Escolar Documentos
Profissional Documentos
Cultura Documentos
Volume 1
Final Report
November 2005
The views and judgements contained in this report are those of Energy Markets and
do not necessarily reflect the views of the Department of Trade and Industry, who do
not necessarily endorse the conclusions.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY .........................................................................................11
International Experience ..........................................................................................11
Current Conditions in the Key Markets ...................................................................12
Barriers to Competition and Changes Required ......................................................15
Transition to Competitive Markets ..........................................................................18
Actions for Consideration by the UK Government .................................................21
1. INTRODUCTION ...................................................................................................25
1.1. Background .......................................................................................................25
1.2. Report Structure ................................................................................................25
2. DEFINING A COMPETITIVE MARKET FOR GAS ...........................................27
2.1. Economic Definition .........................................................................................27
2.2. Characteristics of Truly Competitive Markets..................................................34
2.3. Markets and Geographies .................................................................................40
2.4. Conclusions.......................................................................................................44
3. INTERNATIONAL EXPERIENCE........................................................................47
3.1. US Experience ..................................................................................................47
3.2. UK Experience..................................................................................................51
3.3. Australian Experience.......................................................................................54
3.4. Common Themes and Lessons for the EU .......................................................57
4. CURRENT CONDITIONS IN THE KEY MARKETS ..........................................61
4.1. Production Market in the EU ............................................................................61
4.2. Wholesale Market in the EU.............................................................................68
4.3. Retail Market in the EU ....................................................................................96
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INDEX OF FIGURES
Figure 1 Services Offered by US Pipelines .................................................................49
Figure 2 US Gas Consumption Production and Imports 1950-1995 ...........................50
Figure 3 The Structure of the Dutch Gas Industry.......................................................63
Figure 4 Eon Interest in the Proposed NEGP Route to UK.........................................72
Figure 5 EML Assessment of Gas Flows in Europe..................................................104
Figure 6 Forecast Production for Gazprom from existing fields ...............................105
Figure 7 Production by Russian Independent Producers 1999 to 2004 .....................107
Figure 8 Soyuzgas view of Russian production.........................................................111
Figure 9 Structure of Norwegian Gas Production......................................................120
Figure 10 World LNG Exports 2003 .........................................................................131
Figure 11 European Gas Flows in 2015/6 Constrained $30 Oil Price Case ..............192
Figure 12 European Gas Flows in 2015/6 Most Competitive Base Case ..................193
Figure 13 European Gas Flows in 2015/16 Fully Competitive Case.........................194
Figure 14 Comparison of Spot Flows With the Price Differential Between Zeebrugge
Hub and NBP .....................................................................................................199
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INDEX OF TABLES
Table 1 EU Wholesale: Changes Required..................................................................15
Table 2 EU Retail: Changes Required .........................................................................16
Table 3 Pipeline Supply Production: Changes Required .............................................17
Table 4 Pipeline Supply Wholesale: Changes Required..............................................17
Table 5 Summary of UK Spot Prices 2015/16.............................................................19
Table 6 Gas Prices by Scenario ...................................................................................20
Table 7 Ranking of Changes Required ........................................................................23
Table 8 Characteristics of Truly Competitive Gas Markets ........................................39
Table 9 Definition of Market / Geographical Sectors..................................................42
Table 10 Importance of Competition by Sector and Geographical Area.....................43
Table 11 EU Gas Reserves ..........................................................................................62
Table 12 Current Status of the Production Market in EU............................................67
Table 13 Examples of Cross Border Flow Flows and Capacity ..................................83
Table 14 Comparison of Transportation Tariffs ($/mcm/100 km) ..............................85
Table 15 Current Status of the Wholesale Gas Market in EU .....................................95
Table 16 Throughput of Snam Rete Gas System.........................................................99
Table 17 Current Status of the Retail Gas Market in EU ..........................................101
Table 18 European Gas Imports by Country 2003 ....................................................102
Table 19 European Gas Imports by Company 2003 ..................................................103
Table 20 Russian Gas Contracts with Europe............................................................106
Table 21 Algerian Gas Contracts...............................................................................117
Table 22 Libyan Gas Contracts..................................................................................118
Table 23 Norwegian Gas Contracts ...........................................................................123
Table 24 Norwegian Export Pipelines .......................................................................125
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EXECUTIVE SUMMARY
The UK is now a net importer of gas, with prices and access to supply increasingly
depending, therefore, on markets elsewhere. In this context, it is critical to understand
what might stand in the way of effective and efficient competition in European as well
as global gas markets in the next 5-10 years. As a consequence the Department of
Trade and Industry (DTI) decided to commission a report to consider the Conditions
for Truly Competitive Gas Markets in the EU (and Globally).
The objective of the report was to identify the potential barriers to the development of
truly competitive natural gas markets on the Continent (and globally) and, where
appropriate, identify ways in which the UK Government could influence the political,
regulatory and market outcomes in order to maximise the benefits of competitive gas
markets to UK consumers.
The report firstly considers international experience of how competitive markets
develop, current conditions in the key gas markets, the barriers to competition and
changes required to remove the barriers, the transition to competitive markets and the
implications for prices in particular and actions for consideration by the UK
Government.
For the purposes of analysis the overall gas market was divided into three distinct
markets the producer market, the wholesale market and the retail market and three
distinct geographies the EU25, plus accession and candidate countries, the Pipeline
Supply Area and the LNG Supply Area creating a total of 9 sub-markets. The
importance of each of the 9 sub-markets differs, however, in the context of
competition in the EU market. Four key markets were identified as being the most
important in respect of competition in the EU market the EU Wholesale market, the
EU Retail market, the Pipeline Supply Production market and the Pipeline Supply
Wholesale market. The focus of the report, therefore, is largely on these 4 key submarkets.
International Experience
The study considered, in terms of international experience, the gas markets in the US,
UK and Victoria in Australia which are very different, ranging in size, diversity and
complexity. Each market, however, has successfully introduced competitive gas
markets particularly at the wholesale level. The common themes arising from the
experience of these differing markets are as follows:
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introduced, the removal of destination clauses and the German cartel office
declaring 75% of the 750 contracts between the transmission system operators
(TSOs) and the LDCs as anti-competitive.
The main issues regarding third party access relate to allocation of capacity. Many
TSOs operate a first come first served system which effectively denies access to
capacity to new entrants. Transit is generally treated separately from domestic
transportation. Capacity in transit lines is frequently booked up under long term
contracts and there are cross-subsidies between transit and domestic charges.
Analysis suggests that cross-border capacity is generally under utilised, except
maybe into Italy, and that there are also large discrepancies between transmission
tariffs within EU countries for transporation of similar loads and distances. It is
certainly noticable that tariffs are lower where regulators have taken an active role
in forcing out inefficiency and economic rent than in countries where independent
regulators have been less forceful in regulating tariffs.
Balancing regimes also differ between countries, with a mixture of hourly and
daily balancing, and evidence of overly penal charges. There is, therefore,
considerable scope for network operators to adopt a regime that implicitly favours
their associated supply business. Progress is being made on the publishing of
conditions for access to both LNG terminals and storage facilities with a mixture
of regulated and negotiated TPA.
At the institutional level the regulatory authorities in some countries would appear
to be more proactive than in others, particularly where state ownership is still
important. Germany has only just established a regulator but the cartel office has
been active.
Apart from access to infrastructure and gas supplies, adequate systems are also
required at the LDC level to ensure a smooth switching process and to ensure that
information flows are maintained to support proper customer billing. In addition it
should be noted that a large proportion of customers bills are for components
which are beyond the control of the gas supplier (gas and transportation costs and
taxes). This makes it difficult for new entrants to undercut the prices offered by
the incumbent company and makes the financial advantage of switching
questionable in relation to the potential problems and worries that switching can
bring.
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Analysis by Energy Markets (EML) indicates prima facie evidence that there is a
significant amount of inefficiency and/or economic rent in the distribution and
supply sector in particular, making the cross subsidisation of the supply side by
the incumbents pipes business much easier to achieve. This would indicate that
distribution is yet to come under effective regulatory control and supply to small
users (households and small industrials) has not been subjected to competitive
pressure.
Europe (EU25 plus Romania, Bulgaria and Turkey) imported just over half its gas
supplies in 2003. Russia accounted for half of the imports, Norway 25% and
Algeria 20%. Russia and Algeria will increase their exports to Europe in the next
10 years, but new pipeline supplies are expected from Libya, Iran and the Former
Soviet Union countries in the Caspian Sea area (Turkmenistan, Azerbaijan,
Kazakhstan and Uzbekistan). Europe will remain highly dependent on gas flowing
from Russia through the Ukraine to Slovakia. However, alternative routes through
Belarus and Poland (Yamal) and direct to Turkey under the Black Sea
(Bluestream), are now flowing gas with volumes expected to increase over the
next few years. A third route to Germany under the Baltic Sea (North European
Gas Pipeline) is also planned although the timing of this project remains subject to
uncertainty.
Norway is the second largest importer into the EU market and recent reforms have
led to the break up of the GFU and producers selling their gas directly. The
offshore transportation regime has also been reformed by the creation Gassco
(operator) and Gassled (owner) with open access and an entry exit methodology.
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Changes Required
Main Drivers/Factors
Removal
of
anti-competitive
clauses
from
contracts
and
encouragement of shorter term
contracts
Introducing full competition into the EU Wholesale market is seen as a key priority
and an area where there are significant barriers to entry. This is particularly the case in
respect of access to, and availability of, pipeline capacity at reasonable tariff levels.
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Gas storage is also another key area and the Second Gas Directive and the Guidelines
for Good Practice have failed to provide real access to storage at a reasonable price.
For gas release programmes to be effective it will be important to release gas not only
from purchase contracts but also at the sales end as well.
Table 2 EU Retail: Changes Required
Barriers to Competition
Changes Required
Main Drivers/Factors
Overcoming
resistance
from
incumbents and concern about the
possible high cost of introducing
retail competition
Removal
of
exclusive
arrangements, shorten duration of
contracts and institute gas sales
release programmes.
Proper
legal
unbundling
of
transportation, supply and storage.
Privatisation of state owned
businesses.
Cost
reflective
distribution charges to eliminate
excess profits and inefficiencies
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producers,
Restrictions
on
exports
independent producers
by
Changes Required
Main Drivers/Factors
Because of the dominance of supplies to the EU by a few countries and largely state
owned companies introducing more competition in this area is seen as a High Priority.
Table 4 Pipeline Supply Wholesale: Changes Required
Barriers to Competition
Changes Required
Main Drivers/Factors
No
transmission
connections
directly with specific (FSU in
particular) countries with abundant
gas reserves. Inhibits diversification
of EU supplies
Could
encounter
powerful
resistance from Gazprom and
Russian Government
The wholesale markets in the Pipeline Supply area are also seen as a High Priority for
competition because of the importance of diversifying supplies to the EU. The
diversification of supplies will require the construction of new pipeline links,
particularly those adding to Russian and Gazproms routes.
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The Fully Competitive Case - The Fully Competitive Case represents the best
possible world from the point of view of competition in the gas market. It depicts
a fully competitive gas market in EU and globally by 2015/16. Within the EU the
liberalisation process has been completed and there has been substantial reform in
the gas market in Russia and other gas producing countries. The LNG market
becomes fully commoditised with extensive spot trade. The Fully Competitive
case is included as a benchmark against which to measure the other scenarios
and is not necessarily considered to be a realistic picture of the market in
2015/16.
The Most Competitive Case - This case represents the most positive outcome
from the point of view competition in the gas market that can reasonably expected
to be achieved over the next ten years. Long term contracts continue to play an
important part in the market but pricing terms move away from oil price
indexation to market-related pricing. Liberalisation within the EU itself is
substantially completed but there remain problems beyond the EU borders. Whilst
some reform has been attempted in Russia, and Russia has signed the Energy
Charter Treaty, Gazprom remains dominant over Russian production and still
effectively manages to exclude gas from the Caspian area from direct access to the
European market.
In respect of key data inputs to the EGM, the assumptions were as follows:
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Oil prices - We have used the DTI assumption for the oil price of $30/bbl (real
2004 prices in 2015/16) and tested the sensitivity of the constrained case (the only
case with gas prices linked to oil) to $20/bbl and $40/bbl (real 2004 prices).
Supply and Infrastructure - The Fully Competitive and Most Competitive cases
both assume plentiful supplies and infrastructure. In the Fully Competitive case
the pipeline supply area is extended by new pipelines from Egypt to Turkey and
from Nigeria to Algerian and on to southern Europe. Supplies from the Caspian
can transit Russia using TPA in this case as well via Turkey and the Nabucco
pipeline. In both the Most Competitive and Constrained, Russia does not introduce
TPA. Caspian gas can be routed via Turkey and, in the case of Most Competitive,
in the Nabucco pipeline to Austria. Russia is able to continue to buy supplies from
Caspian area producers to help supply its own exports to Europe.
Table 5 shows the projected UK prices in real terms for 2015/16 for the three
scenarios. It gives an indication of the magnitude of the beneficial impact on prices of
increasing degrees of competitiveness in the EU gas markets.
Table 5 Summary of UK Spot Prices 2015/16
P/Therm Real 2004
Prices
Constrained Case
Most Competitive
Most Comp Sensitivity
Fully Competitive
UK Spot Price
Q1
32.0
22.2
23.7
17.3
Q2
33.6
22.2
23.7
18.7
Q3
30.1
18.7
20.3
15.2
Q4
30.1
18.7
20.2
15.2
Average
31.5
20.4
22.0
16.6
Gas prices in the scenarios are summarised in Table 6 for 14 of the 25 countries
included in the EGM. Generally, price (or basis) differentials between countries,
including between the UK and other Member States, should reflect the transportation
tariffs on the connecting pipeline systems. In the Constrained Case and the Most
Competitive Case contractual and physical constraints on the pipeline systems result
in basis differentials between countries diverging from the transportation tariffs. In the
Fully Competitive Case, where almost all constraints have effectively been removed,
basis differentials do reflect the tariffs. Also in the Most Competitive and Fully
Competitive cases, the general pattern is for prices to get higher the further west in
Europe the country is. However, in the Most Competitive cases it is noticeable that
prices in Central Europe are relatively higher than in neighbouring countries, which is
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Austria
Belgium
France
Germany
Greece
Ireland
Italy
Netherlands
Poland
Portugal
Spain
Switzerland
Turkey
UK
Constrained Case
Most
Competitive
MC
Sensitivity
Fully
Competitive
WACOG
Spot Price
21.3
18.9
21.1
21.1
14.6
27.1
31.7
23.0
20.1
36.6
31.0
37.4
22.8
18.6
36.6
19.5
20.6
14.6
11.9
24.6
20.8
21.7
15.5
11.9
26.1
15.3
16.1
14.2
12.9
18.2
22.4
23.7
19.0
21.7
18.3
19.7
26.1
11.5
12.7
30.6
10.0
16.1
9.8
20.5
13.6
11.8
16.5
10.7
21.5
16.0
14.1
12.7
9.2
17.6
15.0
28.0
23.5
31.4
32.8
34.9
31.5
20.5
14.1
20.4
21.1
14.1
22.0
15.2
11.2
16.6
It is important for Europe to secure adequate low cost supplies from Russia, FSU and
other sources. The alternative is that potentially higher prices result from the EU
competing with the US for LNG supplies. The Most Competitive case would bring in
sufficient supplies to Europe to lower prices in general. For the UK the gas price
would be around 20.4 p/therm, or 11.1 p/therm less than in Constrained case. Supplies
from Russia are now the key in setting spot prices, with LNG supplies becoming a
price taker, as opposed to the price setter as in the Constrained case.
The Fully Competitive Case would not only help contain gas prices, through greater
pipeline capacities and increased liberalisation and competition, but also improve
security of supply to Europe because there is a much more diversified range of supply
countries contributing to supply. Russia will contribute a significant proportion of
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European gas requirements under any scenario because of its reserve position.
However, in the Fully Competitive Case, the Russian share is limited to less than 35%
and more importantly the gas is produced by a wider range of producers, because of
the assumed break up of Gazprom, and independent gas producers can market their
gas directly to Europe.
European imports are currently dominated by three producers Gazprom, Sonatrach
and Statoil who control 84% of imports. The combined market share of these three
producers declines to 69% in the Constrained Case, 59% in Most Competive and 51%
in Fully Competitive.
Actions for Consideration by the UK Government
The possible options and recommendations are linked directly to the barriers to
competition and the changes required in key markets as described above. The changes
required in the key markets can be divided into the EU area and the Pipeline Supply
Area, since the actions that the UK Government can undertake will differ between the
two areas. Direct action that the UK Government can take is relatively limited since
almost all the changes required are outside the UK. Much of the actions, therefore,
will be limited to influence and persuasion, although under certain circumstances it
may be possible in the future for direct legal action to be taken under EU Competition
Law.
The changes are ranked in terms of their relative priority and possible achievability
and linked with potential actions by the UK Government. The ranking of the changes
is shown in Table 7 below.
Out of the top 10 changes required, 6 relate to the EU Wholesale market, focussing
particularly on access and availability of transmission capacity and the flexibility on
gas supplies both in terms of volumes and contractual terms. Changes in the EU Retail
market are of less importance, apart from the requirement to unbundle transportation
and supply and reforming the gas sales contracts to LDCs. In the Pipeline Supply area
the focus is very much on expanding pipeline capacity both in terms of diversification
through new connections and privatisation of existing pipelines.
It is perhaps not too surprising that 3 of the top 5 ranked changes relate to acesss to
and availability of capacity, effective gas release and unbundling, all of which were
seen as integral in the introduction of competition in the US, UK and Victoria in
Australia. In addition, the other 2 in the top 5 new pipeline connections and more
transit through the UK - are designed to increase the EUs diversity of supplies, also a
key factor in the US and the UK.
A number of the recommended changes required, especially at the EU Wholesale
market level, go well beyond the Second Gas Directive and further than has been
suggested at the Madrid Forum. If these changes are to be implemented, therefore,
most, if not all, of the other countries in the EU and the European Commission will
have to be persuaded of the merits of the changes.
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Code
Title
Change Required
EUW1
EUW5
PSW3
Promote the construction of new pipeline links and try to reduce the influence
of the incumbent producers
EUR4
EUW3
Transit Regimes
EUR2
EUW4
Presumption that all storage should be regulated TPA, unless it can be shown
that there is true competition. Simplified balancing regimes, with daily being
the minimum balancing period
EUW2
PSW2
10
EUW7
11
PSP3
Foreign Investment
12
PSW1
Regulated TPA
13
PSW4
14
EUW3
(EU)
Transit Regimes
15
PSP2
Restrictions on Independent
Producers
16
EUR1
Distribution TPA
17
PSP1
18
EUR3
Supplier Switching
19
EUR5
Upstream Costs
20
EUW6
Spot markets and hubs will develop once the conditions for effective
competition are in place
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1. INTRODUCTION
1.1. Background
The UK is now a net importer of gas, with prices and access to supply increasingly
depending, therefore, on markets elsewhere. In this context, the Department of Trade
and Industry (DTI) believe it is critical to understand what might stand in the way of
effective and efficient competition in European, as well as global gas markets, in the
next 5-10 years. While the Government is already very active in influencing EU
liberalisation, there are likely to be political, regulatory, technical and market factors
that can either slow down or limit the extent of true competition on the Continent.
Identifying these ahead of time will be key. As a consequence the DTI decided to
commission a report to consider the Conditions for Truly Competitive Gas Markets
in the EU (and Globally).
In the context of the DTIs remit, the objective of the report would be to identify the
potential barriers to the development of truly competitive natural gas markets on the
Continent (and globally) and, where appropriate, identify ways in which the UK
Government could influence the political, regulatory and market outcomes in order to
maximise the benefits of competitive gas markets to UK consumers.
The full terms of reference are reproduced in Appendix 1. However they included the
following sets of key questions that would need to be answered:
1. What conditions (regulation, structure, conduct) would be required for the EU
(and global/LNG) gas markets to be truly competitive around 2010-15?
2. What will be the most important drivers/factors, between now and 2010-15, which
will determine whether these conditions will be met?
