EU cautious in opening valve of gas market

Date: 04/07/1996

By Tim Jones

LIBERALISATION of the EU's natural gas markets should come a lot more quickly than it did for electricity.

Yet, despite the relief among big industrial consumers that the battle over the opening up of electricity markets is finally over, they have not let this turn into excess optimism over gas.

A first discussion of gas liberalisation will not take place until the next meeting of energy ministers under the Irish presidency on 3 December. Even then, the European Commission is expected to take a cautious approach in an attempt to avoid antagonising the same countries which fought so hard against the creation of a common electricity market.

Energy Commissioner Christos Papoutsis has still to decide whether to wait for the completion of the so-called 'co-decision' procedure with the European Parliament over the electricity deal before pushing ahead with an agreement on gas.

This procedure - as was seen in the case of the Trans-European Networks and the biotechnology directive - can take a long time.

But Commission officials suggest Papoutsis will tread carefully. “He feels that we need to confirm electricity before taking careful steps towards gas liberalisation,” says an aide to the Commissioner. “Once that is done, he will decide whether he wants to restart negotiations.”

This is frustrating news for the companies in the vanguard of efforts to turn Europe's highly national energy markets into a common system which they are convinced will deliver lower-cost gas and electricity.

EnerG8, a consortium of some of Europe's biggest companies and consumers of primary energy, issued a statement last week calling for a quick completion of the single market in natural gas. They are determined not to see a repeat of the eight years it took to agree even a partial and staged opening-up of the electricity markets.

For the liberalisers, the potential of the natural gas market demands a rapid response. In 1993, final consumption of natural gas was 255.5 cubic gigametres (Gm3) - about 19&percent; of total primary energy consumption in the EU.

While natural gas is still largely used by residential and industrial customers for basic heating, it is also increasingly being used as an alternative to coal for the cheap production of electricity.

Recent analysis from DRI International Energy Service predicts that consumption in the Union will rise to 350 Gm3 by 2005.

Production is concentrated in the Netherlands, the UK, Italy and Germany - which alone account for 200 Gm3 - and yet imports account for a growing proportion of consumption.

DRI expects the EU to import up to 50&percent; of the natural gas consumed within its borders by the year 2005, with the bulk of this coming from Russia, Norway, Algeria and Libya.

This backdrop provides arguments for those on both sides of the divide.

The liberalisers, led by Germany and the UK, believe a series of closed national markets where operators hold exclusive transmission and distribution rights will undermine European competitiveness. But France, in the vanguard of the protectionist camp, argues it makes no sense for national operators facing an import wave to have to sign contracts with up to 1,000 purchasers.

The Commission has nevertheless pressed on with its drive for liberalisation.

When the single market in goods and services was established in 1993, energy was not part of it, but the Commission came forward with two directives to push through gas and electricity liberalisation. The intention was to implement the gas directive by January 1996 - a forlorn hope given the protracted wrangling over electricity.

Nevertheless, reforms in the gas sector are already under way under first-stage laws passed back in 1991. A first directive ensured the transparency of gas pricing to the final industrial consumer - notably the huge consumers in the UK and Germany - by obliging gas operators to inform the central office of statistics about the range of tariffs demanded from all types of customer, while a second called on member states to facilitate the transmission of gas along their networks.

While pushing through legislation, the Commission also took legal action under the existing Treaty of Rome. Having decided that legal monopolies for the import and export of gas were contrary to the single market, the Commission launched infringement proceedings against the French authorities.

France hit back, arguing that such monopolies were necessary to ensure security of supply and meet their public service obligations.

In December 1993, the Commission published its final proposals to liberalise the sector along the same lines as those drawn up for the electricity sector.

Liberalisation would, the directive said, “be progressive and implemented in phases in order to enable industry to adjust in a flexible and ordered manner to its new environment”.

The proposal called for negotiated 'third party access' to the system under which huge consumers could sign supply contracts directly with the producers of natural gas, similar to the systems operating in the US and the UK.

This downplays the role of transmission (transporting natural gas through high-pressure pipelines) as a commercial operation, with profits coming mostly from production and final distribution.

The directive would establish common rules on access to the market for large customers and urge member states to set out the criteria used for licensing the transmission, storage and distribution of natural gas as well as the operation of inter-connected systems.

Member states would be expected to ensure that producers and suppliers could provide gas to their own premises or to customers in all member states through an inter-connected system, subject to agreements with the relevant transmission companies and distribution operators.

Acknowledging that this is only the second stage of a three-phase liberalisation, the Commission wants this choice of supplier to be limited to big industrial consumers. It proposes limiting this to companies whose consumption exceeds 25 million cubic metres per year or distribution companies whose aggregate turnover is 1&percent; of overall consumption in the member state concerned.

To ensure competition in the area of infrastructure, the Commission has also called for common rules on the construction and operation of liquified natural gas terminals, transmission and distribution pipelines, and the storage facilities used to balance out supply and demand.

It says both customers and producers of natural gas should have access to the transmission and distribution systems, LNG facilities and storage facilities without discrimination and subject to available capacity in return for reasonable remuneration.

For British Gas, operating in the most open market in the EU, liberalisation is of a more than academic interest.

It has a major stake in the construction of the 'interconnector', a pipeline from East Anglia to Zeebrugge. Due for completion in October 1998, the pipeline will allow the transmission of 20 billion cubic metres of gas to continental Europe and from there into the UK.

Under the Gas Transit Directive of 1991, the company has some rights to transmit the gas, but must do so with the agreement of the transmission companies in the relevant member states.

Negotiations are continuing, but access to the huge German market for 8 billion cubic metres of British Gas' surplus will hinge on liberalisation.

While Papoutsis is cautious, the Irish presidency and its successor - the Netherlands - are keen to get an agreement as soon as possible.

The Dutch government, which is considered a convert to liberalisation, hopes to come forward with a draft accord within a year.

As so often, commercial interests are paramount: the Netherlands' monopoly operator Gasunie has been convinced that any lost sales at home could be more than offset by increased export opportunities.

With pressure coming from both the major suppliers and the biggest customers, history is unlikely to repeat itself, with few expecting it to take another eight years to build a common gas market.