Gas agreement in the pipeline

Date: 31/10/1996

By Tim Jones

OFFICIALS working on liberalisation of gas supply in the EU can always console themselves with one thought when the going gets tough - even in the worst-case scenario, negotiations cannot possibly take as long as the eight years devoted to opening up the electricity market.

The interests involved are simply not as great. The Mediterranean member states tend not to be big gas users at all and the political clout of Gaz de France is not on the same scale as that of Electricité de France (EdF).

Only 156,000 people are employed in the European natural gas industry and production is concentrated in a handful of countries - the Netherlands, the UK, Italy and Germany. These countries alone account for annual natural gas supplies of 6,267 petajoules (one PJ = 25.6 million cubic metres), out of the EU's total of 7,252 PJ.

On the face of it, the issue matters less to most member states. Nevertheless, neither the Irish nor Dutch presidencies will find getting an agreement easy and their officials know it.

“We are hoping for a first set of conclusions in December, but we never thought there would be a common position,” said a diplomat. “If the ground is well laid in December, that would be progress in itself.”

It is often forgotten that proposals to liberalise the natural gas market are as old as those for electricity.

Back in 1991, the European Commission published a first-stage law urging member states to facilitate the transmission of gas along their networks, and another aimed at ensuring transparency in gas pricing for the final consumer (the end-user). Under these rules, gas operators had to communicate the tariff ranges offered to all types of customer to their central office of statistics.

At the same time, the Commission took legal action to scrap monopolies on the import and export of gas, launching infringement proceedings against the French authorities.

Eventually, in December 1993, the then Energy Commissioner Abel Matutes published detailed proposals to liberalise the sector along the same lines as electricity. According to the directive, liberalisation would be “progressive and implemented in phases in order to enable industry to adjust in a flexible and ordered manner to its new environment”. The regime was due to come into force from January 1996.

This did not happen. Instead, the Commission and successive presidencies gave up on gas until the tougher electricity dossier was closed.

The electricity deal itself was a compromise and the Irish presidency has extrapolated a proposal for the gas market based on the same trade-offs. But the two sides are still far apart.

As usual, the arch-liberalisers are led by the British, while the French head up the 'protectionist' camp, with both sides using the same basic facts to argue their corners.

To the liberalisers, the huge potential of the natural gas market requires early deregulation so that Europe's biggest suppliers do not find themselves out-gunned by non-Union firms.

In 1993, final consumption of natural gas in the Union accounted for 19&percent; of total primary energy consumption, and this is growing. Gas is still largely used for basic heating and is increasingly in demand for the cheap production of electricity in place of coal.

Eurogas, the industry's lobby in Brussels, forecasts an increase in EU consumption from 255 million tonnes of oil-equivalent in 1994 to up to 330 million tonnes in the year 2000 and as much as 415 million tonnes in 2020.

The sting is in the tail. The steep rise in consumption over the next four years will come from imports, with the DRI International Energy Service predicting that the Union will import close to 50&percent; of its consumption by 2005, much of this coming from notoriously unstable countries such as Russia, Algeria and Libya.

Both sides in the debate use these facts as ammunition. The UK and Germany claim that European companies will only be able to compete if they are as unfettered as possible. The French fear that allowing customers to shop around for alternative supplies without the intervention of the single buyer - in the form of Gaz de France - would threaten continuity of supply.

The UK government has a more pressing problem. British Gas, the EU's second largest supplier behind Dutch firm Gasunie, has a huge amount of surplus gas it is desperate to export.

The company has invested heavily in the 'interconnector' (a pipeline from East Anglia to Zeebrugge) which is due to be built by 1998. Once this is up and running, British Gas will be able to transmit 20 billion cubic metres of gas - the equivalent of one-third of total UK consumption - to continental Europe.

Without liberalisation, the project could turn into a 'white elephant'. Unless European markets are opened, British Gas will have to negotiate with national suppliers just to get the gas across its own country - and this will be done on the host company's terms.

Negotiations on an EU-wide gas deal are still at a very early stage: the Irish presidency opened official talks on 21-22 October on the basis of a new compromise proposal, but already the two sides are voicing their scepticism.

In an attempt to win over the waverers, Dublin has left many blank spaces in the proposal with the hope that negotiators will fill them in. It does not, for example, state how big industrial companies will have to be if they are to have the freedom to choose from other suppliers.

The Matutes text published in 1993 proposed limiting this choice to firms whose consumption exceeded 25 million cubic metres per year or distribution companies whose aggregate turnover was 1&percent; of overall consumption in the member state concerned.

This is way too high for the liberalisers, and the UK government has even suggested cutting the size of eligible firms to those using a million therms a year, or close to 3 million cubic metres.

What the Irish have done is to adopt the spirit of the electricity compromise, offering member states market-opening options.

Under Dublin's plan, governments could pick and choose between a system where producers, suppliers and customers negotiate the price of access to networks on a case-by-case basis, or one where transmission and distribution charges are set and published.

The first system is known as 'negotiated' third-party access (TPA) and the second as 'regulated' TPA. “The UK will inevitably fight for a common system of regulated TPA, but the Irish may well have succeeded in stripping away some of the softer liberalisers to the negotiated TPA idea,” said a diplomat involved in the talks.

If the British decide that any directive is better than no directive at all, they are likely to accept negotiated TPA for some member states, but only if the regulatory authority overseeing the agreement has the teeth to enforce fair play.

The real work on the deal will be done by the Dutch presidency next year. The Hague is determined to get an agreement since it has a major strategic interest in a successful outcome to the talks as home to Europe's largest gas supply company.

Depending on the progress made at that stage, a decision will be taken by next summer on whether the gas markets will open at the same time as electricity in January 1999.