Consultants predict European gas deregulation could save billions

European gas consumers could save up to $2 billion/year (£1.4 billion) by 2005 if gas markets were deregulated to the same extent as the UK market, results of a new assessment concluded. UK consultants Energy Markets Ltd. also estimated by 2010 these savings would increase to $3.6 billion/year (£2.5 billion).

By the OGJ Online Staff

HOUSTON, Aug. 21 -- European gas consumers could save up to $2 billion/year (£1.4 billion) by 2005 if gas markets were deregulated to the same extent as the UK market, results of a new assessment concluded.

UK consultants Energy Markets Ltd. also estimated by 2010 these savings would increase to $3.6 billion/year (£2.5 billion). Consumers in the UK would also benefit from lower gas prices in continental Europe, because of the direct pipeline link through the UK-Belgium interconnector, said Mike Fulwood, CEO of Energy Markets.

European buyers have driven up wholesale gas prices in the UK during the past 2 years as they sought cheaper alternatives to traditional supplies from Norway, Russia, and Algeria. This drove up UK gas prices to levels that approached wholesale continental European prices, based on traditional take-or-pay contracts linked to oil prices.

Consequently, wholesale gas prices have fluctuated widely over recent years between $60/thousand cu m (Mcm) and $150/Mcm, Energy Markets said. Using $20/bbl as a long-term oil price, gas prices under these contracts should average about $95/Mcm, although there would be likely to be short-term spikes, the consultants said.

If European markets were liberalized rapidly, gas-on-gas price competition would start to replace these traditional contracts with the result that wholesale prices would fall all over Europe, Energy Markets predicted. They estimated UK consumers would then save $614.2 million/year (£425 million).

Traded gas markets are usually accompanied by a move to shorter-term contracts and spot trading, Energy Markets noted. As competition develops, existing long-term contracts come under pressure in terms of both prices and volume.

Principal author Brian Little said that in all scenarios "we have assumed oil prices fall to $20/bbl by 2003. If oil prices remained higher than this, then the savings from gas liberalization would be even greater."

Gas consumption is expected to rise fueled in large part by demand from the electric power industry.

Changing suppliers
Germany and the UK are the biggest gas consuming countries followed by Italy, the Netherlands, and France. The report forecast demand in these countries will continue to grow and soon will be joined by Turkey where a rapid increase in natural gas demand is projected over the next 20 years.

The report also forecast significant changes in the main suppliers of gas to the European market. Currently, some 60% of the gas consumed in Europe is supplied from indigenous European production -- mainly the UK, the Netherlands, and Norway. Russia presently supplies about 27% and Algeria, 27%.

By 2020, just 34% of supplies will come from indigenous European production, Energy Markets predicted, while Russia will supply 31% and Algeria, 11%. About 11% will be supplied by newcomers such as Kazakhstan, Turkmenistan, and Uzbekistan, while the Middle East, including Iran, will supply Europe about 9%.

Although European gas markets have developed on a national basis, there is considerable capacity to transport gas across national borders, the report noted. This capacity has been developed in support of import of gas from within Europe and from further afield, including Russia and Algeria.

The main import route is from Russia via the Ukraine, Slovakia, and the Czech Republic. Gas also flows southward from Norway and the Netherlands to supply Belgium, France, and Germany, and on to Spain and Italy.

Energy Markets said completion of the UK-Belgium interconnector means the European gas grid is now linked from the Russian wellheads in the east to the UK and Ireland in the west. Plans are already in place to install new compression facilities in Zeebrugge, Belgium, so that the capacity to flow gas through the interconnector may be equalized in both directions, in anticipation the UK will need to import gas from Russia and other sources in the next 10 years.

Algerian gas flows north to Italy, Portugal, Spain, and Slovenia by pipeline. With the build up of LNG supplies into Spain in particular, the report concluded there is potential for Algerian pipelines to take gas further north to France and Austria.

Much of the gas is likely to come to Europe via Turkey, Energy Markets said. Although Turkey may absorb some of this gas in its own expanding markets, the consultants said they believe Turkey will also become a key transit country with new capacity being needed to move the gas through the Balkans to markets in northwest and southern Europe.

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