Gas sector poised for revolution

Date: 07/10/1999

By Tim Jones

TEN months before the EU's single market for big-contract natural gas sales comes into force, suppliers and heavy consumers are already feeling the impact.

The opening last autumn of a 200-kilometre pipeline (the Interconnector) between Bacton in eastern England and the Belgian port of Zeebrugge, and new-style flexible contracts negotiated with powerful Russian and Algerian extractor/suppliers, are already changing the face of the market.

The hard-won deal reached between EU energy ministers in December 1997 to open just 30% of the market in 2000 is certain to be surpassed in most countries as heavy industrial users exert extra leverage to arm-twist suppliers into more favourable contract terms.

German chemicals group BASF has, for example, already warned Belgian monopoly supplier Distrigas that it could lose its Antwerp plant's annual 500-million cubic metres business when the Union market opens next August. The Belgian government, a reluctant market-opener during the EU negotiations, has already decided to open up 47% of the market to competition.

Via the Interconnector, the British have begun exporting characteristics of the world's most open market for gas. When it opened, gas was selling in the UK at 7 euro-cents per British thermal unit (Btu), compared with double that across the continent. This gap has narrowed since October last year.

Analysts expect the continent to emulate the UK and put less emphasis on the long-term contracts which often lock buyers into unfavourable contracts with suppliers. Instead, in the UK, a 'spot' market in which large producers, end-users and suppliers all trade gas in a daily telephone market accounts for about 10% of gas deliveries. Long-term contracts linked to spot-price indices, which enable buyers to benefit from falls in the live price, will start to replace charges linked retrospectively to oil costs.

Zeebrugge, the continental hub for the Interconnector as well as the 830-kilometre-long Seapipe from the Norwegian fields and a key port for liquefied Algerian gas, is expected to become the heart of the new market.

Flexibility for heavy industrial consumers is becoming increasingly vital as consumption is growing by 4% a year in Europe and the proportion of the electricity market powered by natural gas is expected to double to 20% within 15 years.

At the moment, supply is matching or surpassing demand, so buyers have a strong hand. But Dutch supplier Gasunie predicts this trend will start to turn significantly from 2005 and demand will have to be met increasingly by Russia and Algeria.

The company's managing director George Verberg has warned that this poses special problems for European supply and transit companies, and ultimately for consumers. "It is conceivable that failure by the downstream gas industry to commit in time to invest in new supply infrastructure could lead to transportation bottlenecks and abrupt tightening of supplies with adverse effects on security of supply and price level and stability," he said recently.

Part of a survey 'Challenges for industry', p13-20.