3. What are the likely outcomes on these key factors, and, on balance, how
competitive is the European/global gas market likely to be around 2010-15?
4. What are the implications of this level of competitiveness for UKs energy
markets, especially the prices and security of supply issues we might face?
5. Based on the above, what, if any, action (including influencing strategies) should
the UK Government consider in order to facilitate the development of competitive
gas markets?
1.2. Report Structure
In considering the requirements in the terms of reference, Energy Markets added a
further 3 questions to the 5 that the DTI had posed:
1. Are there any truly competitive gas market in the world and what lessons can be
learned from them?
2. What actions are needed by the EU and Regulatory Authorities in Member States?
3. What are the implications of a competitive gas market for responses to price
signals both in the short term and the medium term?
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In respect of answering these and the DTIs questions and in the context of achieving
the objectives outlined in the terms of reference, this report is structured as follows:
Section 2 defines what we mean by a competitive market for gas, expanding on the
definition in the terms of reference, describes the conditions required in a competitive
gas market. It also considers different markets within the gas chain and different
geographies, including those outside the EU.
Section 3 outlines the international experience with reference to the USA, UK and
Australia, describing how the competitive markets developed and considering
possible lessons for the EU.
Section 4 considers the current conditions in each of the key markets and geographies.
Section 5 considers the barriers to the development of competition and the changes
required.
Section 6 considers the timing of the transition in the context of the 2010 to 2015
timeframe using different possible scenarios and discussing the likely outcome.
Section 7 looks at the implications of a competitive gas market, describing the gas
price differentials between scenarios, differences in gas flows and transportation
capacities, assesses the implications for security of supply to the UK and Europe as a
whole and how the market may respond to the price signals and differences.
Section 8 looks at actions for consideration by the UK Government outlining a series
of options, both for the UK Government and the EU and Member States Regulatory
Authorities, and describes a strategy for the UK Government for the implementation
of the reports recommendations.
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effective marginal cost negative1. At the infrastructure level there is a high level of
fixed costs and the short run marginal cost is very low. The gas supplier, on the other
hand, faced with possibly buying at the spot price is looking at a marginal cost much
closer to the economists concept. Depending on the point of view of the buyer or
seller of gas and also whether or not there is an excess supply of gas and/or capacity,
the marginal cost of gas can vary enormously. Appendix 2 reviews the concept in
more detail.
For the purposes of this report, however, it is helpful to add more detail to the
definition. A useful expansion of the definition of a truly competitive gas market was
recently published by the New Zealand Ministry of Economic Development2, who are
responsible for policy relating to competition and regulation of gas markets, in the
context of the establishment of competition in their market. The key definitional
points were as follows:
1. A market where there is full competition in production, wholesaling and retailing
natural gas, and where gas can be freely traded between producers, wholesalers,
retailers and consumers.
2. An interconnected transmission and distribution system with clear rules for access
by all prospective participants. Where pipeline capacity is in competition,
capacity is tradable and transmission prices are set by reference to the market.
Where natural monopoly exists, clear rules for reference pricing are available
and disclosure arrangements and legal remedies are available at an economic
and timely manner to redress concerns.
3. Arrangements in the transmission, distribution and retail sectors that provide
confidence in the market that cross-subsidising is not occurring in vertically
integrated organisations.
4. A market where clear market signals encourage the efficient allocation of
resources along the gas supply chain by providing information to market
participants through flexible pricing arrangement, contracts of variable length,
efficient gas trading mechanisms, and the scope for commercially negotiated
settlements.
5. A market where pricing is established according to a consumers willingness to
pay and market power does not interfere with the ability of consumers to exercise
this preference. This means that product differentiation does not occur between
consumer groups exhibiting similar willingness to pay.
6. Contestability in the market with the aim of achieving freedom of choice by all
consumers to access gas on the most attractive conditions in terms of price,
quality and reliability of service from retailers, wholesalers and producers.
Industrial consumers able to negotiate supply and pricing terms that are
compatible with their business needs.
However, exploration and production (E&P) company management do not always take rational
economic decisions. Their bonuses will often be based on the accounting profit of the business, which
has, as a cost, depreciation on a unit of production basis. This makes the accounting marginal cost
much higher.
2
This definition was not selected because what might, or might not, be happening in New Zealand is at
all relevant for the EU market, now or in 10 years time, but simply that this definition provided a good
and succinct summary of what any competitive market for gas might look like anywhere in the world.
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The first point highlights the importance of competition in all steps of the gas chain as
an introductory statement. The second point deals with the rules of access to the
essential facilities of the natural gas networks. The remaining four points, however,
address in different ways the issue of market power and possible abuse of market
power:
Point four focuses on the need for transparency of information through flexibility
in prices and contract terms and conditions. It also implicitly confirms the
importance of transparent price signals to the market.
Point five emphasises that prices should not be distorted by market power nor
should there be any form of price discrimination.
Point six highlights that the terms of supply and service offered should be set by
customers requirements and not by what a supplier dictates as being appropriate.
There is one further issue that is alluded to in this definition, but which would benefit
from further clarification. This issue is the importance of market information being
freely available to all. In a perfect market information must be available to both
buyers and sellers about market prices, product quality and conditions of sale. A
particular risk arises where an advantage could arise from a players interests
elsewhere in the supply chain. For example, if a supply affiliate of a gas transportation
company has better knowledge of the system capacity and gas flows, from its
ownership of the transportation business, than its competitors.
In the above definition, two clear issues are identified market power and access to
essential facilities. These are considered in more detail in the following sections.
2.1.1. Market Power
In considering the issues of market power, two aspects need to be considered. Firstly
it is essential to define the market in which market power might exist, and secondly
assessing the extent of market power.
The OFT recently published guidelines on the application of competition law to the
UK energy sector3. This guideline provides insights into the problems of defining a
market in the gas sector for the purposes of assessing whether market power exists. A
fuller discussion of the OFT guidelines is contained in Appendix 3.
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Market Definition
In these guidelines it is noted that a market definition usually contains a product, a
geographical area and a temporal dimension. The guidelines are also applicable to the
European gas market because it is based on interpreting Articles 81 and 82 of the EC
Treaty.
In product terms, superficially, natural gas might be regarded as a homogenous
commodity4. However, gas consumers do not receive the same molecules that their
shipper delivered at the entry point and natural gas has different values at different
times and in different locations. In a gas market, the product has to be defined both in
terms of the commodity (which is homogenous) and also when it is delivered. Ofgem
points out, in its response to consultation on this issue5, in gas markets there is a
limited ability to substitute transactions in one time period with another. There is
limited capacity available to put gas in and out of storage from a day-to-day.
The temporal dimension conventionally used in market definition is one year.
Transient distortions to prices are usually ignored. However, in the OFTs guidelines
it is noted that the gas system in the UK is balanced daily. Due to the inelasticity of
demand, high price spikes can occur for short durations resulting from severe weather
or supply outages. The OFT notes that large price increases for a short period of time
can be as damaging to the market and to competition as small increases that endure
over a longer period.
The OFT paper also addresses the issue of geography. Again, the OFT notes that a
situation, at one particular point on the network, may have a surprisingly
disproportionate effect on the market. They note, for example, that a market might
reasonably be defined as a particular entry point into the system, because there might
be limited scope for substitution at that point.
This analysis serves to show that gas markets need to be defined carefully to assess
whether there is market power and also helps to explain why companies may claim
that their market is open to competition, while retaining sufficient control at key
points to restrict competition. It also helps to explain why the liberalisation process
takes time, as regulators progressively expose and remove problems which emerge at
these key points. During this process the incumbent has a considerable informational
advantage over the regulator, as the company will have a much better understanding
of where key points exist and how to retain effective control of them.
It is not within the remit of this study to discuss, in detail, issues surrounding gas quality, whether it
be the low-cal and high-cal systems in some EU countries e.g. the Netherlands, or the issues
surrounding UK gas quality relative to the rest of the EU. DTI have been leading an exercise on gas
quality in the UK for the last 2 years and Marcogas and EASEE-Gas have been doing work on the EU
aspect. Gas quality issues can be resolved, but at a cost which will need to be factored into the overall
cost of gas supply, whether the market is fully competitive or not.
5
OFT and Ofgem. Responses to the Energy Sector Consultation. January 2005
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Baumol W J, Panzer J and Willig R.D. (1986) Contestable Markets and the Theory of Industrial
Structure, Harcourt Brace and Jovanovitch.
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In practice few markets are perfectly contestable but scale is important. For example
the gas supply market will be closer to being contestable if new entrants can enter the
market without investing in infrastructure which would involve significant level of
sunk costs or entering into long term contracts for gas which could involve serious
loss in the event of exiting the market.
Summary
This analysis indicates that the potential for companies to distort the market is not
necessarily predicated on dominance of the entire market at all times. In some cases it
is sufficient to exercise control at key points in the network such as cross border entry
points. Even then, this control may only need to be exercised for a short period such
as the peak demand period.
Prima facie evidence of market power can be found from excess profits and also the
existence of economic rent, which could still exist even if excess profits did not.
Conversely, evidence for predatory pricing behaviour can be found from prices which
set temporarily below variable costs with a view to driving out competitors from the
market and returning to high prices in the longer term. In addition there is other
evidence that can be considered including the presence of real competitors in the
market; barriers to entry and exit; and the choices and options available to customers.
2.1.2. Access to Essential Facilities
The concept of essential facilities is key to understanding the economics of operating
a competitive gas market. In a gas network essential facilities may include pipelines,
compressors, gas storage, gas treatment and LNG terminals. The concept of Third
Party Access (TPA) to gas systems is based upon the idea that these are essential
facilities and competition will only occur if competitors are allowed access to them
on the same terms as the incumbents the level playing field.
The World Trade Organisation defines an Essential Facility as a facility that is
With a few exceptions gas infrastructure meets this definition. Whilst there are some
examples of pipe to pipe competition in gas infrastructure, these are rare. Even in
these cases the number of operators is limited. Thus the rationale for TPA is that
competing gas suppliers need to be allowed fair access to these facilities to enable
them to compete, because it is not feasible to duplicate them.
Long Life Irrevocable Investments
The key issue in respect of essential facilities is that natural gas infrastructure is
largely a long life investment. Natural gas pipelines are conventionally given
accounting lives of 40 years or more and so are most gas storage installations,
although technically they can last much longer if well maintained. The long life, and
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the high initial cost of gas infrastructure, means that the costs have to be recovered
over a long period of time.
In addition to being long life, natural gas infrastructure is, for the main, an irrevocable
investment. Once the investment has been made it is dedicated to the purpose for
which it was built and cannot be used for other purposes. Construction and planning
lead times are also a factor. Major gas infrastructure projects have a lead time of at
least 2 years and often more. The planning lead times are even longer and it can be a
decade or more between the time a project is first proposed and the date when
construction actually begins.
Impact of TPA on Network Development
The introduction of TPA introduces a new dimension into the decision making
process on investments. Where a gas utility is operating as a conventional vertically
integrated business, the investment risk in long life assets can be managed in the
following ways:
The utility understands the expected future pattern of gas flows and can, to some
extent, exercise control over them;
The cost of any mistakes can be smeared across all of its monopoly customers:
and,
It is not exposed to competition, even at the margin (for example, competitively
supplied gas storage can act as a substitute for pipeline capacity).
With the introduction of TPA, exposure to risk and the management of these risks
change. An operator of a TPA gas network has less information about the pattern of
future supply and demand on which to base investment decisions. While the network
operator will have good information about future gas demand supplied from the
network, there is some degradation on the information that they have because they no
longer control the selling price of the product and do not have direct contact with new
and future customers to assess market trends.
On the supply side the degradation of planning information is more marked. A private
sector monopoly minimises its costs by exactly matching gas supply to demand and
only providing the minimum capacity to meet that requirement plus an operating
margin to allow for flexibility to respond to unforeseen circumstances such as
equipment failure on or upstream of the operators system. Barring contingencies for
operational problems, a monopoly will only plan for one pattern of supply to meet its
peak demand. With the introduction of competition, sources of supply become a
matter for the gas producers and market wholesalers and not for the transport
company. A competitive market will want more capacity than a monopoly market as
various suppliers compete for the same customers. The problem that has to be solved
under TPA is to devise a method that gives the operator an incentive to invest in new
capacity by managing its risks.
There are a number of methods that have emerged in various jurisdictions:
Rolled in Rates (any new investment is added to the transporters asset base and
reflected in its charges this method essentially maintains the risk at the same
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The development of TPA is discussed later in the report and these methods will be
addressed in more detail then. However, what will become clear is that effective
arrangements are needed to ensure that there is an incentive for network operators to
invest in new capacity. Moreover the arrangements have to be compatible with the
development of the market. A shortage of capacity can severely constrain the
introduction of competition.
Summary
Investments in gas infrastructure are long life with significant lead times for
construction. Traditional vertically integrated monopolies have in-built structures for
managing the risks with these long life investments. The introduction of TPA alters
the risks from these investments and introduces complexity.
The network operators have less information about the patterns of supply and demand.
Price signals from the market are of little value beyond indicating that there is a need.
New arrangements need to be put in place when TPA is introduced to ensure that
there is an incentive to invest in new infrastructure.
2.2. Characteristics of Truly Competitive Markets
In this section we address one of the questions posed in the terms of reference
The characteristics specific to the Production, Wholesale and Retail markets are
discussed below. Many of the characteristics apply equally to the three geographical
areas (EU, Pipeline Supply and LNG Supply) so we do not present these separately in
the text as that approach would become repetitive. Following on from the discussion
above the conditions, or characteristics, for competitive markets are considered in the
context of the key identified areas of Market Power and Access to Essential Facilities.
In addition a third category is added entitled Institutional, which is not a direct
characteristic of a competitive market, but includes those institutional, legal and
regulatory factors which are seen as important. Table 1 summarises the characteristics
which are described in more detail below by market.
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Shorter term and smaller contracts: a trend towards one day to one year
contracts, away from the more traditional longer term contracts.
Spot and future price indexation: use of price indices from futures markets
and/or price reporting services as escalators in longer term contracts, thereby
increasing their importance above physical share of the total market.
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International experience suggests (see section 3), that it is not essential for
competition to develop at the retail level in order for the benefits of competition at the
wholesale level to filter down to retail customers8. On the other hand a truly
competitive wholesale market is a pre-condition for successfully establishing a
competitive retail market as suppliers need to be able to obtain the gas and
transmission capacity they need at market prices to supply their customers.
All of the characteristics discussed above for truly competitive markets at the
wholesale level generally apply equally to the retail markets. Consequently they are
not repeated here in the interest of brevity.
However, the retail market presents additional challenges particularly in relation to
the need to supply large numbers of customers consuming small amounts of gas
annually. Customers in the wholesale market are LDCs and large end-users such as
industrial companies and power generation companies. For these customers, energy
costs represent a significant proportion of total costs and most employ professional
buyers. By contrast the retail market consists of smaller industrial and commercial,
and household customers, where energy costs may not be significant and inertia may
7
Regulated access (and charging) is required in the case of natural monopolies which is most obvious
in terms of transmission and distribution networks. It is less obvious for LNG terminals and storage
facilities where there could be, and in some cases, is, competition. This will be developed in more
detail particularly in the context of storage.
8
End user prices at the retail level would still have to be regulated, if there was no competition at this
level, to ensure that the impact of competition at the wholesale level would be passed through. This
is effectively what happened in the US and UK.
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be a big problem. This means that there is a need to develop awareness of the ability
to switch suppliers and the benefits of doing so. To some extent this can be
undertaken by the market but in practice there is often a need for agencies such as
Regulatory Authorities to become actively involved raising awareness among
customers of their right to choose supplier and what is involved in making the switch.
Appendix 6 briefly reviews some of the UK experience in the retail market.
Even for large industrial users, experience has shown that there can be administrative
difficulties involved in switching supplier. For retail markets these issues become
even more complex because of the vast increase in numbers involved. For example in
the UK there were 18 million customers who became eligible to choose supplier when
the market was opened to all customers in 1996. This required heavy investment in IT
systems to keep track of each shippers customer portfolio and the development of the
supply side administration dimension of the Network Code. It is easier to
underestimate the time required to develop such systems and there is a danger that
systems may not be fully developed in time for market opening.
The issue of Public Service Obligations also needs to be handled carefully. Public
Service Obligations relate to security of supply, regularity, quality and price of
supplies, and environmental protection including energy efficiency and climate
protection. Customer protection measures include safeguards to protect vulnerable
customers including measures to help them avoid disconnections. Standards need to
be established for transparency regarding contractual terms and conditions, general
information and dispute settlement. Unless these standards are applied equally to all
suppliers some classes of customer will effectively have no choice but to remain with
the incumbent supplier.
There is also a need for standards to govern suppliers sales activities to limit
instances of bad practice particularly in relation to door-step selling and/or telesales.
Finally arrangements need to be considered for one or more supplier of last resort to
step in and maintain supply to customers on an interim basis in the event of failure of
a gas supplier.
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Retail
Wholesale
Proactive regulation by both energy regulators and
competition authorities.
Multitude of Suppliers
Access to
Essential
Facilities
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The Pipeline Supply Area countries will principally consist of Russia, other Former Soviet Union
countries, Norway, North African countries such as Algeria, Libya and Egypt and Middle East
countries such as Iran and Iraq. It also includes any transit countries, with little or no production for
export, such as Ukraine.
10
The LNG Supply Area countries would include Qatar, Trinidad, Nigeria, and Malaysia
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Wholesale /Midstream
Retail/ Downstream
Geographical Areas
Pipeline
Supply Area
LNG
Supply Area
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Geographical Areas
Production/ Upstream
EU
Medium.
EU production has an important but declining role in the
supply mix due to increasing import dependence
Pipeline Supply
Area
High
Competition is essential between producer countries
seeking to supply Europe and between producers within
in each supply country to reduce dominance.
LNG Supply
Area
Medium
Competition is developing naturally in the LNG market
requiring less attention from a policy point of view than
the Pipeline Supply Area.
Increased commoditisation of the global LNG industry
will increase competition to supply Europe, while LNG
countries will compete against each other to supply the
EU.
Wholesale /Midstream
High.
Competition in wholesale markets is important to drive
down wholesale prices.
Access to gas and capacity in liquid transparent markets
is essential for retail competition to develop
High
TPA to infrastructure in producer and transit countries
will be needed for competitive supplies to reach Europe
Active wholesale markets in producer countries would
also be beneficial
Medium/Low
Producers supplying the LNG liquefaction plant should
be able sell gas independently using shared access to
liquefaction plant and ships
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Retail/ Downstream
Medium/High
Competition in retail delivers the benefits to final
customers in EU.
However we note that benefits can be achieved without
retail competition e.g. in North America
Low
Retail competition in supply areas is not essential for
competition to develop in Europe
Low
Retail competition in supply areas is not essential for
competition to develop in Europe
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2.4. Conclusions
The terms of reference for this study included a definition of truly competitive
natural gas markets as follows:
we would consider a competitive market to be one where no company holds and/or
exercises significant market power, where prices reflect the costs of marginal supply
(and not, for example, contract prices conventionally linked to oil prices) and where
gas is available to anyone anywhere willing to pay the competitive market price.
More detail was added including defining the competitive market to include
competition along the whole gas supply chain production, wholesaling, and
retailing. Two key areas were identified in terms of ensuring that there is a truly
competitive market. The first was open access to the essential gas facilities and
second the issue of market power. In the case of market power, four areas were
discussed:
Elimination of economic rent and cross-subsidies between steps in the gas supply
chain;
Efficient market with transparent price signals;
No distortion to gas prices; and,
Supply terms dictated by gas consumers and not suppliers.
Analysis of market power indicates that the potential exists for incumbents to distort
the market by controlling the position at key points in the network. Even then this
control may only need to be exercised for a short period. They do not need to control
the networks all the time. A company can control a market even if it appears that open
access exists.
Evidence of market power can be found by looking at indicators in the market;
Excess profits may be observed, although companies may give a priority to preserving
their monopolies.
