Europe's gas industry braces for change

Natural gas markets and suppliers are poised for major changes in Europe the next 2 years as new pipeline connections bring in more supplies to meet growing demand and deregulation re-emerges on the European Union's agenda.

So the main concern at the Annual Congress of the Technical Association of France's Gas Industry (ATG) last month in Paris was on how such a changing outlook would affect the European Union's security of gas supply-especially for countries such as France, Belgium, and Spain that are almost totally dependent on imports.

The share of gas in the EU's energy mix is projected to jump to 25% by 2010 from the current 20%, mainly through increased demand from the power sector. And EU dependence on gas imports is expected to exceed 50% by 2010 and 70% by 2020, up from the current 40%.

Still the consensus remains that supplies would be plentiful to 2000 and even some years beyond.

A gas supply "bubble" is even forecast when the Interconnector line linking U.K. gas supplies with the European continent comes on stream at yearend 1998. Britain's North Sea gas will then be arriving on the continent along with added supplies slated to arrive by yearend 1998 through the Maghreb-Europe gas line from Algeria and through the Norfra gas line, due on stream in 1998 with increased volumes of gas from Norway's Troll field, to Dunkirk in France. There is also the project to double capacity of the big pipeline system carrying Russia's Siberian gas to Europe.

Britain's contribution should remain relatively marginal, accounting for less than 5% of overall supplies. But even so, it could well change the very nature of the continental market because of the probable development of shorter-term transactions and a broadening of the types of offers and services. It has been described as a sort of hypermarket where clients will shop for the gas they need.

At the ATG Congress, Patrick Lambert, who heads the gas division within the EU Commission's energy directorate, is convinced gas market deregulation would be approved some time next year. Discussions have already started among member countries. The Netherlands, which is taking over the EU presidency in January, has gas deregulation high on its agenda.

Dramatic changes ahead

Until now, Europe's gas market has functioned on a very organized and very partitioned basis, where a few very large producers deal with a few very large buyers, where each national market is managed autonomously, and where competition is between gas and other energy sources-but also where a 1 million-km, tightly interconnected gas grid has been developed, including 454,000 km of international gas pipelines.

The introduction of short-term transactions into this market, where long-term contracts are the rule, would introduce a relatively large measure of gas price volatility. This could well change the way prices are fixed in Europe, argues Gaz de France Pres. Pierre Gadonneix.

Such views are bolstered by London's International Petroleum Exchange plans to set up a gas futures market. Such a market, it is believed in France, might extend its influence to continental Europe through Interconnector, as transactions transiting through this gas line would be hedged in London.

France's Industry Ministry objects that "it is not very likely such a financial market for gas could be set up on the continent, because there are so few producers."

Nevertheless, spot transactions will very likely develop on a deregulated EU gas market-a natural follow-up to the recently-approved electricity market deregulation.

The question remains whether a futures market is good for natural gas supply security. The European Commission recently argued such markets bolster supply security in a competitive context, because the market is better informed of the values and expectations of the different players.

Opposition to deregulation

Opponents of deregulation, particularly in France, argue that futures markets do not improve supply security in the sense required by countries heavily dependent on outside suppliers, for they fail to encourage long-term contracts or prevent physical shortfalls of gas due to political or climatic reasons.

Because of this, the French administration and Gaz de France are already digging in their heels in anticipation of market deregulation in Europe. They insist that "gas is not electricity" and a gas directive cannot be a copy of the recently approved electricity deregulation.

Pierre Gadonneix, in fact, claims there is no need for an EU directive on gas deregulation at all: "In truth, Europe's gas market has already been achieved without the Brussels technicians. This is what annoys them."

He insisted that what is important is to "know very soon whether or not there would be a directive and what it would involve." For so long as uncertainty prevails, no one will launch the very heavy investments needed by the gas sector.

Claude Mandil, head of France's Energy Department at the Industry Ministry, contends the concept of subsidiarity should be the key to any gas deregulation, leaving France free to deal with supply security as it sees fit, he said. This implies maintaining control over its long-term gas contracts and over its national gas distribution system.

He focused on a time when the U.K.-induced gas bubble would shrink in about 12 years, and Europe will need to go much further afield than now to ensure supplies for an increasingly voracious and much more complex gas market. Such a market would feature increased competition between not only gas and competing fuels but between gas market sectors, notably industrial markets and power generation, as well as gas-on-gas competition as a growing number of producers go downstream to chase business with end users.