes Verberg in emphasizing the damage potentially wrought by underinvestment in transportation infrastructure. EU policy makers, he says, compound the problem by neglecting producers and pipeline owners as they formulate gas market legislation.

EU's deaf ear

"The uncertain nature as to how liberalization unfolds, and the total lack of recognition in speeches by EU officials of the legitimate concerns of investors, all add to the unease investors have in expanding production and transportation capacity to supply the ever-growing market need for gas," said Bierema. Meeting European gas demand that is forecast to jump by a third to 600 billion cu m/yr by 2020 requires investment in the order of $60-100 billion.

The trouble doesn't end there, in his opinion. Balanced against secure supplies are the lower energy prices promised by liberalization advocates and implementation of the Kyoto protocol, which will affect price levels "in no small measure."

The UK heavy industry group Intensive Energy Users last week called for a ban on continental gas monopolies buying supplies from Britain via the Interconnector pipeline. It sees a link between high British prices and a "huge rise" in imports by the likes of Gasunie and Gaz de France.

A single European gas market looks distant indeed.

More in Economics & Markets