In respect of access to essential gas facilities, it was noted that investments in gas
infrastructure are long life with significant lead times for construction. Traditional
vertically integrated monopolies have in-built structures for managing the risks with
these long life investments. The introduction of TPA alters the risks from these
investments. The network operators have less information about the patterns of supply
and demand. Price signals from the market are of little value beyond indicating that
there is a need in terms of possible volume and/or location. New arrangements need
to be put in place when TPA is introduced to ensure that there is an incentive to invest
in new infrastructure, such as rolling in the cost of new investment into the cost base
for assessing tariffs or identifying a specific supplementary charge for new investment
as in Italy, as described in Section 4.
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Finally, for the purposes of further analysis the gas market will be divided into three
distinct markets the producer market, the wholesale market and the retail market
and three distinct geographies the EU25, plus accession and candidate countries, the
Pipeline Supply Area and the LNG Supply Area. The importance of each sub-market
differs, however, in the context of competition in the EU market. The Pipeline Supply
and LNG Supply area retail markets and the LNG Supply wholesale market were
considered to be of low or medium to low importance and will not be discussed much
further in this study.
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3. INTERNATIONAL EXPERIENCE
The focus of the study is largely to consider the conditions for truly competitive
markets in the EU, with the implications for the UKs energy markets taken into
account and also any actions the UK Government might consider in order to facilitate
the development of competitive gas markets. However, in reviewing the conditions
for truly competitive markets, the following question can be posed:
Are there any truly competitive gas markets in the world and what lessons can be
learned from them
This section will address that question largely by considering the experience in the
USA, but also referring to what has happened in the UK and the state of Victoria in
Australia. Much has been written and talked about the US experience and a multitude
of studies have been completed on the relevance for the European gas markets. It is
not intended to revisit all this work but simply to briefly summarise what we would
consider to be the major developments and lessons. Following discussion of the UK
and Victorian experience, any common themes that emerge will be considered.
A number of key factors will be considered for each market. These include:
Regulatory change
Unbundling
Development of hubs
As the analysis proceeds in respect of the EU market it will be seen that these factors
become very important in respect of competitive markets
3.1. US Experience
Appendix 4 provides a brief account of the recent history of the introduction of
competition in the US, describing the development of competitive markets for gas in
the producer and wholesale markets. What were the key factors in all this which
resulted in the competitive markets?
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11
This can be contrasted with the electricity industry where FERC has much less influence because
there was less interstate commerce.
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Released Capacity
Quadrillion Btu
20
Interruptible Transportation
15
No-Notice
Service
10
Sales
Firm Transportation
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
In effect this was a gas release programme, with gas being released from the
traditional high-priced sales contracts, and replaced with spot gas moved initially
under interruptible transportation contracts.
3.1.4. Access to and Availability of Capacity
This effective gas release because of Orders 380 and 436 also opened up the
availability of transportation to third parties. The capacity was no longer needed for
sales by pipelines to LDCs and, following Order 436, pipelines could no longer
discriminate against third parties requesting transportation in favour of their own
merchant sales. For the pipelines to get at least some revenues, therefore, they had to
sell transportation on an interruptible basis12. Access to pipeline capacity, therefore,
became relatively simple. This was also helped by the fact that gas demand had
declined in the early 1980s, because of high gas prices, and there was spare capacity
anyway on the interstate system.
12
Although this was interruptible transportation it was effectively almost firm, because much less gas
was flowing under the firm sales contracts.
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25
20
15
10
5
0
Consumption
Production
Imports
1950195519601965197019751980198519901995
Source: US Department of Energy
3.1.5. Unbundling
The culmination of the restructuring of the wholesale and producer markets in the US
in Order 636 involved the complete unbundling of transportation, supply and storage
for the interstate pipelines. Gas sales had largely been unbundled anyway as a
consequence of earlier FERC Orders, but Order 636 went as far as absolutely
prohibiting sales by pipelines. Additionally, all the separate pipeline services such as
transportation, gathering, processing and storage, which had previously been bundled
together, now had to be unbundled and priced separately, giving equal nondiscriminatory access to all parties including pipeline affiliates.
3.1.6. Development of Hubs
Hubs (or market centres) were a natural evolution in the US gas industry restructuring
process. They evolved to provide new gas shippers with many of the physical
capabilities and administrative services previously provided by the pipelines as part of
their bundled sales services. Two of the key services offered by the hubs were
transportation between, and interconnections with, other pipelines and the physical
coverage of short-term receipt/delivery balancing needs13. Because of this latter point,
13
In 2000, FERC issued Order 637 in an attempt to lessen the impact of imbalance penalties on
shippers and the issuance of operational flow orders by pipelines. Order 637, in part, required that the
interstate pipeline transporter must provide, to the extent practicable, parking and lending or other
services that facilitate the ability of shippers to manage transportation imbalances.
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hubs are often found near to storage facilities. The development and existence of hubs
or market centres, as independent commercial operations, provides good evidence that
competition is being developed in the respective market.
3.1.7. Harmonisation and Standardisation
With the increasing complexity of the deregulating and competitive gas industry it
quickly became clear that harmonisation and standardisation of the rules and
procedures of the pipelines were necessary. This ranged from mundane matters such
as the timing of the gas day through to the exchange of information electronically.
Immediately following Order 636, each pipeline had its own proprietary system for
handling all the issues dealing with capacity booking, nominations, allocations,
balancing etc. For the active gas marketer, therefore, this led to the requirement to
have individual dedicated computers and lines for each and every pipeline14. In
September 1994, therefore, the Gas Industry Standards Board (GISB) was established
as an independent and voluntary North American organization to develop and
promote the use of business practices and related electronic communications
standards designed to promote more competitive, efficient and reliable gas service.
In 2001 GISB took over responsibility for the electricity industry harmonisation of
standards and became the North American Energy Standards Board (NAESB).
3.2. UK Experience
It is not the intention to spend a lot if time on the UK experience since readers of this
report should be reasonably familiar with it. In this brief review, we will merely
highlight the similarities and differences in respect of the key factors with the US.
3.2.1. Market Size and Diversity
While the UK is a significantly smaller market than the US, it is still the largest gas
market in Europe, with annual consumption currently around 100 bcm. The key
difference between the UK and the US was that prior to deregulation there was only
one gas supplier and transporter British Gas. On the production side, there are over
45 oil and gas producers in the North Sea, with the largest six producers account for
71% of gas production. The development of the competitive market was assisted by
the willingness of large industrial customers to switch from British Gas to alternative
suppliers and also the construction of new gas-fired power stations brought new
buyers into the market. The UK also pushed ahead with retail competition and that
brought in more players such as the regional electricity companies to compete with
the supply arm of British Gas, now unbundled as Centrica. Centrica remains the
dominant supplier of gas in the household sector but there is no evidence of any abuse
of this dominant position.
14
Although only just over 10 years ago, this was before the internet really took off!
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The other element in assisting gas release was the introduction of Accord15 into the
UK market in 1994. At that time British Gas Exploration and Production had surplus
uncontracted gas supplies and as part of the Joint Venture agreement between British
Gas and NGC that set up Accord, these supplies were sold through Accord. Accord
sold these volumes aggressively which led to a sharp decline in UK wholesale prices.
3.2.4. Access to and Availability of Capacity
In the UK there was only one transmission and distribution company in contrast to the
US with multiple pipelines and LDCs. In the US capacity was fairly easy to come by
following Orders 380 and 436. British Gas, however, resisted third party access until
they bowed to the inevitable and introduced the Network Code. One of the key
elements of the Code was the entry-exit capacity booking and tariff system. In the
early stages, any shipper that was willing to pay for entry capacity under a fixed tariff
was allowed to book it and if capacity was overbooked then in the event of more gas
being nominated than capacity available, there was a pro rata reduction16. Exit
capacity at the NTS offtakes was allocated based on the customer profile of each
shipper in the LDZs.
3.2.5. Unbundling
The legal separation of British Gas transportation and supply businesses into separate
subsidiaries was effected by the 1995 Gas Act and it went one stage further in 1997
when the supply business Centrica was demerged from the rest of the business.
Also in 1997 the transportation and storage businesses were separated. Since then the
storage business has been sold twice17. There has been clear and effective unbundling
and separation in the UK.
3.2.6. Development of Hubs
One of the side effects of the entry-exit capacity system was the establishment of the
National Balancing Point (NBP) and with it Transco offered a free title transfer
facility. The NBP rapidly became a virtual hub18 and the pricing point for physical
gas in the UK and in 1997 the IPE futures market.
3.2.7. Harmonisation and Standardisation
Since the UK had only one transmission and distribution company, all the standards
were already applied to the whole country so harmonisation was not an issue. As the
UK is now set to become more heavily reliant on imported gas, issues of
15
Accord was a 50:50 joint venture between British Gas and NGC (now Dynegy). In 1997, NGCs
50% share was bought by Centrica who had inherited the share held by British Gas upon the demerger
of British Gas.
16
This system was eventually replaced with 6 monthly auctions of entry capacity and then long term
auctions, supplemented by short term auctions.
17
Ironically the Rough storage facility is now owned by Centrica.
18
The NBP is not a physical location like the Henry Hub in the US.
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harmonisation with other European countries, particularly with respect to gas quality,
have become more relevant. We note here that interoperability can be facilitated by a
harmonisation of gas quality specifications, by suitable blending arrangements or by
the provision of gas processing facilities to which there is open access.
3.3. Australian Experience
At the other end of the scale from the US and, to some extent, the UK is the state of
Victoria in Australia. A full description of the development of a competitive gas
industry in the State of Victoria is included as Appendix 5.
3.3.1. Market Size and Diversity
Total consumption in Victoria is around 5.5 bcm with 1.4 million customers. In the
mid 1990s the State of Victoria decided to privatize and restructure its gas industry.
Before the reform the state-owned Gas and Fuel Corporation of Victoria (GFCV)
purchased virtually all the gas required from one offshore supply source (owned and
operated by BHP and Exxon) and sold the gas on to all the customers. The process of
restructuring the gas industry in Victoria is described in the section on Unbundling.
3.3.2. Regulatory Change
The change in Victoria was driven through by the State Government based on their
aim of privatising the gas industry and introducing competition. As a consequence the
industry underwent a major restructuring.
3.3.3. Effective Gas Release
The experience in Victoria is useful in providing some key lessons in how to handle a
dominant producer and a relatively small market. Before being separated, Gascor was
handed the responsibility of dealing with the gas supply contract with BHP and
Exxon. The first step was to separate this contract into 3 parts and vest each part
with a retailer. Retailers were then encouraged to go and contract with other potential
gas suppliers once interconnections were constructed with other parts of Australia19.
3.3.4. Access to and Availability of Capacity
A major element of the success of the industry restructuring related to the booking of
transportation capacity, which is done under the so-called market carriage model.
The traditional contract carriage model was not introduced because of the risks and
inflexibilities it would create. Under the traditional contract carriage model, parties
may only transport gas to the extent that they have contracted for capacity, and that
they pay for the capacity whether or not they actually use it in full.
For Victoria, contract carriage was felt to be insufficiently flexible to be compatible
with the proposed market arrangements. The intention to completely deregulate the
19
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market, including domestic customers, meant that retailers would have no long term
guaranteed customer base. Retailers would not therefore be well placed to enter into
long term ship or pay capacity contracts.
Also, because there were expected to be several different gas sources within the next
few years, and because market participants may purchase gas from the spot market,
market participants and customers will not know where their gas will be sourced
from. The pool gas spot market (see below) was therefore believed to be much less
flexible if parties had to contract for point to point capacity flows on the pipeline.
A transportation model, the Market Carriage Model, was therefore developed that is
consistent with the designed spot market, and which achieved the following
objectives:
VENCorp (the system operator) and GPU GasNet (the transmission asset
owner) entered into a Service Envelope agreement, which defines the level
of transportation capacity to be provided by GPU GasNet under its access
arrangements. This has to meet the needs of the existing authorised large
customers, plus anticipated load growth amongst small (Tariff V) customers;
Where a party subsequently negotiates with and pays GPU GasNet to augment
the pipeline, it will receive an additional MDQ authorisation which is related
to the agreed increase in the Service Envelope for that augmentation;
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increase its authorised capacity and there is no existing spare capacity, then it must
arrange for augmentation to take place.
Each retailer received an authorised Maximum Daily Quantity (MDQ) for each of its
customers when the spot market began. This was based upon the MDQ that each
large customer had been allocated by Gascor (the State owned precursor of GPU
GasNet), as well as an allowance for domestic (Tariff V) customers. The authorised
MDQ then moves with each customer as they change retailers20. New small
customers are automatically authorised; new large customers (or their retailers) must
apply to VENCorp to gain authorisation, which will depend on spare capacity being
available.
3.3.5. Unbundling
In December 1994 GFCV was split into two entities GTC to manage the
transmission system and Gascor to manage the distribution and retail functions. In
March 1997, three stapled businesses were created out of Gascor, each comprising a
separate distributor and retailer21. They were fully corporatised in December 1997
and were privatised during the first half of 1999. Distribution and retail were
stapled together because they were considered to be separate activities but it was
believed that retailers on their own would not create enough interest from buyers.
Each retailer was therefore stapled with a distributor before sale.
At the same time the Gas Transmission Company was established as Transmission
Pipelines of Australia (TPA, not to be confused with Third Party Access). The
System Operator was also set up as Victorian Energy Networks (VENCorp), which
also now manages the gas wholesale market. In May 1999, TPA was privatised and is
now called GPU GasNet.
3.3.6. Development of Hubs
A key feature of restructured gas market is the way the spot market works, which is a
pool model. The pool model is based on the notion that decentralised bilateral
transactions may not always lead to an economically efficient outcome because of the
technical characteristics of natural gas pipeline systems. In transmission networks
where there are a large number of interconnections with potentially significant costs
arising from congestion of the network, this approach may offer a better model for the
establishment of a market in the absence of sufficient depth and liquidity in a
domestic market. In this model, market participants inform the pool operator how
much gas they want to buy or sell and at what prices they are willing to complete
transactions. The pool operator aggregates this information into system supply and
20
This is effectively how the allocation of exit capacity also works in the Transco Network Code. The
capacity is allocated on a daily basis and if a customer changes supplier the capacity automatically
moves to the new supplier. There is no risk to the distribution or transmission company in this
arrangement since for every end user someone will be paying the capacity charge.
21
The clever part of the stapling exercise is that the boundaries for the retail and distribution
businesses did not match. Each distribution business was stapled with retail businesses covering part
of the other 2 distribution areas. In this way no monopoly was created in any one geographic area.
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demand and calculates the system price that will clear the market. The system price
then becomes the spot market price for the day and is applied to all balancing
transactions.
3.3.7. Harmonisation and Standardisation
Harmonisation and standardisation was not an issue in Victoria, since it was an
integrated industry before the restructuring with one source of gas supply.
3.4. Common Themes and Lessons for the EU
The US, UK and Victoria in Australia are very different gas markets, ranging in size,
diversity and complexity, yet each have successfully introduced competitive gas
markets particularly at the wholesale level. The common themes from these differing
markets can be considered in a number of different categories. Firstly, the key market
structure changes which have taken place, secondly what external exogenous factors
have been important and thirdly what have been some of the consequences of the
market structure changes. Finally, some general observations will be made.
3.4.1. Market Structure
Effective Gas Release
If the existing market structure is one of a monopoly supplier of gas to end users or
LDCs then new entrants will require access to gas supplies to compete. In the absence
of an unanticipated new source of supply, then the incumbent(s) will have to release
gas from their own contractual portfolio. In the US, the availability of alternative
sources of supply made the requirement for formal gas release unnecessary but the
impact of Orders 380 and 436 in effect allowed the purchasers of the gas (in this case
the LDCs) to buy the alternative gas. In the UK the regulatory authorities compelled
British Gas to release some gas from its portfolio as well as preventing them from
buying too much of the newly discovered gas from the North Sea. This together with
the impact of Accord on the wholesale gas market and the dramatic desertion of
British Gas by industrial and commercial customers also ensured that gas was
released on both the buying and selling side. Finally, in Victoria, the whole reform of
the industry was built on the premise that the one single large gas purchase contract
needed to be split into three and matched with an equivalent amount of gas sales to
produce viable competition which would be supplemented by new sources of gas
supply and new entrants into the sales market.
A key lesson in gas release, therefore, is that gas should not only be released on the
purchasing side at the wholesale level but also some mechanism found for releasing
gas sales from the grasp of the incumbent(s).
Access to and Availability of Capacity
Fundamental changes in moving towards competitive markets are often focused on
the market for transportation capacity, especially at the transmission level. In the US
there was a very effective large release of capacity on the interstate pipelines as their
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merchant sales business disappeared and they were forced by FERC to open up their
pipelines to regulated third party access. Because of the availability of competing
pipelines and the excess capacity that was available on most main pipeline routes, this
process happened relatively quickly. In the UK and Victoria, in contrast, the process
of opening up the pipeline systems to third party access was much more of a planned
transition, aided by the US experience, with a key difference being the adoption of
common or market carriage as opposed to contract carriage in the US. The adoption of
a market carriage regime, where no willing shipper can be denied access to capacity to
enter the pipeline system and where exit capacity is allocated rather than booked,
would seem to have positive advantages in respect of the promotion of a competitive
market. Under a market carriage regime, incumbents cannot deny access to the market
to new entrants and capacity is automatically granted to any shipper/supplier who has
contracted to supply gas to an end user. There is no need for exit capacity, at least, to
be released by incumbents to new entrants since the allocation process happens
automatically.
Unbundling
The unbundling of the pipeline services into transportation, supply and storage in
Order 636 in the US was seen as the culmination of the market liberalisation process
and the final confirmation that a fully competitive gas market, at least at the wholesale
level, had arrived. Again in the UK and Victoria, building on the US experience,
unbundling was seen as an essential prerequisite right at the beginning of the
liberalisation process. In the US unbundling did not go as far for the pipelines as
separation of ownership and the pipeline affiliate marketing companies remain
important players in the wholesale market. However, the tight rules on pipeline access
and the large numbers of independent producers, marketing companies and LDCs, as
well as large industrials and power plants ensured that no single entity or groups if
entities could build a dominant position. In the UK unbundling went much further into
ownership separation, although this was a commercial decision by British Gas rather
than a regulatory one. In Victoria, transmission was separated from distribution and
supply, and within transmission asset ownership was separated from operation. The
distribution and supply businesses were the subject of a quasi-separation in that
distribution and supply were privatised together but the distribution and supply areas
did not overlap.
3.4.2. External Factors
Market Size and Diversity
An important factor in determining the ease with which a competitive gas market can
be introduced is the existing market structure in terms of size and diversity. In the US
the sheer size of the market and the diversity of participants from the thousands of
producers, multiple pipelines, the many LDCs and large end users, meant that the
foundations for competition were mostly in place. The UK certainly had the market
size plus a significant number of producers in the North Sea, which meant that the
main issue in respect of diversity was the structural break up of the British Gas
monopoly. The gas market in Victoria really had no natural foundations for the
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22
In the UK there were some capacity issues at St Fergus, which led to the introduction of capacity
auctions.
23
The fact that governments often announce the success of competition in terms of lower prices to
consumers can come back to haunt them. Many of the opponents of moves towards competition point
to the UK as an example of the dangers of competition because of rising and volatile prices, despite
low prices historically and compared to other EU countries.
24
While this is cited as a benefit, there can also be dangers in this concentration of power and authority.
Some of Ofgems proposed reforms, such as hourly balancing, have been unrealistic, while the
introduction of entry capacity auctions, at the time, did little to resolve the real problem of entry
capacity shortage at St Fergus and caused significant disruption to the market.
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25
Similar harmonisation efforts are underway in Europe, including efforts to minimise the impact of
gas quality differences on cross-border trade.
26
This is not to argue that competition shouldnt be extended to the retail market throughout Europe,
since it may be a good thing in itself, but that the main benefits of competitive gas markets can be
achieved through wholesale market reform. It could also be argued that to achieve wholesale market
reform, that a competitive retail gas market is required, as we would argue was the case in Victoria.
