No problem coping with the gas pressure

Date: 06/02/1997

By Tim Jones

REGULATORS will not bring an end to the dominance of long-term gas supply contracts in Europe. Instead, claims the boss of the EU's biggest natural gas company, market forces will do the job.

“There is a rapidly growing gas market in Europe so there is also greater room for other types of contracts,” says George Verberg, general managing director of the Netherlands' Gasunie.

“This means that, in due time, you will see a nice mix of long-term 'take-or-pay contracts' along with other contracts and even short-term and spot gas sales.”

With electricity liberalisation out of the way, the European Commission and energy ministers have turned their attention to the market for natural gas.

This is dominated by so-called 'take-or-pay' contracts under which the continent's major suppliers - western oil companies, Russia's Gazprom and Algeria's Sonatrach - fix the volume of gas to be delivered to transmission firms for up to 30 years. The buyers then take the gas they pay for but also pay for gas they do not take, which is then stored for them to take later.

Some of the more 'liberal' governments in the negotiations believe that continuing with these types of contracts will freeze this nascent market at a time when it should be most open.

“I would disagree with that,” says Verberg. “The European Union itself has accepted long-term take-or-pay contracts as the backbone of security of gas supply for western Europe, which is dependent on a very small number of important suppliers.”

As they anticipate the arrival of liberalisation, European gas suppliers are fighting for market share by signing a swathe of new contracts with producers.

A fortnight ago, Germany's Ruhrgas penned a deal with British Petroleum for 15 billion cubic metres of gas from the North Sea and extended an existing contract with Gasunie for 90 billion cubic metres until 2022.

Over the past month, Norwegian gas producers have agreed to supply 6 billion cubic metres of gas for the first time to Italy's SNAM over 25 years, and Gazprom has announced that it is considering constructing a pipeline through Finland into central Europe.

Verberg believes that this flurry of activity says more about companies wanting to tap into a fast-growing market than it does about any wish to safeguard their positions against domestic competition.

Contracts should be capped but this should not be done by fiat. “The maximum length of the contract should be a period determined by the commercial partners involved, which would turn out to be somewhere between 20 and 25 years,” he says.

When the market does finally open, Gasunie will be in a strong position to compete. It is centrally located at the heart of Europe's biggest consumer market with a network of 11,000 kilometres of pipelines and is already hooked up to other European distribution systems.

“We think our product and capabilities will give us a good chance to maintain our important position in the western European gas market,” says Verberg.

Crucial to Gasunie's commercial future is its ability to transmit gas into the UK - an aim that will depend on the construction of the 'interconnector' pipeline between Bacton and Zeebrugge, which is expected to move 20 billion cubic metres of gas every year between the UK and the European continent.

For months, Gasunie has been in dispute with Belgian supplier Distrigaz over the latter's terms for allowing it access to the interconnector.

Although the two companies have moved closer to a deal, they have yet to sign on the dotted line and Verberg is still considering the alternatives.

“We have another option for getting to Zeebrugge and could also imagine other lines going to England, so we at Gasunie are not bound by a single option,” he explains.

Once the routes are settled, Gasunie will be well-placed to supply much of the UK's gas needs. At the moment, British Gas has a huge surplus it wants to sell into Europe, but this will not last forever.

“I am not so sure that this situation will be in the long-term,” says Verberg. “There are rumours that in five or seven years, the UK will already be short of gas, but besides that there are two products which we can sell if we have a connection to the UK grid - capacity and volume.”

Gasunie's cooperation pact with Gazprom, which accounts for 60&percent; of total gas imports to the EU, will play a major part in this, says Verberg. “In time, I would not be at all surprised to see Russian gas sold into the UK,” he adds.