Pipedreams in EU gas market

Date: 22/05/1997

By Tim Jones

KEY areas of industrial liberalisation in Europe are usually thrashed out between the EU's big players.

During the long-drawn-out talks over opening communications services, civil aviation and electricity markets to competition, it was the French, German and British governments which fought their national and sectional corners to the death.

Gas - the final piece of the liberalisation jigsaw - is unusual in that one of the Union's tiddlers has the most to lose from freeing the market. “We regard this as of vital national strategic interest,” proclaimed the country's representative at a recent meeting of EU gas negotiators.

Belgium is in a unique 'hub' position when it comes to forming a single European market for gas, with the port of Zeebrugge acting as a crossroads for the entire continent.

Since October, Norwegian gas has been coming to Zeebrugge from the huge North Sea Troll field, where Shell, BP, Exxon, Mobil and Statoil have invested 20 billion ecu, via the 'Zeepipe' pipeline.

An international market is developing at the port which will mature even further when the so-called 'interconnector' between Bacton on the East Anglian coast and Zeebrugge has been completed.

Through this, UK supplier Centrica hopes to sell as much as 20 billion cubic metres (m3) of gas every year to continental Europe and - once UK reserves start to run low - Russian and Dutch suppliers aim to push their gas the other way into the British Isles.

In the middle of all this lucrative trade lies Belgium and its national supply company Distrigaz/Distrigas.

In the current pre-liberalisation climate, the continent's major producer/suppliers - the oil companies, Centrica, the Netherlands' Gasunie, Russia's Gazprom and Algeria's Sonatrach - can strike agreements with Distrigaz to transport gas through its pipelines as long as none of it remains in Belgium.

Most recently, Conoco (UK) Ltd signed a deal to route 1 billion m3 of gas every year through Distrigaz's VTN/RTR network and on into Germany. This allows Conoco to fulfil a contract signed last year with Germany's Wingas to supply gas through the interconnector from the day it opens for business in October 1998.

Distrigaz is constructing new pipelines from Zeebrugge south through Blaregnies and through Gent and northern Belgium and Eynatten into Germany, so as to capitalise on this kind of business.

Last week, Centrica contracted to sell Germany's Thyssengas up to 3 billion m3 of gas over a period of seven years, starting from October 1998. Transit will have to be negotiated with Distrigaz.

On the face of it, the Belgian company should benefit more than most from becoming the master of ceremonies in this pan-continental gas trade. But, in reality, it will not and Distrigaz knows it.

Already, Gasunie has talked about laying its own pipeline to the UK so as to cut out Zeebrugge. The Union's biggest supply company had suggested building its pipeline to the interconnector, but last week made a short-term tactical retreat.

In a letter to the Belgian authorities, Gasunie confirmed it had dropped plans to build this pipeline and would use the established Distrigaz network to import British gas in the next few years. However, Gasunie is studying its options, which could include laying a new interconnector between Bacton and Den Helder.

Formal liberalisation poses further threats to Distrigaz as one of Europe's smallest gas companies, particularly if the directive outlaws long-term exclusive 'take or pay' contracts. These allow the EU's major producers to set the volume of gas they deliver to supply firms for as long as 30 years at fixed prices.

At the annual general meeting for shareholders last week, Distrigaz chief executive Jean-Pierre Depaemelaere issued a stark warning. “In its current form, the draft European directive fails to establish uniform game rules for companies active on the gas market,” he said. “Although this was the initial aim, we must admit that recently the content of the text has evolved in the opposite direction.”

Distrigaz has contracts which oblige it to take up minimum thresholds of gas from its suppliers up to 2020. A major fall in the price of gas, which theoretically should follow liberalisation, would hit the firm's balance sheet hard.

Similarly, the fundamentals of the directive pose a threat to Distrigaz and its cosy relationship with municipal distribution companies. Under the latest draft of the proposed law, the first round of liberalisation would allow big industrial customers using more than 25 million m3 of gas to choose their suppliers. This threshold would be reduced to 10 million m3 five years later and to 1 million m3 after ten years.

This would have to be equivalent to opening 30&percent; of a national market to competition, expanding to 40&percent; after five years and 50&percent; after ten.

Governments are squabbling over whether distribution companies as well as industries should be classed as customers 'eligible' to shop around for gas. The Belgians are determined to prevent this since it could lead to the nightmare scenario in which, for example, the city of Antwerp could leave the Distrigaz fold and contract to buy cheaper gas from elsewhere.

Depaemelaere is convinced that the directive has become lopsided, and gives unfair advantages to established 'upstream' producers and their host countries, allowing them to become masters of the supply chain.

“Companies like Distrigaz will find themselves refused access to the production, storage and transit infrastructure of producers, but these latter companies will not be obliged to publish their cost structures,” he told shareholders last week. “So we find ourselves in a situation which accentuates the natural dominant position of producers, while 'downstream' companies are put in a position of weakness.”

Distrigaz believes that a directive aimed at forcing open the downstream supply and distribution end of the market misses the whole point. This is that gas prices will only fall in a liberalised market - as they did in the UK and the US - when producers are forced to compete.

Market analysts are becoming increasingly convinced that Distrigaz will be snapped up by one of the more diversified companies, with Gasunie heading the list of potential predators. The Groningen-based company is well located close to the interconnector, with a network of 11,000 kilometres of pipelines hooked up to other European distribution systems and linked to Gazprom. Buying up the key to the crossroads of Europe seems to be an attractive proposition.

“They are scared,” said one analyst. “They are really too small and have not got the fire-power to deal with some of these big producers.”

Publicly at least, Depaemelaere remains optimistic, insisting: “However the market and regulation evolve, we want to play a key commercial role on this market - in Belgium and Europe.”