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Reserves BCM
End 2002
24
4
84
14
320
1
34
20
227
1,756
165
15
3
697
3,364
8
101
R/P ratio
2.1
0.1
8.0
1.6
22.2
2.9
0.7
13.6
73.1
5.6
0.2
0.2
108.4
238.7
0.6
14.6
11.4
40.0
10.5
8.8
14.4
11.7
28.6
16.7
24.0
29.5
7.5
15.0
6.4
14.1
13.3
6.9
Source: IEA/OGJ
4.1.2. Netherlands
The Dutch gas market structure is more a partnership between the State and the
private companies and there is considerable overlap between the upstream and
downstream segments. Gas production and exports are vital to the Dutch economy
and the government has kept tight control over the industry, especially depletion
policy, since the gas market structure, or Gasgebouw as it is known, was developed in
1963 after the discovery of the Groningen field.
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Shell and ExxonMobil are pre-eminent among private sector actors in the Dutch gas
industry through their 50:50 joint venture NAM. These two companies also own
interests of 25% each in Gasunie with the state owning the other 50%. The states
direct interest in gas production is operated by EBN27. NAM holds the concession for
the Groningen field. EBN and NAM are also involved in development of other
smaller fields. Other E&P companies active in Netherlands include BP, Wintershall,
Total, GDF and ConnocPhillips.
Production from the so called small fields started to come on stream in the mid
1970s. There are now around 200 small fields in production, the majority of them
being very small. Just over half of the fields are offshore. Under the small fields
policy Gasunie is required to buy all gas on offer from small fields if requested. The
prices paid for this gas are about the same as gas import prices. Gas from small fields
does not have to be sold to Gasunie, however.
The purpose of the small fields policy which was introduced in 1973, was to
encourage the development of other smaller fields to prolong the life of Groningen
27
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field which has unique flexibility with production ranging between zero and 500 mcm
per day. This is enough flexibility to cope with seasonal variations in the Dutch
market and to increase the value of Dutch exports by adding swing.
The state has the power to decide the annual production rate of the Groningen field. In
practice a cap of 80 BCM per year was placed on total production in 1996. Because
Groningen acts as the swing producer it is the only field affected by the cap. As
production from small fields has started to decline production from Groningen has
increased in recent years to compensate. This has led to speculation that the
Government may in future impose a specific cap on Groningen to delay its depletion
which could then result in total production falling below 80 BCM as the smaller fields
decline further. Because of the cap on domestic production, Gasunie and other players
have increased imports to supply both the domestic market and exports.
The government continues to regard the small fields policy as important for security
of supply and the long term future of the Dutch gas industry based on the Groningen
field. The gas producers on the other hand regard continuation of the small fields
policy as incompatible with liberalised markets.
The industry has been calling for improvements in the mining climate which
governs Exploration and Production activities in Holland. The industry argues that
developing small fields is very sensitive to cost overruns and therefore more risky
than larger fields. The Netherlands Oil and Gas Exploration and Production
Association (Nogepa) estimates that changes to the tax regime in 2002 led to the
cancellation of 27 projects and to the evaluation of numerous other projects with a
total volume of production amounting to 39 BCM. A study by Gaffney, Cline &
Associates for EBN at the request of the Ministry of Economic Affairs, concluded that
fiscal conditions in Netherlands are relatively unfavourable for new projects28.
On behalf of the state, EBN participates in all stages of offshore gas exploration, and
development. Gas revenues still represent a significant part of government revenue.
Gas Production is subject to a State Profit Share (SPS) amounting to 40% of the
profits for offshore fields and 40% to 95% for onshore fields. Since January 2003,
royalties have been levied only on onshore projects at rates that vary between 0% and
7%.
4.1.3. Denmark
Denmark is more than self sufficient in gas and exports to Sweden and Germany.
Production in 2003 was 8.0 BCM with 2.2 BCM exported to Germany and 1.0 BCM
exported to Sweden. Reserves stood at 84 BCM at end 2003.
Exploration, Development and Production of oil and gas is concentrated in the hands
of the DUC (Dansk Underground Consortium) which is a joint venture between A.P.
Mller, Shell and ChevronTexaco.
28
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Until recently all gas production was sold to DONG which also owns the national
transmission system and much of the distribution system. However, following an
investigation by the Competition Commission29, the DUC partners agreed to dissolve
its so-called DUC Gas Team and to market their shares of new gas quantities on an
individual basis without any co-ordination of sales efforts or joint marketing taking
place. The agreement covers both sales to DONG in Denmark and to other buyers
within the rest of the EU.
4.1.4. Germany
Germany is a sizeable gas producer. In 2003, indigenous production amounted to 22.2
bcm and covered 24% of domestic gas demand. There are 16 exploration and
production companies. Two of them are responsible for three-quarters of German
production, namely BEB Erdgas und Erdl (50%) and ExxonMobil (25%). BEB is
jointly owned by ExxonMobil and Shell so these two companies are dominant in the
German production sector.
Most production is onshore with limited offshore production in the North Sea which
is exported to Netherlands.
Germany has already been fully explored for gas deposits. Proven gas reserves are
estimated at 264 BCM and probable reserves at 113 BCM; considering the current
production volume, the proven reserves would be enough to cover 12 years of supply.
Without major new discoveries (which seems unlikely), German production will go
into decline some time before the period of interest of this study, i.e. 2010 to 2015 and
Germany will become even more dependent on imports.
4.1.5. Italy
In 2002, domestic production in Italy reached 14.9 BCM an 11% decline compared
with 2000 and accounted for 21% of total gas supply. Most of Italy's natural gas fields
are located in the Po Valley and offshore in the Adriatic Sea.
Proven gas reserves are estimated at over 200 BCM. A decrease in indigenous
production is expected, owing to major difficulties in obtaining permits for new
exploration and production activities, in particular in the Adriatic Sea. The
development of the Adriatic fields project (Alto Adriatic project), financed by Eni,
has been on hold for several years because of a moratorium on production in the
Adriatic Sea established by the Ministry for Environment and Territory in 1995.
During 2001, only 40 wells were drilled in Italy, eleven of which were for exploration
(the lowest figure in the past 20 years), while 53 wells were drilled in 2000. This is
the consequence of the depletion of existing fields and of a lack of new discoveries
put on stream, and confirms the challenge facing the upstream sector. In comparison
with 1994, domestic gas production declined by about 25%.
29
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Market Power
Status
Generally true
Netherlands operates the small fields policy and UK taxation can be adjusted to
encourage development
Some arrangements exist e.g. Dutch small fields policy gives Gasunie
monopsony over Dutch production
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Oil and gas producers seeking to move downstream to sell their product.
Large energy users such as power generators importing gas primarily for
their needs
Pure wholesalers or traders who enter the market to trade gas and possibly
sell to very large industrial and power generators
Oil and Gas Producers
Foremost among the first group are Shell, ExxonMobil, BP and Gazprom. All are
active in the UK wholesale market and seeking to expand into other countries. Shell
and ExxonMobil have established positions in the German market arising from their
joint venture company BEB. Last year the two companies decided to spin off the gas
marketing arm of BEB into two separate companies with each taking a 50% interest in
the gas sales contracts of existing customers. Potentially a similar arrangement exists
in Netherlands where Shell and ExxonMobil each own 25% of Gasunie. However, a
proposal to break up Gasunie with the state retaining control of the pipeline and the
two oil majors splitting the market arm between them broke down over failure to
reach agreement on financial issues.
BP has been particularly successful in building up a wholesale business in the Spanish
market and has an ambition to build up a 15% share in Germany. In doing so it is
seeking to replace by organic growth, the strategic holding it had in Germany before it
disposed of its interest in Ruhrgas. It will be difficult to establish a 15% market share
without significant sales to power generators.
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Gazprom
As discussed below, Gazprom is by far the largest exporter of gas to Europe with
49% of exports in 2003. Gazproms influence is particularly strong in the new
member states where it supplies even higher shares of gas. For example Gazprom
supplied 79% of Polish imports in 2003 with the remainder being supplied by
Norway, Germany, Uzbekistan and Turkmenistan. Attempts by Poland to further
diversify supplies have met with strong opposition from Gazprom resulting in a
planned pipeline from Norway and associated supply contracts being cancelled.
Gazprom is also seeking to exert influence over gas transit pipelines including a 49%
interest in the SPP transit system in Slovakia and a 48% interest in EuroPolgaz which
owns and operates the Polish Section of the Yamal pipeline. The company retains an
involvement in Ukraine as part of the consortium to manage the transit system and is
also seeking to increase its influence in Georgia which lies on an important route for
gas from the Caspian to Turkey and thence into Europe. Gazprom recently
amnnounced interest together with Lukoil in pursuing privatisation of gas
transmission systems in Romania, Bulgaria and Hungary.
Gazprom signed a Memorandum of Understanding with E.ON in July 2004 which
identifies four main areas of cooperation:
The fact that Gazprom is talking to western companies at all about this particular field
is significant, in terms of its willingness to embrace foregin investment, since the
reservoir is shallow and easily exploited, whereas Gazprom usually only looks for
western help with more challenging projects. The clue to this change in attitude may
be seen in the linkage with the NEGP which Gazprom is keen to progress but E.ON is
less convinced about the need.
The signficance of this particular MOU is difficult to assess at this stage because the
details in many areas were left open in the MOU and even those that were spelt out in
more detail now appear to be changing. For example, the MOU gave E.ON exclusive
rights to negotiate investment in the gas field but Gazprom has widened participation
to include Wintershall and RWE, citing impatience at lack of progress in talks with
E.ON. For E.ON the MOU offers the opportunity to increase its equity gas base but
the company has made it clear that it will only invest in the project if it is sufficiently
profitable in its own right.
E.ON is just one of many many potential investors in the NEGP and it is not clear
what percentage interest the company will take if and when the project eventually
goes ahead. The decision to cooperate downstream in Europe was only loosely
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defined in the MOU and the extent of co-operation may be expected to depend
ultimately on E.ONs involvement in the gas field and pipeline projects.
Gazprom is also increasingly becoming an owner of natural gas utilities in the Baltic
region. Gazprom holds a 34% stake in Latvia's Latvijas Gaze and a 37% stake in
Estonia's Eesti Gaas (along with other major foreign shareholders, Germany's E.ON
and Finland's Fortum). Most recently, in January 2004, Gazprom finalized its
acquisition of a 34% stake in Lithuania's natural gas company, Lietuvos Dujos. After
the three Baltic states' entrance into the European Union in May 2004, Gazprom plans
to raise natural gas wholesale prices from the current price of around $80-$85 per
thousand cubic metres to be more in line with European prices (around $120-135 per
thousand cubic metres). Gazprom plans to gradually increase the tariffs depending on
the pace of the Baltic region's economic development.
Gazprom has hitherto sought to develop its downstream interests through Wingas its
joint venture in Germany with Wintershall (35% Gazprom, 65% Wintershall). More
recently it has established itself as player in the UK market both in its own name and
indirectly through a joint venture between Norsk Hydro and Wingas. Gazprom has
indicated a desire to win 10% of the UK market.
National Utility Companies
The second class of wholesale market participants comprises major European gas and
power companies who are seeking to replace any losses of market share in the home
markets, with growth in other EU member states as they open up to competition or
privatise their infrastructure. Here there is an issue of reciprocity which arises from
the unequal pace at which member states have opened their markets to competition.
For instance, continental European companies can build significant interests in the
UK when their home countries are slow in opening their markets to companies from
UK and elsewhere?
Some of the major national utility companies involved are described below. The
strategies of these companies have been largely asset led.
E.ON
E.ON was formed in June 2000 by the merger of VEBA and VIAG, two of Germany's
largest industrial groups. Acquisitions including Ruhrgas in Germany and Powergen
in UK have made E.ON the biggest privately owned Energy utility in Europe.
Strategy is focused on the core power and gas businesses and five target markets
(Market Units): Central Europe, Pan-European gas, UK, Nordic and US Midwest.
E.ON uses an integrated business model for its gas and power businesses which
emphasises both vertical and horizontal integration. Growth is being pursued both by
strong investment in existing power stations and gas and power networks and through
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Responsible for 58% of all imports into Germany and handles 57% of all
gas consumed. Its transmission interests in Germany and elsewhere are held
as a series of joint ventures with other companies rather than as 100%
ownership of the grid. The joint venture parties include gas producers
(Statoil, Shell, Exxon) and foreign gas companies (GdF, Dong, Eni) as well
as other German gas transporters such as BEB.
Owns 24.5% of SPP the Slovak gas import, transport, storage, distribution
company. SPP is of enormous strategic importance because it carries around
75% of Russian gas supplies for Western Europe. Gas arrives from Ukraine
and is transited to the Czech Republic (and on to Germany and France) and
to Austria (and onwards for Italy and Slovenia).
Through Ruhrgas also has a 20% interest in the BBL pipeline and an 11%
interest in the Interconnector.
30
31
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Romanian gas supplier Distrigaz Nord (51% share). E.ON Ruhrgas AG had
already acquired stakes in the Romanian power and heat generator CCNE
and in gas supplier S.C. Congaz S.A.
Gasum (Gazprom 25%, Fortum 25%, Ruhrgas 20%) is the main buyer for
Russian gas in Finland.
Sydkrft, a joint venture between E.On Ruhrgas (55%) and Statkraft (44.6%)
in Denmark.
RWE
RWE has expanded its control of gas assets through its 4.1 billion purchase of
interests in the Czech Republic. The acquisition included a 97% stake in Transgas
which is part of the largest east-west artery in European gas infrastructure supplying
20% of NW European gas consumption and 34% of all Russian gas exports. Transgas
also has underground storage facilities with total available capacity of 3.2 BCM. At
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the same time as buying Transgas, RWE also acquired controlling interests in 8 of the
9 Czech Local Distribution Companies. In the same year RWE acquired Innogy plc
in UK. In May 2003 RWE bought out Shells interest in the German gas company
Thyssengas to become the sole owner of that business.
RWE is the second largest gas company in Germany (after E.ON) and also has
significant involvement in the Dutch and Hungarian gas markets through ownership
of distribution assets with a customer base of 3.5 million customers in Europe. It has
1.9 BCM of gas storage capacity and 2BCM of gas production through RWE-DEA. It
is active in gas trading through RWE Plus/Trading.
Gaz de France
Gaz de France (GdF) is the incumbent monopoly in France. On the 19th November
2004 GdF and Electricite de France (EdF) changed their status to limited liability
companies. Partial privatisation of GDF will begin in July 2005 and the state will
maintain at least 70% in each company. There has been considerable opposition to
this from the powerful French unions.
GDF and Total signed a protocol agreement under which they will separate their cross
holdings in two small French gas companies. GDF will become the sole shareholder
of Compagnie Franaise du Mthane (CFM) of which GDF previously owned 55%
and Total 45%. Total will become the sole shareholder of Gaz du Sud-Ouest (GSO),
in which GDF previously had 30% equity interest and Total 70%. CFM transmits and
markets natural gas via a 6,700 kilometre network of pipelines in western and central
France. It sold 100 billion kWh of natural gas in 2003. GSO operates a 4,200
kilometre network in south-western France and sold 36 billion kWh of gas in 2003.
GdF own 24.5% of SPP the Slovak gas import, transport, storage, Distribution
Company. SPP is of enormous strategic importance because it carries around 75% of
Russian gas supplies for Western Europe. Gas arrives from Ukraine and is transited
on to Czech Republic (and on to Germany and France) and to Austria (and onwards
for Italy). GdF also owns 50% of the Megal pipeline which transits Russian gas
through Germany to France (the other shareholder is E.ON Ruhrgas). GdF also owns
25% of the Segeo pipeline system which transports Dutch gas via Belgium to France.
GdF also holds a wide range of interests in gas distribution in France (Bordeaux,
Strasburg, Grenoble), the rest of Europe (including in Italy, Germany, Austria,
Hungary, Portugal, Romania and Slovak Republic) and in Latin America.
GdFs energy trading activities are carried out through Gaselys, its 50:50 joint venture
with Socit Gnrale. Gaselys trades on physical and derivatives markets in Europe;
including Oil, Gas and Electricity as well as providing risk management and asset
services and asset and portfolio optimisation covering assets such as storage
capacities, power plants, and long term contracts.
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ENI
Eni is an integrated energy company which operates in the oil and gas industry, power
generation and oilfield services, construction and engineering. The company is active
in around 70 countries.
Enis main strategic objectives are:
Enhancing the programmes to improve efficiency: by further developing costcutting programmes and by an appropriate allocation of capital expenditure
throughout all operational units.
One of the main reasons cited by the Competition and Energy Authorities in Italy for
lack of competition is that Eni retains its dominant position on the market, directly
and through its subsidiaries in the gas supply stage, both over imported gas and
Italian-produced gas, even though there are statutory ceilings on the quota of gas that
Eni may put on the Italian consumer market until 2010. In 2003 this amount was
equivalent to about 68% of total gas consumption. But this figure rises to well over
75% if account is taken of the amounts of gas assigned by Eni to its hand-picked
operators (what are called the "innovative sales").
Eni also controls the entire international transport infrastructure used to import gas
into Italy, most of which is entirely taken up by long-term gas supply contracts (take
or pay contracts) which were drawn up or renegotiated by Eni just before the entry
into force of directive 98/30/EC. The import pipelines and Enis ownership are:
Greenstream gasline, a new import route to Italy, that will carry 8 BCM
from Libyan fields booked under long term import contract, (Enis 50%
interest).
The TENP Pipeline with transit capacity of 44 million cubic meters/day and
four compression stations, transports natural gas from Netherlands through
Germany, from the German-Dutch border at Bocholtz to Wallbach at the
German-Swiss border. From Wallbach gas is transmitted to Italy in the
Transitgas pipeline. TENP is jointly owned by Ruhrgas (51%) and Eni
(49%).
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The TAG Pipeline ( jointly owned by Eni 89% and OMV 11%) and 3
compression stations, which transports natural gas from Russia across
Austria from Baumgarten, the delivery point at the border of Austria and
Slovakia to the Tarvisio point of entry in Italy. ENI had agreed to increase
the capacity of the TAG pipeline from 28 bcm to 34 bcm under pressure
from EU and Italian competition authorities.
The TMPC Pipeline for the import of Algerian gas with a transit capacity
of 101 mcm/day. It crosses underwater the Sicily Channel from Cap Bon to
Mazara del Vallo in Sicily, the point of entry into Italy.
Eni also owns 59.1% of Snam ReteGas the main gas transportation company and
controls LNG and storage facilities. Its subsidiary Italgas also holds interests in a
number of Italian gas distribution companies.
Enis other transmission assets outside of Italy include:
Eni has been actively pursuing mergers and acquisitions in the last couple of years:
In 2003 Eni purchased 50% of Union Fenosa Gas, engaged in the energy
field in Spain and 49% of the capital of Gas de Portugal.
In the same year Eni acquired the Norwegian company Fortum Petroleum
now Eni Norge ASa subsidiary of the Finnish company Fortum Oy.
January 2004 Eni sold the entire capital of Stargas SpA to Gas Plus.
In July 2003 Tigaz (a subsidiary in which Eni holds 50% interest) purchased
a majority stake in 3 natural gas distribution companies (Mol-Gaz (now
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Eni has been present on the German natural gas market since late 2002
through GVS in which it acquired a 97.8% interest in joint venture with the
German electricity operator EnBW
In 2004 Eni sold 33.34% interest in Galp energia (Portugal) to the state
owned Portuguese company.
Eni sold 50.9 bcm of gas in Italy in 2003 a modest increase of 0.8%, despite losses to
industry and wholesalers due to competition. The reduction in market share was
compensated for by higher sales to the power segment (up 2.55 billion cubic metres)
and the colder weather.
Sales in the rest of Europe were 14.15 BCM an increase of 4.23 BCM or 42.9% due
mainly to:
the progressive coming on line of long-term supply contracts with operators of the
natural gas market (1.54 BCM);
the start of LNG supplies to the Spanish electric company Iberdrola (0.70 BCM)
in the second half of 2002 and of supplies to the Turkish market via the Blue
Stream pipeline in February 2003 (0.63 BCM).
Sales of natural gas in secondary distribution outside Italy (4.4 BCM) increased by 0.7
bcm, up 17.2% due to increased consumption, mainly on the Hungarian market and
the purchase of three distribution companies in Hungary
Large Energy Users
In this category of competition are companies which act mainly at the national level
and have a background as power generators or utlities in their own countries.
Examples include Edison and Plurigas in Italy, Essent and Nuon in the Benelux
countries and Iberdrola and Cepsa in Spain. Previously this would also have included
National Power and Powergen in the UK and could still be said to include companies
like Scottish and Southern.
Independent Wholesalers
This fourth category of possible competition is notably absent from the EU market.
This was not the case a few years ago when the US companies such as Enron,
Dynegy, Williams, Duke, AEP, Reliant etc. were active in the European markets. The
role of the indpendent wholesaler, especially in contributing to a liquid spot market
was important in the development of competitive wholesale markets in the UK and
US. The more aggressive traders bias for short selling was a key factor in helping to
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reduce prices in these markets and their limited presence in recent years in the UK
could be said to have been a contributory factor in the very high forward winter prices
that have been seen32.
Effective Unbundling
Traditionally gas supply, transportation and storage were integrated in a single
company selling gas at prices which covered the costs of all three activities. The first
gas Directive required unbundling in the form of accounting separation only. The
second Directive goes further in requiring legal separation but not separation at the
level of ownership. This means that transportation and supply businesses may be held
in separate subsidiaries but can be owned by the same parent company.
Unbundling means among other things that TSOs must not behave in any way that
favours its affiliate supply company. The affiliate has access to the same services as
any other shipper on the same terms and must pay the same charges. There are also
strict rules on protection of data which make it illegal for the TSO to pass on
information received from other shippers to its own affiliate. National Regulatory
Authorities have the responsibility to ensure this non-discrimination.
The unbundling requirements do not prevent the operation of a combined
transmission, LNG, storage and distribution system operator provided it is legally
independent from other activities, including the supply business.
Most of the EU15 member states have implemented at least legal unbundling and two,
UK and Denmark have unbundling at ownership level.
Gas Release Schemes
Some Member States have introduced gas release programmes which require the
dominant companies to release gas from their long term contracts to new entrants. Gas
release was first used effectively in the UK and with varying degrees of success in
Italy, Spain, Germany and France.
Early attempts in the UK to break British Gas control over wholesale gas focussed on
limiting British Gass purchases of new supplies to 90% of output from new
developments. This was followed in the early 1990s by a requirement to release gas
from existing contracts. The gas release measures greatly assisted development of the
spot gas market and resulted in the creation of a number of small gas supply
companies. Today the UK has the lowest degree of concentration of control of
wholesale gas and Centrica (the marketing arm of the old British Gas) still controls
around 50% of gas supply.
Gas release, combined with limitations on gas import activity, has also been tried in
Spain and Italy which have resulted, in each case, in the percentage of wholesale gas
controlled by the largest company being reduced to 75%. In Italy, Eni Gas and Power
32
This has also been recently noted in the Trade and Industry Committee report on Fuel Prices. HC
279-1.
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is required to release further gas such that its share of wholesale gas will be reduced to
61% by 2009.
In the recent approval of the merger between E.ON and Ruhrgas, the German
authorities imposed gas release on Ruhrgas.
Such gas release schemes have to be effective, however, and result in a real release of
gas at competitive prices. The incumbents can sometimes establish a scheme which no
one will participate in and then point to that as evidence that they have tried to
introduce competition but no one was interested33.
Gas Contract Changes
Long term contracts continue to play an important role in the European gas wholesale
business. There has been no indication whatsoever, that interest in signing long term
contracts has diminished with the prospect of market liberalisation. However, we do
see changes in the terms of these new contracts compared with the traditional
contracts signed in the era of national monopolies. These changes affect
Price review clauses are being activated more frequently in respect to some
of the existing long term contracts which were signed in the monopoly era.
Contract prices are being indexed to a wider range of markers including the
NBP spot price in the case of Centrica in its contracts with Statoil and
Gasunie. Electricity pool price has also been included in Gas Natural
contract with Atlantic LNG.
Distrigaz bought 25% of its supplies on the spot market in 2002. Gas
Natural buys spot LNG to cover winter sales.
33
For example setting a high reserve price can render a scheme ineffective.
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Multiple contracts with relatively small volumes are replacing the large
volume deals which would have underpinned infrastructure development in
former times. For example, Sonatrach is selling gas which will become
available in the new 8 BCM Medgaz pipeline to Spain in a series of
contracts for around 1 BCM per year to buyers including Total, Cepsa and
Iberdrola.
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This kind of contract was challenged legally in 1999 when Stadtwerke Aachen
(STAWAG) declared its contract with Thyssengas null and void. Two courts decided
in favour of STAWAG on the grounds that the contracts breach both German and EU
competition law. Thyssengas appealed to the High Court but withdrew the day before
the court was due to announce its decision. Subsequently two other LDCs have
challenged their contracts which also resulted in out of court settlements at the last
minute.
These cases were settled in November 2003 and triggered an investigation by the
German anti-trust authority the Bundeskartellamt. The investigation was at first a
low-key affair but the Bundeskartellamt has now confirmed it has completed its
investigation of 750 contracts and has judged 75% of them as anti-competitive
because they make it impossible for new entrants to gain access to the customers.
All contracts are judged anti-competitive if:
they have a duration of more than two years and oblige the buyer to buy more than
80% from the supplier; or
they have a duration of more than four years and oblige the buyer to buy more
than 50% from the supplier.
The Bundeskartellamt has decided not to outlaw every single contract because that
would take too long to achieve significant change. Rather it has decided to target
Ruhrgas, Wingas and RWE Energy to make voluntary changes and has started a
negotiation process with them. The authority is willing to accept different solutions,
such as a release of contracted gas volumes, improved cancellation rights or reduced
contract duration. The criterion for acceptable solutions is that customers gain a
genuine right to switch supplier.
It argues that past gas release programmes have been ineffective and had no impact on
the market. The companies either offered rebates to keep the customers or offered
contract conditions which made it difficult for customers to switch suppliers.
Some market observers believe that the authoritys initiative will bring about genuine
moves towards a competitive market in Germany. However, it can be expected that
the companies involved may be looking for solutions which satisfy the Cartel office
but minimise the impact on company sales.
The LDCs procurement contracts cover both gas and transportation as a bundled
service. Nevertheless, the price frequently has a binomial structure with a commodity
component and a capacity component roughly representing the supply of gas at the
import point and the provision of transportation to the city gate respectively. The
commodity component is usually linked to an inland Germany heating oil index,
whereas the capacity component is linked to inflation.
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34
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Transparency requirements.
Secondary markets.
The cross border capacity figures published by GTE on its website. This
data is quoted as hourly capacity for specific cross-border locations. We
have aggregated the data for country-country capacity (for example
Olbernau, Sayda and Waidhaus were combined to give the total capacity for
gas to flow from the Czech Republic to Germany) and convert the hourly
capacity to an annual equivalent.
EMLs own assessment of flows of gas in the European Grid in 2003. The
assessment is based on import and export data combined with our
assessment of the physical routing of gas between countries. We draw up
our assessment as a flow map (see section 4.3.5), which is circulated widely
throughout the European gas industry and the work has benefited from
feedback from a number operators.
The following table summarises the findings for selected cross border flows and
capacities in NW Europe. We show the annual flow, the annual capacity and the load
factor (flow/capacity*100%).
The table shows that utilisation of capacity at many borders is very low, often less
than 40%. We would not expect pipelines to operate at a 100% load factor because of
35
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To
Border Points
Czech Rep
Germany
Germany
Netherlands
France
Germany
Netherlands
Belgium
Belgium
France
Belgium
Austria
Switzerland
Germany
Italy
Italy
Olbernau, Sayda,
Waidhaus
Obergailbach
Oude, Bocholtz
Zavenaar
Hilvarenbeek, Obbicht,
s Gravenvoeren
Quevy,
Taisinieres,
Blaregnies
Eynatten
Tarvisio
Griespass
Annual
Flow
(BCM)
20.0
Annual
Capacity
(BCM)
57.4
Load
Factor
%
48.8
6.7
27.6
14.3
76.8
40.0
35.9
14.7
34.2
43.1
16.3
27.7
58.9
0.8
22.9
14.5
9.0
28.2
22.2
8.9
79.5
65.4
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in 200036. RWEs expectation was that the introduction of regulated tariffs in January
2002 and consequent removal of cross-subsidies would further enhance its return from
the Czech acquisitions.
On occasions the distinction between transit and domestic tariffs has carried over into
TPA arrangements. This is particularly the case in Belgium where Fluxys publishes
entirely separate tariffs for transit and domestic transportation.
The distinct concept of transit (within the EU) was enshrined in the 1991 EU Transit
Directive, which is being repealed, although the Energy Charter Treaty also contains
transit provisions which covers EU trade.
Tariffs
Energy Markets have undertaken a lot of work in looking at transmission tariffs across
Europe. Table 14 below summarises tariffs for use of High Pressure systems around
Europe. The tariffs are shown in $/mcm/100km for transmission over two distances
50km and 350km for different load factors, as represented by hours used . The
results have been ranked in increasing order of the tariffs on a case by case basis.
For purposes of this report we are most concerned with transit of gas over longer
distances at high load factor so we concentrate for the moment on the 350 km, 8,000
hours case. On this measure there is the very large variation between countries
ranging from $0.9/mcm/100km for Belgium to $4.5/mcm/100km for Greece.
Generally, the lowest tariffs are shown for more mature networks in large well
developed gas markets including Austria, Belgium, Germany, Netherlands and UK.
Tariffs in emerging gas markets such as Spain and Greece are higher partly because of
relatively large investment costs during the rapid growth phase of the market.
However, even among the more mature gas markets there is considerable variation in
the tariffs. For example the German tariff is more than twice the UK tariff. In
principle these countries have broadly similar geographies and cost structures and we
would expect tariffs to be more closely aligned. One obvious difference is that tariffs
in UK and to a lesser extent Holland have been subject to downward pressure from
regulators which has squeezed out inefficiencies as well as economic rent.
The Greek tariff is up to 9 times the UK equivalent tariff though it should be noted
that Third Party Access does not yet exist in Greece and the figures shown are based
on tariffs which have been agreed but not yet implemented. The high tariffs can be
partly explained by the relatively high capital cost required to develop a gas industry
from a low base compared to a mature network where annual growth in throughput is
relatively small in percentage terms. In the Greek case, the transportation tariff has
been smoothed over a period of 15 years (otherwise increasing volumes would result
in very high tariffs in the first few years with high capital costs being recovered from
relatively few consumers and very low tariffs in the future when costs are spread over
an increasing number of consumers).
36
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8,000
hours
2.9
3.7
5.9
6.4
6.4
6.4
15.6
19.4
20.7
23.8
31.3
Case 2
Germany
Austria
UK
Netherlands
Belgium
France
Italy
Denmark
Ireland
Spain
Greece
5,000
hours
4.6
6.0
6.7
9.5
10.2
10.4
20.9
30.3
31.3
33.4
47.2
Case 3
Germany
UK
Austria
Netherlands
Belgium
France
Italy
Denmark
Ireland
Spain
Greece
2,500
hours
9.2
9.2
12.0
17.6
19.7
20.8
34.8
59.1
59.8
59.8
89.5
350 km on HP System
Case 4
Belgium
UK
Netherlands
Italy
France
Germany
Austria
Denmark
Ireland
Spain
Greece
8,000
hours
0.9
1.2
1.4
1.8
2.1
2.5
2.7
2.8
3.0
3.4
4.5
Case 5
Belgium
UK
Netherlands
Italy
France
Germany
Austria
Denmark
Ireland
Spain
Greece
5,000
hours
1.5
1.6
2.1
2.3
3.2
3.9
4.3
4.3
4.5
4.8
6.7
Case 6
UK
Belgium
Italy
Netherlands
France
Germany
Denmark
Ireland
Spain
Austria
Greece
2,500
hours
2.6
2.8
3.6
4.0
6.2
7.8
8.4
8.5
8.5
8.6
12.8
Many TSOs require shippers to book capacity on an annual basis and that is often
restricted to specified gas year for example October to September. Some TSOs now
offer more flexible contracts for shorter periods but often at a disproportionately high
tariff compared to a full year. The availability of interruptible transportation capacity
is also limited or non-existent on some systems.
Balancing
Potential new entrants into the emerging liberalised gas markets are often obliged to
purchase gas in a contract for a fixed flat volume during a year, which does not match
the seasonal requirements of their customers. This means that access to storage or a
flexibility instrument is usually a necessary condition for new entrants to obtain
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effective network access. In addition, the policy of TSOs relating to balancing of the
network over shorter periods is an important part of the conditions for network access.
For both balancing and storage, practice varies considerably and a number of
countries place various restrictions on the access of third parties to storage facilities,
with storage charges apparently significantly higher than in the UK for example.
For balancing the most developed system is that in the UK, where there is a balancing
market similar to that in place for electricity and the margin between the sell and buy
price is usually relatively low. As discussed above in the Netherlands balancing
services are supplied predominantly from the Groningen field which is controlled by
Gasunie (as the purchaser of the gas) and this combined with the hourly balancing
requirements results in significant costs and uncertainties for shippers.
For most other Member States imbalance energy is charged at a multiple of the
wholesale price without reference to market mechanisms. These multiples range from
1.2 to over 4 depending on the country and the circumstances. It is also notable that
few TSOs allow pooling of imbalances and this is a disadvantage to new entrants with
smaller portfolios of customers. Only Austria, Italy and the UK are considered to have
a favourable cost/market based balancing system.
Overall there remains considerable scope for network operators to adopt a regime that
implicitly favours their associated undertakings. Requirements for third parties to
balance over hourly periods, when combined with restricted access to flexibility and
storage instruments, lead to significant barriers to new entrants, who are likely to have
much smaller loads and portfolios of customers, subjecting them to greater variability
throughout the day.
TPA to Storage and LNG
The second Gas Directive extends TPA to LNG and Storage. Conditions for access to
LNG plants have been published on websites by most operators of existing LNG
plants, including Spain, Belgium, France, Greece and Italy. The tariff for Italy, at
least, is regulated.
The Authority for Electricity and Gas of Italy has been particularly proactive in
pressing for TPA to LNG facilities. It overruled attempts by Eni subsidiary, GNL to
deny access to its Panigaglia plant to Gas Natural on the grounds that the entire
capacity was contracted to Eni S.p.A. GNL was fined 50,000, for its refusal to grant
access but this was the minimum fine allowed in recognition that GNL had promptly
complied with the ruling37.
The Belgian regulator, CREG, has also ordered changes to Fluxys proposals for a
system of short-term bookings of unloading slots at the Zeebrugge LNG terminal. The
first proposal was judged to underestimate the number of slots available. There has
been a lengthy negotiation between Fluxys and CREG over the terms for third party
37
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access (TPA) to the terminal, which is currently used mainly by Distrigas, the owner
of Fluxys.
The indicative programme, as the TPA regime is known, will regulate short-term
bookings this year and next. It will also be the basis for TPA after the expansion of
the terminal from 4.5 BCM per year to 9 BCM in 2007.
The regulator wants Fluxys to publish more information than they have suggested so
far. Although Distrigas owns all capacity until 2006, slots are occasionally sold to
others for spot cargoes. After the indicative programme is agreed, potential customers
will be consulted at a Shippers Day in March. They are expected to include the
three companies that booked long-term capacity after 2007: Distrigas, Tractebel and
ExxonMobil.
The CREG spokesman said they were discussing the rules for the operation of a useit-or-lose-it system. Many details such as how much notice must be given about
availability are still under discussion. There will be a secondary market for slots after
the expansion, if not before. It will be run by Fluxys LNG. Capacity owners will make
a yearly forecast of their shipping plans and a few months ahead they will confirm
which slots they want. So far no decision has been taken on how much notice will be
given.
The Spanish regulator, CNE, has ruled out a secondary market in re-gasification
capacity in Spain at least for the time being. CNE says that sales of part of a contract
are not allowed for in the current regime (although secondary trading of pipeline
capacity is covered). New rules need to be brought in to prevent an integrated
company from booking a large volume of capacity and then choosing who to sell it to.
The issue is important in Spain where LNG supplies over half the market and there
are financial penalties for not using booked capacity. There is no timetable to
introduce the new rules.
As discussed below major new infrastructure projects may be exempted from TPA
requirements.
The second Gas Directive requires tariffs or at least the methodology upon which they
are based to be approved by regulators. The Directive allows negotiated access for
storage. CSL, Edison, Enagas, Fluxys, and Stogit all have regulated storage TPA38.
BEB, BP, DONG, GDF, NAM, OMV, RAG, E.ON Ruhrgas, RWE-TG, VNG AND
Wingas also have published tariffs but these are negotiated TPA.
A proportion of storage, particularly in France and Germany, is regarded as
strategic storage, to be used in the event of supply disruptions by exporting and/or
transit countries. Such storage is unlikely to be available in the event of supply
problems in other countries.
38
July 2004 Madrid Forum European Gas Regulatory Forum, DGET. Technically speaking CSL does
not offer regulated TPA but the undertakings have pretty much the same impact.
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Enables main line extensions and new markets to be developed at lower prices to
these markets than pricing on an incremental basis.
Eventually all pipeline customers benefit from increased throughput and
economies of scale, therefore all customers should pay.
Expansions and extensions will get built which otherwise would not get built,
bringing operational and financial benefits to the system as a whole.
By bringing new shippers and customers onto the system, rolled-in pricing will
promote competition and provide a level playing field for competitors.
Encourages infrastructure development, especially applicable in immature
markets, growing markets
Provides a mechanism to extend systems to rural and disadvantaged areas,
meeting social and other national objectives
An interesting variant of this system has been adopted in Italy39 where supplementary
charges are included in tariffs in respect of new investment (post 2001). These
supplementary charges are included for six years after the investment becomes
operational. The rate of return for new investments is lower than that for existing
assets (7.47 per cent compared with 7.94 per cent in respect of pipelines and 9.09 per
cent compared with 9.15 per cent for LNG terminals). New investment is included in
39
The Italian Authority for Electricity and Gas. Decision 120/01 as amended by decision 127/02, May
2001.
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the tariff on the basis of increased asset values appearing on the TSOs balance sheets.
Hence only actual investments are included rather than planned investments.
Joint Ventures
The joint venture approach has been used widely in Europe for many years to develop
pipelines for international transit of gas. Traditionally capacity in these joint venture
pipelines was allocated exclusively to equity partners in the project which would
include the buyers and sellers of gas as well as the system operator in transit
countries. Third parties were often actively excluded from taking capacity (see
discussion of the Marathon case below).
This model is especially prevalent in the main pipeline system in Germany. Ruhrgas
transmission interests are held as a series of joint ventures involving other parties
including Statoil, Norsk Hydro, Eni, Dong, Gaz de France, Shell and Exxon. BEB
was also a joint venture between Shell and Exxon (now disbanded) whilst Wingas is a
joint venture between Gazprom and Wintershall. More recently the authorities in
Germany have forced Ruhrgas and Wingas to cooperate on construction of a pipeline
from Lamperhheim to Burghausen on the German Austrian border. The two
companies had originally planned to build separate systems but this was ruled out on
environmental grounds.
Similar joint ventures are used in Belgium, Austria, Switzerland and Poland for gas
transit pipelines. A similar approach was also taken for the Interconnector project
linking UK and Belgium.
These joint venture pipelines are subject to RTPA under the second gas directive in
the same way as TSOs national systems. However, it is often the case that capacity is
fully contracted to the equity parties leaving no capacity available to new entrants. In
some cases such as that of the TAG pipeline in Austria the regulatory and competition
authorities are seeking to remedy this lack of capacity available to third parties by
pressurising the equity partners to increase capacity by installation of compressors.
However, the problem is complicated because the pipeline is physically located in
Austria but also serves the Italian gas market.
The Bacton to Zeebrugge interconnector was also developed as a joint venture and
initially capacity was allocated to the equity partners in proportion to their shares in
the project. However, the project structure did allow for capacity to be sold or
assigned to third parties on a long term basis and there is an active market for
secondary capacity.
Open Season
The Open Season approach has been used widely in North America but is a relatively
new approach in Europe. The first project to be advanced under the Open Season
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In the UK we have seen all of these methods used. All of Transcos network
investments are rolled into Transcos Regulatory Value at each periodic price review.
Although Ofgem has put in place a market mechanism, through long term auctions41,
to assist Transco in deciding which investments it should undertake, before they are
rolled in to the asset base at subsequent price reviews. Arrangements are in place to
allow capacity to be sold on a short term basis. The three new LNG terminals
operate under long term contracts and Ofgem has decided to exempt them from the
EU requirements in respect of TPA for twenty years. Ofgems decision to exempt
South Hook and Grain from TPA has been ratified by the European Commission and
ratification is awaited in respect of Dragon LNG.
Ofgem has also indicated that it considers the application by BBL pipeline for
exemption meets the necessary criteria for an exemption to be granted.
4.2.3. Institutional
Proactive Energy Regulators
All member States now have regulators. Although there is some variation in the
precise arrangements, most of the regulatory authorities are independent bodies
established separately from other government departments and direct ministerial
control. They have a high degree of independence of Government, being set up under
founding legislation which sets out the authorities objectives, responsibilities and
powers. This strong grounding in law provides an effective means for regulators to
resist political interference, especially if that would contravene the stated policies and
40
Marathons Symphony project to export Norwegian gas to the UK adopted an Open Season approach
but did not go ahead.
41
Though they were called auctions they were effectively Open Seasons since the minimum price was
set at the Long Run Marginal Cost and those who bid the LRMC were allocated the new capacity
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objectives set out in the law. Governments can only change the regulators objectives
and powers through changes to legislation.
Although, politicians are usually involved in the appointment of members of the
regulatory bodies, appointments are typically for fixed terms and members cannot be
removed for political reasons. For example, the Italian Regulatory Authority for
Electricity and Gas (known as Autorita) was set up under Law 481 in 1995 as an
independent authority body which makes its own decisions under the terms of its
founding law, procedures and regulations. Autorita has been one of the more
proactive authorities establishing a sound methodology for setting tariffs in the SRG
and Edison networks, establishing Network Codes and enforcing gas release
programme and market share targets on Eni. Its efforts have been frustrated by the
dominance of Eni and it has joined forces with the Italian competition authority to try
to reduce that dominance (see below). In many ways the battle between Autorita and
Eni is reminiscent of the battle between Ofgas (later Ofgem) and British Gas in the
1980s and 1990s.
The Netherlands Office for Energy Regulation DTe is slightly unusual in that it falls
under the Ministry of Economic Affairs and has been included as a chamber within
the Netherlands Competition Authority (NMa). However, the tasks which DTE is
responsible for are specified by the Electricity and Gas Acts, ensuring its
independence of government. DTe has had notable success in the area of network
tariffs where it secured tariff reductions of 5% per annum under the first price control.
However, it has allowed Gasunie to impose an hourly balancing regime which is
unnecessarily restrictive42 and has to work within the confines of an industry structure
over which the government exercises tight control (see Section 4.1 above)
In France the Commission for Regulation of Energy (CRE) consists of members
appointed for six years. Three of the Commissioners (including the Chairman) are
appointed by Decree, while others are appointed respectively by the presidents of the
Senate, National Assembly and Economic and Social Council. In Italy there are three
commissioners who were appointed by presidential decree in 1996. In Spain the
National Energy Commission (CNE) is governed by a Board of Commissioners
formed by the Chairman, who is the Commissions legal representative, the Vice
Chairman, seven members and a non-voting Secretary. The Commissioners are all
professionals with acknowledged technical ability who are appointed by Royal Decree
on the proposal of the Minister of Economy following his appearance before the
relevant Committee in the Congress of Deputies (Lower House of Parliament) and the
ensuing debate.
A European Energy Regulators Group was established on 11th November 2003 by
Commission Decision 2003/796/EC to facilitate consultation, co-ordination and cooperation between the regulators. The Group is composed of the heads of the national
regulatory authorities or their representatives. The Commission shall be present at the
meetings of the Group and shall designate a high-level representative to participate in
42
As discussed in section 4.2.2, hourly balancing imposes unnecessary burdens and costs on new
entrants, particularly where they are denied access to storage or are charged excessive storage tariffs
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all its debates. Experts from EEA States and States which are candidates for accession
to the European Union may attend the meeting of the Group as observers. The Group
and the Commission may invite other experts and observers to attend its meetings.
This new Group formalizes the activities of the already extant Council of European
Energy Regulators (CEER).
Proactive Competition Authorities
The competition authorities at both EU and national levels have been influential in
achieving changes and tackling dominance at both EU and national level.
At EU level DG Competition has had some success in
The Marathon case which goes back to the 1990s, when the Norwegian
subsidiary of Marathon requested access several times to the gas pipelines of
five gas companies in continental Europe. The Commission settled the case
with BEB43, Gasunie44 and Thyssengas45. Negotiations with Ruhrgas and
GdF were not settled until 200446. In all cases the operators eventually
agreed to changes in their TPA systems and other measures to promoted
competition such as gas release.
The break up of the Norwegian gas sales cartel see section 4.3.5
At national level the German cartel office has been proactive in the issue of long term
contracts between TSOs and Local Distribution Companies, as described above.
In Italy the competition authority is working with the gas and electricity regulatory to
tackle the issue of Enis dominance with notable success in the Blugas case.
The Competition Directorate is to launch an inquiry this year into gas and electricity
market competition in the EU. The three main aims of the inquiry are :
The overall aim is to have better information on what still needs to be done to create a
flexible, competitive single European gas market. Only after the inquiry has been
completed will the EC decide whether further action is required and if so, at what
43
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level. Impetus for the inquiry comes from the Lisbon Communication, published in
January of this year, which aims to enforce the ECs competition policy. It
specifically calls for inquiries in key sectors, like financial services and energy, to
ascertain why markets do not fully function. Companies would be obliged to provide
information and would be fined if they did not comply.
4.2.4. Summary
Conditions in the EU wholesale markets vary considerably between member states,
and one aim of the second gas directive and the proposed regulation on access to
networks is to achieve greater harmonisation towards good practice.
Market dominance continues to be a major issue. Many national markets continue to
be dominated by the incumbent gas company. We are also seeing the advent of
powerful pan-European gas and power companies with high profile strategies based
on aggressive acquisition and investment programmes aimed at controlling large
sections of the physical infrastructure and access to end users via ownership of
distribution companies. The implementation of the 2nd Gas Directive may go some
way towards limiting any market dominance but on its own is not enough, principally
because of its weaknesses in the area of storage, balancing and the separation of
transportation and supply functions. Major producers are also trying to establish
market positions but they are lagging somewhat behind the gas and power companies
in terms of sales. Notably absent from the market are the independent wholesalers
such as Enron, Dynegy and other US companies who were trying to enter the market a
few years ago.
Legal unbundling of transportation, storage and supply has largely been implemented
but how effective this has been in creating a level playing field for new entrants is
uncertain. Gas release schemes have also been introduced, which conceptually is good
progress, but not all have been effective. More progress is being made in respect of
gas contracts with more flexibility being introduced, the removal of destination
clauses and the German cartel office declaring 75% of the 750 contracts between the
TSOs and LDCs as anti-competitive.
The main issues regarding third party access relate to allocation of capacity. Many
TSOs operate a first come first served system which effectively denies access to
capacity to new entrants. Transit is generally treated separately from domestic
transportation. Capacity in transit lines is frequently booked up under long term
contracts and there are cross-subsidies between transit and domestic charges. Analysis
suggests that cross-border capacity is generally under utilised, except maybe into
Italy, and that there are also large discrepancies between transmission tariffs within
EU countries for transporation of similar loads and distances. Whilst relatively high
tariffs may be justifiable in growth markets where there is an intensive capital
requirement, there is less justification for differences among more mature and well
established gas markets where costs should be broadly similar. It is certainly noticable
that tariffs are lower where regulators have taken an active role in forcing out
inefficiency and economic rent than in countries where independent regulators have
been less forceful in regulating tariffs.
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Balancing regimes also differ between countries with hourly and daily balancing and
evidence of overly penal charges with considerable scope for network operators to
adopt a regime that implicitly favours their associated supply business. Progress is
being made on the publishing of conditions for access to both LNG terminals and
storage facilities with a mixture of regulated and negotiated TPA. The issue of
network development under a TPA regime is being dealt with largely on an ad hoc
basis. The UK and Italy have better developed systems based on rolled in rates but
joint ventures, open seasons and applications for TPA exemptions are all being used.
A more consistent, coherent approach across the EU would be useful.
At the institutional level the regulatory authorities in some countries would appear to
be more proactive than in others, particularly where state ownership is still important.
Germany has just established a regulator but the cartel office has been active.
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Market
Power
Access
Essential
Facilities
to
Status
In 14 countries there is only one company with access to 5% or more of gas. The number is three or more in Germany (12) Ireland
(5), Spain (4) UK (5) and Romania (4).
Switching by large industrial users is significant in Belgium (60%), Denmark (30%), Estonia (20%), France (25%), Ireland (>50%),
Italy (30%), Netherlands, UK (>50%) Romania (>50%). The rest are less than 10% or not known
Some progress in most countries though some are doing accounting separation only. State ownership remains in some countries
Schemes planned or implemented in Austria, France, Germany, Italy, Spain and UK, although effectiveness unclear
Only UK has genuine spot market, but other hubs developing in NW Europe and virtual balancing points in UK, Netherlands and
TPA Transmission
Only Italy and UK judged by EC to have flexible TPA system with cost or market based balancing
TPA Storage
Negotiated access allowed by second gas directive. Regulated TPA in some facilities
TPA LNG
Negotiated charges allowed by second gas directive. Published charges starting to appear, some regulated. GGPS approved at
Madrid Forum special meeting in January
Only Italy
Mixture of daily and hourly balancing. Some charges still over penal
No consistent pattern across the EU. Rolled in in Italy and UK but JVs and TPA exemptions still popular
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Germany of about 0.1 BCM per annum, is one of the most active foreign players in
Germany. Most of the industrial and Stadtwerke customers are based in Northern
Germany. The Danish gas major Dong has a one-man sales team in Germany. Dongs
target is to substitute losses in the home market in Denmark with sales in Germany,
the Netherlands or Sweden.
Italys Eni controls jointly with the German energy provider EnBW Gasversorgung
Sddeutschland (GVS) a regional distribution company based in Stuttgart with annual
sales of around 0.08 BCM. Eni is now supplying GVS about 10% of GVSs overall
needs. So far, neither Eni nor GVS are perceived as active competitors on the German
market. Last but perhaps not least the Austrians have an eye on the German market.
The sales company EconGas, controlled by the Austrian gas major OMV, is trying to
sell gas in southern Germany
The dominant market player E.ON Ruhrgas lost only 0.6 BCM of sales in 2003 to
competitors, according to figures presented at an analyst conference. This represents
only 1.1% of the 2002 sales total of 56.9 BCM in Germany. The incumbents remain
entrenched, their positions reinforced by the ongoing difficulties for third parties to
secure pipeline capacity at competitive prices.
A possible way for new entrants to access the German market would be through the
projected increase in demand for gas from new power stations. Total German gas
demand is projected to increase from 90 bcm in 2002 to 109 bcm in 2015 in our base
case demand projections as outlined in Section 6, mostly driven by increased use of
gas for power generation. In the UK market the emergence of new entrants in the
1990s was helped by the dash for gas in power but without the other key reforms it
is unlikely that competition would have developed as rapidly. It is certainly the case,
as evidenced by the US and UK experience that it is easier to introduce competition
into a growing market, rather than a static or declining market, but it would seem
unwise to rely on growth in the market enabling new entrants to compete, in the
absence of other reforms. If the growth in gas demand did not materialise for any
reason then new entrants would not get into the market and competition would be
unlikely to be introduced47.
Netherlands
Gas market liberalisation began in the Netherlands with the Gas Act introduced in
August 2000. The market was opened initially to all consumers using 10 million cm
per year or more, representing 45% of the entire market. The threshold was lowered to
0.17 million cm per year, representing 65% of the market, in January 2002. The
market was fully opened on 1 July 2004.
The level of switching by eligible industrial customers is open to some uncertainty.
The fourth EC Benchmarking Report does not give a figure on switching rates for
47
While the introduction of competition in the US and the UK occurred at the same time as the growth
in demand, and this growth was certainly considered to be helpful, it could be argued that the presence
of competition actually helped the growth rather than the other way round.
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Netherlands. The third benchmarking report which covered 2002 the first year of the
lower threshold suggested that 15% of eligible customers had switched supplier. In
2003 Gasunie Trade & Supply sold a total of 15.3 BCM of gas in the liberalized
segment of the market, which comprises industrial users and greenhouse growers with
an annual gas offtake of more than 1 million cm and power stations. This was a
reduction of 15% compared to 2002 when T&S sold 18.1 BCM. Gasunie attributes
this reduction to a loss of market share to competitors in the liberalized market.
According to EnergieNed, the Federation of Energy Companies in the Netherlands,
only about 1 to 2% of small customers were expected to switch to new suppliers when
the market was fully opened on 1st July 2004 (compared with 2% for electricity
suppliers)48. The low take-up of gas competition was attributed by EnergieNed to a
lack of awareness of the possibility to switch from one gas supplier to another.
There are 26 companies with licences to deliver gas to small customers and there are
at least thirteen websites in the Netherlands which compare energy prices. However,
according to DTe only five of these sites make use of independent data, not one of
them is comprehensive, and offers complete transparency. The Dutch Consumers
Association says that many customers have no idea what their contractual details are.
According to the DTe, customers can in theory save 100 per annum or about 9% of
the average annual bill by switching gas supplier. However, based on figures
published by Nuon49, energy costs account for 30% of the average household bill and
distribution costs account for a further 16%. That leaves just 54% of the average bill
or about 599 subject to competition. A reduction of 10% on that portion would save
the customer less than 5 per month which many will think is hardly worth the trouble
of switching.
Italy
In May 2000, the government adopted the Letta Decree50, which implemented the
EU's first Directive (98/30/EC) on natural gas. The Decree set a liberalisation
schedule, which opened the natural gas market to full competition in January 2003,
and established regulated third party access to the natural gas grid. The Decree also
introduced two measures to increase competition in the retail and wholesale gas
markets:
1) no single company can supply more than 50% of the natural gas sold to final users
beginning in 2002; and
2) from the beginning of 2002, no company will be allowed to supply more than 75%
of Italys annual natural gas demand, with the limit reduced to 61% by 2010.
A new energy law, the so-called Marzano Law, was approved in August 2004
transposing into national law the requirements of the second EU Gas Directive. The
48
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law amongst other things aims to clarify the roles of the State and Regions in the field
of energy, in particular allowing co-ordination by the state.
Although Eni currently remains the predominant supplier in Italy, its market share is
declining as required by the Letta Decree. In 2003, Eni supplied 68% of the natural
gas delivered to the national pipeline grid, compared with 73% in 2002. According to
Snam Rete Gas data (see Table 16), Enel and Edison supplied 12%51 and 10%,
respectively, with Plurigas52 providing 4%.
After securing its own bank of natural gas import contracts, Edison is likely to
become Enis largest competitor in coming years.
Table 16 Throughput of Snam Rete Gas System
Eni*
Enel
Edison
Plurigas
Others
Total
2001
2002
2003
58.2
6.3
3.8
0.75
1.4
70.4
54.6
8.3
5.3
3.16
3.1
74.4
51.7
9.2
7.5
3.08
4.9
76.4
% Change
2002 to
2003
-5.2
10.9
40.3
-2.5
59.3
2.7
There are around 300 local and regional distributors operating in the Italian market.
Ownership of these companies is diverse and varies between private, public and
municipal ownership. In 2002 Eni took full control of Italgas, the largest distribution
company, driving a wave of consolidation in the distribution market. As privatisation
of municipal utilities is becoming more widespread and liberalisation of the market
puts pressure on small distributors, a number of consortia have been formed by
municipal utilities. For instance while Plurigas has been formed by Aem Milano
(40%), Amga Genoa (30%) and Asm Brescia (30%), Blugas consists of four
municipalities in north-east Italy and the Milan-based Gas Plus consortium. In
addition, both Italgas and Edison have formed alliances with groups of municipalities.
New foreign entrants have also positioned themselves to market gas at the distribution
level. Energia, a JV of the Italian conglomerate CIR and Austrias Verbund, aims to
become a leading multi-utility business. It has also contracted gas supplies from
Norway and Libya and its gas supply business became fully operational at the
beginning of 2002. In addition, Spains Gas Natural has acquired a number of small
distribution companies, particularly in southern Italy, building a relatively strong
distribution portfolio.
51
Note. These figures relate to throughput in the SRG system so do not include direct sales by Edison
from its own network.
52
Plurigas buys gas on behalf of its shareholders a group of local distribution companies
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Spain
Prices for industrial and commercial gas consumers in Spain are falling amid a price
war and oversupply in the liberalised Spanish market. The price fall happened quite
suddenly and the gas bubble could be a feature of the market for some years as new
supplies come on stream from LNG and there is little capacity to export the surplus
gas.
Since Spain fully liberalised its energy markets in 2003 many industrial and
commercial consumers have switched supplier. The main groups in the liberalised
market are the incumbent, Gas Natural, followed by BP with an 11% share and
Iberdrola and Cespsa both with 5% or about 1 BCM in annual sales. The liberalised
market takes the regulated tariff as its benchmark for prices, and discount obtained by
large consumers widened from around 3% at the beginning of 2004 to as much as
15% by the end of the year. Almost all small consumers have opted to remain on
tariffs set by the regulator.
France
Hardly any of Frances eligible gas customers have exercised their right to switch,
according to the latest market opening data from regulator, CRE. Of the 530,000
eligible sites, only 23,140 have used their eligible status to change contract or supplier
(4.4%). Out of a total eligible market of 350 TWh, 37.7% (or 132 TWh) has been
renegotiated, but only 9.7% of the total (34 TWh) has actually gone to a different
supplier. The switched volume has risen since July 2004 however, when it was 23
TWh, or 6.6% of the eligible volume.
There are only 10 suppliers in total, according to CRE, and the market share of
alternative suppliers has actually been decreasing slightly on a month on month basis
since last August. Of the market that exercised eligibility in December (that is, chose
to break from the old regulated tariff contract), only a 26% share went to alternative
suppliers on average. This situation is likely to improve in 2005 however as a result of
the gas release program for the south and southwest of the country. The French
residential market is still closed to competition.
4.3.2. Inefficiency and Economic Rent
Some analysis undertaken by EML, for a private client last year, on inefficiency and
economic rent in the European gas industry has some relevance to this study.The full
analysis cannot be included for reasons of confidentiality, but it indicates prima facie
evidence of a significant amount of inefficiency and/or economic rent in the
distribution and supply sector in particular, making the cross subsidisation of the
supply side by the incumbents pipes business much easier to achieve. This would
indicate that distribution is yet to come under effective regulatory control and supply
to small users (households and small industrials) has not been subjected to
competitive pressure.
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Market
Power
Access
Essential
Facilities
to
Status
Multitude of suppliers
Most member states have fewer than 6 suppliers (Germany, UK, Poland, Czech Rep, and Hungary have 6 or more)
This may be a problem in some emerging markets for example Sweden , Greece, Portugal and Finland . Switching by large
industrial users is significant in Belgium (60%), Denmark (30%), Estonia (20%), France (25%), Ireland (>50%), Italy (30%),
Netherlands, Spain, UK (>50%) Romania (>50%). The rest are less than 10% or not known
Not clear. State ownership remains in some countries. Evidence of significant economic rent.
Schemes planned or implemented in Austria, France, Germany, Italy, Spain and UK, although effectiveness unclear
Only in UK
Required by second gas directive with tariffs and methodology approved by regulators
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BCM
135.2
67.7
30.3
25.8
3.5
10.0
1.9
1.3
275.7
Share
49.0%
24.6%
11.0%
9.4%
1.3%
3.6%
0.7%
0.5%
100%
The entirety of Russian exports are supplied by Gazprom and the entirety of Algerian
exports are supplied by Sonatrach. Statoil controls almost 60% of Norwegian exports
(including the State Direct Financial Interest which it markets on behalf of the
Norwegian state). These three companies between them control 83.8 per cent of
European gas imports. The rest of the market is divided up between international oil
and gas companies most of which have interests in both Norwegian production and in
LNG export terminals which supply Europe.
53
Here by Europe we mean EU25 plus candidate countries; Romania, Bulgaria and Turkey.
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BCM
135.2
56.1
39.9
8.1
7.5
5.6
4.9
4.8
3.5
2.9
2.9
1.2
0.7
2.4
275.7
Share
49.0%
20.3%
14.5%
2.9%
2.7%
2.0%
1.8%
1.7%
1.3%
1.1%
1.1%
0.4%
0.3%
0.8%
100%
3,057
The map in Figure 5 shows EMLs assessment of flows from the major exporting
countries to 25 gas consuming countries in Europe. Also shown is the route taken by
the gas as it travels through transit countries before reaching its final destination. The
map is colour coded so that for example Russian supplies are shown in dark blue.
We expect that Russian and Algerian imports will increase in the next ten years in
absolute terms but fall in percentage terms as Europe seeks a more diversified import
portfolio. The extent to which Russian dominance may be reduced is subject to some
considerable uncertainty as is discussed in section 6 and 7 which discuss three
possible scenarios for 2015.
New pipeline supplies are expected from Libya, Iran and the Former Soviet Union
countries in the Caspian Sea area (Turkmenistan, Azerbaijan, Kazakhstan and
Uzbekistan). Supplies from these areas could be up to 12% of total imports. LNG is
also expected to expand to represent 14% to 17% of imports by 2013.
Europe will remain highly dependent on gas flowing from Russia through the Ukraine
to Slovakia although alternative routes through Belarus and Poland (Yamal) and direct
to Turkey under the Black Sea (Bluestream) are now flowing gas with volumes
expected to increase over the next few years. A third route to Germany under the
Baltic Sea (North European Gas Pipeline) is also planned although the timing of this
project remains subject to uncertainty.
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16.5
SWE
NOR
Algeria
Netherlands
Norway
Russia
United Kingdom
Other
LNG
1.0
6.5
4.1
IRE
5.0
DEN
UK
2.2
36.4
0.3
0.5
0.3
10.1
www.energymarkets.eu.com
3.4
LNG
27.6
14.0
9.3
4.3
BEL
25.5
POL
0.4
8.5
RUS
GER
30.5
2.5
0.6
LUX
7.8
4.0 4.4
1.2
2.0
0.6
3.1
18.3
NET
76.5
37.5
1.6
SLK
CZE
0.7
6.7
LNG
0.4
5.4
0.5
SWI
LNG
POR
7.0
FRA
14.7
2.5
2.3
8.2
0.7
8.7
7.0
22.9
LNG
ITA
22.0
9.3
MOR
ALG
23.1
TUN
LIB
0.4
1.3
1.9
BUL
CRO
GRE
0.6
3.1
LNG
22.1
16.3
1.1
1.8
CAS
ROM
SLN
AUS
12.5
9.3
HUN
2.1
7.5
0.5
SPA
32.2
1.5
LNG
11.3
TUR
3.5
IRN
4.6
LNG
We expect to see at least four pipelines in place from North Africa to southern
Europe. A fifth pipeline, from Algeria to Italy, is also possible. Algerian gas is
expected to reach France through an extension of the Medgaz pipeline through Spain.
Iran is already supplying gas to Turkey and has a contract to supply Greece in the
future. Turkey is also likely to become a major transit country for gas from the
Caspian area using a new pipeline from Azerbaijan via Georgia. This route is a very
important factor in increasing the diversity of supplies to Europe since it avoids transit
of Russian territory.
LNG will play an increasingly important role in the supply mix with new or expanded
import facilities in Spain, UK, Italy and France. Europe will have its first LNG export
facility in Norway supplying gas to the USA as well as to Spain.
The remainder of this section on the Pipeline Supply Area will review current
conditions geographically.
4.4.2. Russia
Production
Russia has by far the largest gas reserves in the world at 47 trillion cubic metres. In
context it has sufficient gas to supply the UK, the biggest gas consumer in the EU, for
470 years. It is also the largest gas producer with 616 bcm produced in 2003. Almost
70% of production is used in the internal market and the remaining 30% is exported.
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Exports to OECD Europe were 128 bcm in 2003 around 24% of European
consumption.
Gazprom
For many years, Russian gas production has been concentrated on three super-giant
gas fields in Western Siberia: Urengoi, Yamburg and Medvezhye. These fields
together accounted for 80% of Gazproms production in 1999. However they are in
decline now and represented only 62% of Gazproms production by 2003. A fourth
super-giant, Zapolyarnoye, came into production in 2001 and is expected to build up
to production of 100 billion cubic metres by 2008. This new giant field will
compensate for declining production from other fields over the next two to three years
but thereafter the forecast for Gazprom gas production from existing fields is in steep
decline as illustrated by Figure 6.
Gazprom will need to develop other deposits mainly in western Siberia over the next
ten years to maintain production and export levels. Gazprom plans to give priority to
the development of smaller gas fields which utilise capacity in existing pipelines as it
becomes available due to declining output from the giants. Gas has already started to
flow from the Pestsovy field in the Urengoi area. Production is expected to build up to
27.5 bcm by 2006. Other prospects include the Kammennomysskoye fields which lie
just 150 km from the Yamburg field with the potential to produce over 50 bcm per
year.
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IMPORTER
COUNTRY
BCM/yr
From
To
OMV
Austria
6.5
1984
2024/5
Bulgargas
Bulgaria
8.0*
1998
2010
Czech Republic
9.0
1998/9
2015/6
Gasum
Finland
8.1
2014/5
GdF
France
8.0
2015/6
GdF
France
2.5
2012/3
GdF
France
1.5
2012/3
Ruhrgas
Germany
13.0
2015/6
Wingas
Germany
13.5**
1998
2030
VNG
Germany
12.0
2017/8
Depa
Greece
2.24
2013/4
MOL
Hungary
11.0
1996/7
2015/6
GdF
Hungary
0.4
1996/7
2015/6
Snam
Italy
7.4
1996/7
2013/4
Snam
Italy
8.0
1998/9
2018/9
Snam
Italy
5.5
2018/9
Italy
5.6
2008/9
2018/9
Edison
Italy
2.0
Enel
Italy
3.0
2005/6
Gasunie
Netherlands
4.0
2001/2
2015/6
PGNiG
Poland
12.5
1996
2021
SNGN Romgaz
Romania
14.0
1996
2010/11
SPP
Slovakia
9.0
1997/8
2008/9
Switzerland
0.4
Botas
Turkey
6.0
2001/2
2026/7
Botas
Turkey
8.0
2001/2
2026/7
Botas
Turkey
16.0
2002/3
2027/8
Geoplin
Slovenia
0.7
1992/3
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The Yamal peninsula is an important development area and could start producing
from around 2008 in volumes rising to 190 bcm per year by 2020 and a maximum
production of 250 bcm per year by 2030.
The Barents Sea is another potentially important production area. The Stockmanov
field contains around 3,200 bcm of gas. It was discovered in 1988 but development
plans have been delayed. Possible development of the field has been linked to the
proposed North European Gas Pipeline (NEGP) and to an LNG scheme which has
been discussed by Gazprom and Conoco with USA as the target market. However,
Gazprom has designated the South-Russkoye field in the Yamalo-Nenetsk region as
the source of gas supplies for NEGP.
Development of Shtokmanov is expected to cost some $20 billion and presents an
enormous technical challenge because of its Arctic location, and it may be some years
yet before a decision to proceed with development of this field is taken.
Independent Production
By contrast production by independent producers has doubled between 1994 and 2004
see Figure 7.
Figure 7 Production by Russian Independent Producers 1999 to 2004
100
90
80
bcm/year
70
60
50
40
30
20
10
0
1999
2000
2001
2002
2003
2004
The independent producers fall into two groups. The first group consists of oil
companies for which gas is not a major part of their activity. The group includes
Lukoil, Yukos, TNK-BP and Rosneft. The second group consists of companies which
specialise in gas production and are known as Independent Gas Producers (IGPs). The
IGPs include Novatek (which is the second largest gas producer after Gazprom),
Northgas and the production units of Itera.
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According to the Union of Independent Gas Producers (Soyuzgas)54 the oil companies
control 6.5 trillion cubic metres of explored gas reserves (proven and probable) whilst
IGPs control 4.5 trillion cubic metres.
Lukoil produced 4.7 bcm of gas in Russia in 200355 and plans to expand
production to around 33 bcm by 2013 and more than 80 bcm by 2020.
Yukos produced 5.7 bcm of gas in 2003 and expects to increase production to 15
bcm in 2005 and 50 bcm by 2015.
TNK-BP produces some 4.5 bcm of associated gas annually56. The company has
mid- and long-term options for the development of its gas business, which will be
implemented subject to the development of a market for independent gas
producers. Mid-term prospects of TNK-BPs gas business are based on the assets
of Rospan. TNK-BP manages Rospan, which controls 850 billion cubic metres of
gas (and also 1 billion cubic metres of liquid hydrocarbons) in Yamal (West
Siberia). The location of these resources near pipelines allows for gas to be
supplied to the domestic market. The company plans to bring gas output to 17
billion cubic metres a year by 2007, on the basis of Rospans gas and some other
associated gas resources held by TNK-BP.In the long term, the companys gas
output plans are connected with the development of the Kovykta field in East
Siberia. Potential gas output in this field could reach 40 billion cubic metres a
year. Extracted gas will be supplied to the domestic market and to Far Eastern
markets (in particular, China and South Korea). TNK-BP holds 63% in Russia
Petroleum which holds the exploration licenses for the Kovykta field
development.
Rosneft57 increased gas production from 4.8 bcm in 1998 to 9.2 bcm in 2004 and
plans to produce no less than 50 bcm in 2015. Expansion since 2000 has been
largely organic based on an aggressive drilling programme following completion
of its programme to modernise the fields and equipment it inherited from the
Soviet Union. Most of the drilling is performed in the Yamalo-Nenets
Autonomous Region. The company continues to progressively increase gas
production particularly in the Krasnodar area as a result of increasing the number
of gas wells at the Anastasievsko-Troitskoe field. A gas-and-condensate field
Astrakhanovskoe-Susha on Sakhalin is also planned to come into production. In
2001 Rosneft signed an agreement with Gazprom regarding joint development of
five fields in the Yamalo-Nenets Autonomous Region and on the Barents Sea
shelf, including the gigantic Shtokmanovskoe gas field, unique Kharampurskoe
oil-and-gas field and major Prirazlomnoe oil field. In 2002, Rosneft was licensed
to explore the Kaygansko-Vasyukansky sector of the Sakhalin shelf (Sakhalin-5
project), and authorized on behalf of the Russian Federation, jointly with
Kazakhstan, to develop the major Kurmangazy structure on the Caspian Sea shelf.
54
The Union of Independent Gas Producers, Presentation to IEA, Paris 25 November 2003.
www.lukoil.com
56
www.tnk-bp.com
57
www.rosneft.ru
55
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Novatek is the largest IGP in Russia with production of 21 bcm in 200359. The
company aims to reach a level of production equal to 50-60 bcm per year by
2008.The company specialises in development of condensate fields. The company
claims that all its projects are paid back within 5 years on average and generate
strong cash flow which is used to repay loans and further invest in exploration,
production and social programmes. However, the company does note the risks
which arise due to the Gazprom monopoly of the gas transport system.
Northgas60 produced 3.4 bcm of gas in 2002 and expects to increase production to
12 bcm by 2015.
The success of independents in growing their production volumes has led proponents
of energy market reform inside Russia to proclaim that the market restructuring
concept suggested by the ministry of Economic Development and trade in 2002 (The
Gref Concept), which intended to establish the most favourable regime for
independents and ensure the restructuring of Gazprom was right61. However,
Gazprom has been trying to restore its own production levels by acquiring
independent gas producers (Purgaz and Vostokgazprom in 2002 and
Severneftgazprom in 2003). Northgas was also targeted in late 2004. More recently
merger with Rosneft is being considered.
Foreign interest in Russian gas producers increased in autumn 2004 when Total
offered to purchase 25% of Novatek62. The bid price was reported to be $1 billion
which would value the company at $4 billion, although this has not been confirmed by
Total. Completion of the deal has been held up by the Federal Anti-Monopoly Service
which has called on Novatek to complete a proposed re-structuring before it will
consider approving the deal. The restructuring should be finished in the first half of
58
www.iteragroup.com
Mikhelson L.V Novatek, Dynamics of a New Player in the Russian gas market, Energy Security
conference 25 November 2003 Paris
60
www.northgas.ru
61
Vladimir Milov, President, Institute of Energy Policy , Flame 2005 conference, Amsterdam,
February 22, 2005
62
Total press release 22 September 2004.
59
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63
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800
700
600
500
400
300
200
100
0
1998
2005
2010
2015
2020
Gazprom
Regional Companies
oil Companies
Independent Producers
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Domestic gas prices. Most gas continues to be sold at regulated prices that
are below full cost recovery levels. However, regulated tariffs for all but
household consumers have been rapidly approaching cost-recovery levels.
Gazprom operates monopoly control over both the production and wholesale
sectors.
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The effect of very low regulated prices has been that gas in Russia is effectively
rationed rather than there being a market. Gazprom, rather than the state, controls the
rationing process. The company and the government negotiate a gas balance for the
country towards the end of each year, for the year ahead. Since Gazprom holds all the
information on gas production, pipeline capacity and export commitments, it can
control the negotiation of the gas balance. Given the disparity between domestic and
export prices it has a powerful incentive to favour exports over domestic sales at
regulated prices.
Once an aggregate figure has been agreed for the volume of gas to be supplied on
regulated prices, industrial consumers bid for the gas they need. Gazprom then
informs consumers of their quotas for the coming year, which may be lower than their
bids. Any additional gas they need must be purchased at higher prices, either from
non-Gazprom producers or from Gazprom itself, which re-sells a good deal of other
producers gas and also sells some of its own output at higher prices to those who
exceed their quotas. In practice there is never a shortage of gas available for sale to
consumers who exceed their quota and are willing to pay the higher price casting
some doubt on the accuracy of the initial gas balance.
The administration of this rationing system is wholly opaque and there are no defined
rules for setting quotas for consumers. As a result, some consumers get what they bid
for, while others are allocated far less than their bids. Even the overall results of the
distribution are unknown; the government does not appear to have full data on the
actual allocation of regulated-price gas to customers. Some consumers report that
their quotas have simply been frozen, so that reliance on other sources grows in line
with their gas demand. This appears to be the case with respect to the power sector.
Consumers need administrative permission to bid for gas at regulated tariffs for any
new facility, and this is unlikely to be given if Gazprom objects.
In practice, quotas may be adjusted each quarter so that consumers have no certainty
about the quantity that will be supplied at regulated tariffs more than three months
ahead. Quotas for delivery of regulated-price gas can and do change at very short
notice. There are no long-term gas supply contracts. This absence of long-term
contracts is particularly a problem for anyone contemplating investment in any gasintensive activity.
Finally, regulated-price gas quotas are apparently administered on the basis of even
rates of consumption, without regard for the consumers actual usage patterns. Thus, a
consumer enterprise may forfeit unused allocations during periods of low
consumption (including weekends and holidays) while paying penalties for overconsumption during the week.
The principle of Third Party Access to pipelines is established in law but is not
working in practice. Gazprom can refuse access on the grounds of insufficient
capacity in the system or on technical grounds such as gas quality. However,
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information on pipeline capacity and usage is kept secret by Gazprom and nonGazprom producers complain that uncertainty over available capacity is a major
obstacle to concluding contracts with consumers forcing them to sell to Gazprom
instead. Refusal of access can be challenged ex post but this is a lengthy legal process
with uncertain outcome and producers remain mindful that they cannot operate
without cooperation by Gazprom.
As Gazprom wants to limit sales to the domestic market (to maximise more lucrative
exports) it would appear not to have an incentive to use its position to put other
producers at a disadvantage and it denies that it does so. Nevertheless other producers
frequently complain of abuses. For example, Gazprom may declare there is no
capacity on a given route, when the producer believes such capacity is available,
forcing the use of a longer, costlier route.
4.4.3. North Africa
Algeria
Total Algerian exports to Europe amounted to 55 bcm in 2003 including 30 bcm by
pipeline and 25 bcm by LNG.
As well as exports, natural gas accounts for 67% of Algerias domestic energy needs
and 95% of electricity in Algeria is generated using gas. Around 70 bcm per year of
gas is re-injected into the reservoirs to improve production of oil and condensate. A
further 5 bcm per year is consumed as fuel at gas liquefaction plants.
Natural gas reserves amounted to 4,523 bcm at end 2002 equivalent to 56% of total
Algerian hydrocarbon reserves.
About a quarter of dry gas production is from the Hassi RMel field. The remaining
reserves are located in the south-east and in the In-Saleh region in southern Algeria.
Exports are delivered to Europe both by pipeline to Italy and Spain and by LNG from
the countrys two liquefaction plants at Arzew and Skikda. An explosion at Skikda
early last year destroyed two of the liquefaction trains but Sonatrach managed to
honour all of its contractual commitments using spare capacity in the pipelines and at
the Arzew LNG plant. The government has announced it will replace the damaged
plant with a new liquefaction plant estimated to cost $800 - $1,000 million.
Since a price dispute in the 1980s resulted in disruption of supplies to both Europe
and USA, Algerian gas supply has been completely reliable. There have been no
problems with transit of gas through Morocco (to Spain)64 or Tunisia (to Italy).
Nevertheless, recent plans for export pipelines avoid these transit countries by opting
for direct sub-sea routes.
64
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The Medgaz pipeline which is already under construction with a capacity of 8 bcm
per year is expected to start flowing gas in 2006. This pipeline will have an onshore
section from the Hassi RMel field to the port of Arzew and then continue on the
Mediterranean seabed to Almeria in Spain. The pipeline could be upgraded to 16 bcm
per year at a later stage with an extension through Spain to France. There are also
plans for the Galsi pipeline from Algeria to Italy via Sardinia with a capacity of 8 to
10 bcm per year.
These two projects together with planned investment to increase capacity of the two
existing pipelines could result in total capacity of 60 bcm per year by the end of the
decade compared to 24 bcm per year current capacity.
Although foreign companies are allowed to participate in exploration and production
they may only do so in partnership with the state company Sonatrach.
The In-Saleh project is the first such joint venture between Sonatrach and foreign
companies. The consortium currently comprises Sonatrach (35%), BP (33%) and
Statoil (32%). The project should produce 9 bcm per year of gas which has been sold
under long term contracts to Spain and Italy. The gas will be linked by a new 48 inch
pipeline to the coast from where it will be exported by pipeline and LNG.
A joint venture of RYPF (60%) and Gas Natural (40%) has won the Gassi Touil
integrated gas project in Algeria. The expected capital cost of the project is $2.1
billion. Operation is expected to start in 2008/9. The project was originally due to
come on stream in December 2003 but development has been delayed due to technical
problems.
The project includes an upstream production sharing agreement. Sonatrach will own
all pipelines used. Gas Natural - RYPF has an 80% stake in the LNG export terminal
(5.2 bcm/yr) associated with the project. A joint venture marketing company has been
set up between the project partners and Sonatrach. Upstream oil and gas reform is
being undertaken in Algeria through a proposed hydrocarbon law, the so called
Khelil bill which is being re-activated after the government was re-elected. The
government had shelved the law during elections due to opposition to reforms. If all
goes well it could be adopted by November 2005. The law aims to create an energy
regulator and a separate agency for the awarding of exploration contracts.
Algerias gas contracts with Europe are shown in Table 21.
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IMPORTER
IMPORTER
COUNTRY
BCM/yr
From
To
LNG
Distrigas
Belgium
4.6
1982
2013
LNG
GdF
France
5.3
1976
2013
LNG
GdF
France
3.6
1972
2013
LNG
GdF
France
1.1
1992
2013
LNG
Depa
Greece
0.7
1998
2021
LNG
Snam
Italy
1.1
1997
2014
LNG
Enel
Italy
0.9
1999
2022
LNG
Enagas
Spain
3.9
1978
2013
LNG
Iberdrola
Spain
1.0
2002
2018
LNG
Enagas
Spain
5.0
2004
2021
LNG
Botas
Turkey
4.0
1998
2014
Pipeline
Ina
Croatia
2.2
2003/4
2023/4*
Pipeline
Snam
Italy
21.0
1983
2016
Pipeline
Enel
Italy
6.0**
1992
2012
Pipeline
Mogest
Italy
0.5
2007/8
2018/9
Pipeline
Edison
Italy
4.0
2007/8
2026/7
Pipeline
Transgas
Portugal
2.5
1994
2019
Pipeline
Sozd Petrol
Slovenia
1.0
1992
2007/8
Pipeline
Enagas
Spain
6.0
1997/8
2017/8
Pipeline
Iberdrola
Spain
1.5***
2002/3
2017/8
Pipeline
Iberdrola
Spain
1.0
2007/8
2027/8
Pipeline
Cepsa
Spain
1.0
2007/8
2027/8
Pipeline
Total
Spain
1.0
2007/8
2027/8
Pipeline
Distrigas
Belgium
1.0
2007/8
2027/8
Pipeline
Gas Natural
Spain
3.0
2007/8
2027/8
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Prior to the recent elections the focus had been on reducing Sonatrach involvement in
production sharing agreements to zero. The aim is to convert Sonatrach eventually
into a purely commercial company.
Libya
Libyan gas has started flow to Europe in the Green Stream pipeline which delivers gas
under the Mediterranean to Italy. The pipeline has been completed and started to flow
gas but there have been problems due to contamination. The pipeline will have a total
capacity of 11 bcm per year for which a gas contract already exists for 8 bcm.
Libyas gas contracts with Europe are shown in Table 22
Table 22 Libyan Gas Contracts
IMPORTER
IMPORTER
COUNTRY
BCM/yr
From
To
Enagas
Spain
2.0
2001
2008
Edison
Italy
4.0
2003
2023*
GdF
Italy
2.0
2003
2023*
Energia SpA
Italy
2.0
2003
2023*
4.4.4. Norway
Although Norway does not have a significant domestic gas market, it is a major
supplier of gas to other European countries. There are offshore pipelines from the
Norwegian gas producing areas to Germany, Belgium, France and the UK with
combined capacity of 92 bcm per year. As well as supplying those countries,
Norwegian gas also goes to the Netherlands, Austria, Spain, Czech Republic, Italy
and Poland through onshore pipelines.
Petroleum operations in the Norwegian sector of the North Sea date back over 40
years. Most of the largest fields are considered to have been discovered and many are
already in the decline phase or are expected to be so during the course of this decade.
Prospects for maintaining production at the current level hinge on smaller discoveries,
especially near to existing gas fields and pipelines, and on improving recovery rates
from existing fields. A new aspect of this area is the emergence of new companies
who specialise in maximising production from fields in the later phases of production.
Further north, the Norwegian Sea is a much less mature exploration and production
area. Production has grown steadily since 1996 to the point where the 20 bcm Asgard
pipeline, which transports most of the gas from the area is now fully utilised. The
most significant new development planned for this area is the Ormen Lange field
which is planned to be developed after 2007 with the gas sold to UK using a new
pipeline, the Langeled pipeline to Teeside. A number of smaller discoveries have been
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65
Statoil Website shows that as of 4th March 2005, State Street bank and Trust Co of USA was the
second largest share owner after the Norwegian states with 2.12 per cent.
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We have computed the Herfindahl-Hirschman Index (HHI) for this market in two
ways. Firstly we treat the market shares of Petero and Statoil seperately with the HHI
being 2,069. Alternatively if the states interests in Petero and Statoil are considered
jointly the index is increased to 4,049. Economists generally consider a market with
an HHI of greater than 1,000 to be concentrated and greater than 1,80066 as highly
concentrated.
Share %
32.7
26.2
11.2
9.5
8
4.3
3.2
2.8
2.1
100
State (Petero)
State (Statoil)
Norsk Hydro
Total
ExxonMobil
ConocoPhillips
Shell
ENI
Others
2,069
4,049
Source: EML analysis based on the Norwegian Petroleum Directorate Facts 2005 publication
See for example OFT Mergers substantive assessment guidance, May 2003. The US Department
of Justice uses the same threshold.
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France. Gas sales agreements have later been concluded with buyers in Austria, Spain,
Italy, the Czech Republic, Poland and Denmark.
The largest Norwegian buyer is the methanol plant at Tjeldbergodden.
In 2001, the first gas sales contract was signed with a country outside Europe, and part
of the output from Snhvit is due to be delivered to the USA.
Only a small proportion of Norwegian offshore gas is delivered under contracts
lasting less than year. Most is supplied on long-term agreements.
Following action by the European Commission67, Norwegian gas producers have now
committed themselves to market their gas individually in future. In addition two major
gas producers, Statoil and Norsk Hydro, committed themselves to sell in the coming
five years approximately 15 billion cubic metres of gas to customers who previously
did not have access to Norwegian gas.
In June and July 2001 the European Commission initiated formal proceedings against
approximately 30 Norwegian gas companies arguing that the GFU scheme was
incompatible with European competition law. Both the gas companies and the
Norwegian Government claimed, at a hearing in December 2001, that European
competition law should not be applied, since the GFU scheme had been discontinued
for sales to the EEA as of June 2001 following the issuance of a Royal decree by the
Norwegian Government. They also argued that European competition law could not
be applied, since the Norwegian gas producers had been compelled by the Norwegian
Government to sell gas through the GFU system established by the Norwegian
Government.
The final settlement68 included a distinction between three different groups of
producers (1) the permanent members of the GFU (Statoil and Norsk Hydro), (2) six
groups of companies actually selling Norwegian gas through contracts negotiated by
the GFU (ExxonMobil, Shell, TotalFinaElf, Conoco, Fortum and Agip) and (3) all
other Norwegian gas producers, for which formal proceedings had been opened.
As regards Statoil and Norsk Hydro, the settlement consists of two main elements,
namely (1) the discontinuation of all joint marketing and sales activities unless these
are compatible with European competition law (for existing supply relationships this
requires individual negotiations when contracts come up for review) and (2) the
reservation of certain gas volumes for new customers, who in the past have not bought
gas from Norwegian gas producers. In the latter respect Statoil has undertaken to
make available 13 BCM of gas to new customers on commercially competitive terms
and Norsk Hydro has undertaken the same for 2.2 BCM. This gas has to be offered for
sale during the commitment period running from June 2001 to September 2005.
67
Although Norway is no a member of the EU it is a member of the European Free Trade Area and
complies which EU legislation in many instances.
68
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Taking into account that the commitment period already started in 2001 and that
certain volumes have already been sold during the last year, the volumes which are
still available to new customers are lower than the total volume of 15.2 BCM.
External auditors will monitor whether Statoil and Norsk Hydro respect their
commitment to the Commission.
Although not being part of the GFU case, Statoil and Norsk Hydro also confirmed that
they would not introduce territorial sales restrictions and/or use restrictions in their
gas supply contracts. Both types of clauses are considered incompatible with
European competition law as they prevent the creation of a single market.
As regards the other Norwegian companies concerned by the GFU case, the
Commission received commitments from six groups of Norwegian gas companies,
which were sellers of Norwegian gas negotiated under the GFU scheme, namely
ExxonMobil, Shell, TotalFinaElf, Conoco, Fortum and Agip. For these companies the
settlement consists of written commitments to discontinue all joint marketing and
sales activities similar to those given by Statoil and Norsk Hydro. For the remaining
Norwegian gas producers the Commission decided to close the case under the
assumption that they will sell Norwegian gas individually in the future.
Norways gas contracts with the rest of Europe are shown in Table 23.
Gas Transportation
Since 1997, Norway has built up an extensive network of export pipelines with
landing points in UK, Belgium, France and Germany. The main export pipelines are
described below.
Norpipe was Norways first export pipeline system which was constructed between
1973 and 1997 following discovery of vast oil and gas reserves by Phillips Petroleum
in 1969. The Norpipe system comprises an oil pipeline from Ekofisk to Teeside, UK
and a gas pipeline from Ekofisk to Emden, Germany. The 36 inch gas pipeline runs
440 kilometers to the Emden shore facilities which include a conditioning plant that
prepares gas for onward transit to markets in Germany, Belgium, France and the
Netherlands.
The Phillips-led consortium of Ekofisk producers were originally allowed to export
gas independently via Norpipe, but the Norwegian government subsequently vested
this task first in Statoil and then in 1986 in the Gas Negotiating Committee (GFU).
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IMPORTER
COUNTRY
BCM/yr
From
To
Iberdrola
Spain
1.6
2006
2026
GdF
France
1.6
2006
2026*
OMV
Austria
0.5
1993/4
2023/3
Distrigas
Belgium
4.0
1997/8
2017/8
Czech Republic
3.0
1996/7
2017/8
GdF
France
4.0
1996/7
2014/5
GdF
France
2.0
2001/2
2027/8
GdF
France
8.0
1993/4
2023/4
EdF
France
1.0
2005/6
E.On Ruhrgas
Germany
16.8
1996/7
2026/7
BEB
Germany
5.4
1995/6
2017/8
Thyssengas
Germany
2.5
1995/6
2017/8
VNG
Germany
2.5
1993/4
2018/9
Mobil
Germany
0.6
1996/7
2014/5
E.On Ruhrgas/MOL
Hungary
0.5
1995
2005/6
E.On Ruhrgas/MOL
Hungary
0.5
2005/6
E.On Ruhrgas/MOL
Hungary
0.95
1998
2012/3
Statoil/Synergen**
Ireland
0.6
2002/3
2017/18
Snam
Italy
1.4
2001
2012
Snam
Italy
6.0
2001
2025
Gasunie
Netherlands
3.0
1994/5
2023/4
SEP
Netherlands
2.0
1990/1
2010/11
Essent
Netherlands
1.4
2004/5
2009/10
PGNiG
Poland
0.5
2006/7
Enagas
Spain
2.0
1993/4
2028/9
Gottenberg
Sweden
0.15
Alliance
UK
0.6
2001/2
2016/7
National Power
UK
2.2
2001/2
2016/7
Centrica
UK
5.0
2005/6
2015/6
BP
UK
1.5
2001/2
2016/7
BP
UK
5.0
2005/6
2015/6
Centrica
UK
2.0
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The completion of the Statpipe gas gathering system effectively ended Norpipes
dependence on Ekofisk supplies and led to a restructuring and consolidation of
contracts. Statpipe is not an export line in its own right but links fields in the northern
North Sea to the continental European gas market via Norpipe. A 15.8-kilometre
bypass line laid in the summer of 1998 now carries Statpipe around Ekofisk to tie
directly into Norpipe. First gas through this bypass reached Emden on 23 August
1998.
The Zeepipe trunkline system has been developed in several phases to carry
Norwegian gas sold under the Troll gas sales agreements to continental Europe.
Starting contractual deliveries on 1 October 1993, Phase I includes a line from the
Sleipner area in the Norwegian North Sea to a receiving station in the Belgian port of
Zeebrugge. It also embraces a line from the Sleipner area to the Draupner S riser
platform, providing Zeepipe with links to the Statpipe and Europipe trunklines.
The line to Zeebrugge can carry about 13 billion cubic metres of gas per year.
Possible residual liquids and particles are removed from the gas stream at the
receiving station. After metering and pressure adjustment, the gas is delivered on
through the Belgian pipeline system.
Phase II of the development includes two lines. Zeepipe IIA runs from the Troll gas
treatment plant at Kollsnes near Bergen to the Sleipner area. Zeepipe IIB has been laid
from Kollsnes to Draupner E in the Europipe I system. Gas deliveries from Troll
through Zeepipe IIA began on 1 October 1996, with Zeepipe IIB following a year
later. Daily capacity for Phase IIA has been increased by 40 per cent in relation to the
original plan, to 55 million cubic metres, by increasing pressure in the line.
Europipe I comprises a 670-kilometre gas trunkline with diameters of 40 and 42
inches. It runs from the Draupner E riser platform in the Norwegian North Sea to a
receiving station at Dornum on the German coast. Statoil started regular deliveries to
Germany through this system on 1 October 1995.
The Dornum station reduces the gas pressure. A 48-kilometre land line links it with
the metering station in Emden, which carries out quality checks and volume metering
before the gas is delivered to customers in Germany, Austria, the Netherlands and the
Czech Republic.
Long and complicated negotiations were pursued by Statoil with the German
authorities over the Europipe I landfall through the protected Wattenmeer coastal
wetlands. Political and ecological interests had to be balanced against each other
before a decision was reached. A high-tech boring machine was designed to drive a
2,531-metre tunnel for the pipeline under the wetlands.
The 42-inch Europipe II gas trunkline runs for 660 kilometres from Krst north of
Stavanger to Dornum on the German coast. Deliveries through the line began on 1
October 1999. Most of the gas carried through this system comes from Statoil's
sgard, Sleipner East/West, Gullfaks and Statfjord fields. The bulk of deliveries
through Europipe II at Dornum go directly into the 341-kilometre Netra transport
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system, which runs to Salzwedel further east. This line is owned jointly by Ruhrgas,
BEB Erdgas und Erdl, Norsk Hydro and Statoil Deutschland.
The Franpipe (previously called NorFra) gas trunkline, runs for 840 kilometres
from the Norwegian North Sea to France. Comprising 70,000 lengths of 42-inch line
pipe, this facility is able to carry up to 40 million cubic metres of gas per day from
Draupner E to Port Ouest in Dunkerque. The line comes ashore in an industrial zone
which becomes the first direct point of delivery for Norwegian gas to French
customers. First gas arrived on 1 July 1998 at the Franpipe receiving station, which
was built in cooperation with Gaz de France.
The Frigg Transport System comprises two 32 inch pipelines from the Frigg field to
St Fergus in Scotland. The Frigg field straddles UK and Norwegian territorial waters
and there are separate pipes for transporting UK and Norwegian gas. The UK pipe
was commissioned in 1997 and the Norwegian counterpart in 1978. Although the
pipelines were originally set up by competing consortia, both pipelines are now
operated by the same company TotalFinaElf as a result of the merger of these
companies. The pipeline stopped supplying gas to the UK at the end of 2004.
The Vesterled project involves the installation of a new 32 inch pipeline from the
Heimdal Riser platform to the Frigg system. Ownership of the Frigg line will then
transfer to the Vesterled project partners ( Hydro 13.86%, Statoil/SDFI 72.28%, TFE
11.48%, Exxon Mobil 2.38%). Vesterled will be capable of delivering some 11
BCM/year.
Table 24 Norwegian Export Pipelines
Pipeline
Length
Dia.
Km
Inches
880/440
42
21.6
1977
Emden
Zeepipe I
814
40
13.0
1993
Zeebrugge
Europipe I
670
40/42
18.0
1995
Dornum
Europipe II
660
42
24.0
840
42
22.0
1998
Dunkirk
Frigg/Vesterled
350
32
13.0
1978
St Fergus
Statpipe/Norpipe
Capacity
Start
Destination
BCM/yr
Dornam
The Langeled pipeline has received approval from the Norwegian parliament in
March 2004. The pipeline will bring gas from the Ormen Lange field in Norway to
the Easington terminal in the UK. The Langeled system will transport gas from the
land facilities for Ormen Lange at Nyhamna in mid-Norway via a tie-in at the
Sleipner Riser platform in the North Sea to a new receiving terminal at Easington on
the UK east coast. This system will comprise a 42-inch thick-walled pipeline from
Nyhamna to Sleipner Riser (the northern leg) and a 44-inch line from Sleipner Riser
to Easington (southern leg). Capacity will be just over 80 mill scm/d in the northern
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leg and about 70 mill scm/d in the southern. The system will have an overall length of
roughly 1 200 km. While the southern leg is due to become operational in October
2006, the northern will follow in October 2007.
Table 25 Investment Interests in Langeled
Company
Langeled Overall
Northern Leg
Southern Leg
Petoro AS
13.95
37.48
28.36
Norsk Hydro
17.61
18.07
17.14
Shell
16.50
17.04
17.96
Statoil
14.99
9.84
20.21
Dong
10.22
10.34
10.10
ExxonMobil
6.95
7.23
6.66
ConocoPhillips
0.80
0.00
1.57
NB Dong acquired its share from BP. Interests in the overall Langeled project will be finalised before
the line becomes operational on the basis of updated cost estimates for the two legs
Source: Ministry of Petroleum and Energy. Facts 2004.
Norsk Hydro will be the operator for the development phase. When the development
phase is completed the new pipeline will be incoporated into the Gassled system and
Gassco AS will take over operation of the pipeline.
As part of the partial privatisation of Statoil, the Norwegian government created a
new company for the transport of natural gas on the Norwegian Continental Shelf
(NCS). Gassco was created in 2001 and took over operation of the leading pipelines
and most important terminal facilities in 2002. The pipelines and facilities have been
organised as a unified transport system called Gassled with Gassco as operator.
The state holds 38.293% of Gassled through Petero AS which is the operating
company for the States Direct Financial Interest (SDFI). This will increase to
47.928% in 2010. When the States interest through Norsea Gas AS are taken into
account, the State has an interest of 39.5% in Gassled during 2003-10 and 49% from
2011. Other interests in Gassled include Statoil (20.379%), Norsk Hydro (11.134%),
Total (9.038%) and seven other companies with shares of between less than 1% to
5%. Gassco is wholly state-owned. The governments intention in creating Gassco
was to :
Open access to the pipelines and treatment facilities to all producers and
contribute to efficient development of the NCS.
Gas from the Caspian area could be supplied to Europe via the Baku to Erzurum
(BTE) pipeline. This pipeline will pump gas from the large Shah Deniz field in
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Azerbaijan which has proven reserves of 460 bcm to Georgia and then Turkey. Gas
could start to flow within two to three years depending on the development of the
Azeri field and construction of the pipeline.
Iranian gas already supplies Turkey which is unlikely to be able to consume all of the
gas it has contracted from Russia and these newer sources. In all likelihood gas from
Iran and Azerbaijan will flow on to Europe through new pipelines to Greece and to
Austria via the Balkans.
In the Caspian Sea area distinction should be made between the west side (principally
Azerbaijan) and the east side (Turkmenistan and Kazakhstan). While gas from
Azerbaijan will soon be entering the European markets, the real problem lies with gas
from Turkmenistan and Kazakhstan. In order to be able to add to the Russian system a
pipeline across the Caspian sea would be required. The Caspian is not governed by the
United Nations Law of the Sea Convention (UNLOSC) which could give rise to
claims by Russia and Iran, as the original bordering states, to veto any pipeline, even
without opposition from the Azeris, whose territory the pipeline would have to go
through.
The Caspian Areas gas contracts with Europe are shown in Table 26.
IMPORTER
IMPORT
COUNTRY
BCM/yr
From
To
Turkmenistan
Botas
Turkey
16*
2010/11
2030/31
Turkmenistan
PGNiG
Poland
2.0
2005/6
Azerbaijan
Botas
Turkey
6.6**
2010/11
2025/6
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ii) require Governments not to impede the creation of new capacity (subject to any
national legislation which is consistent with the principles of freedom of transit and
non-discrimination);
iii) notes that if a transit country seeks to prevent the construction of new capacity or
additional use of existing capacity on grounds that it would endanger the security or
efficiency of its energy systems, it has to demonstrate that to the other parties
concerned (not just assert it).
iv) states that in order to protect security of supply to consumers and security of outlet
to producers, the ECT prevents a transit country for up to 16 months from interrupting
transit in order to enforce its claim in a dispute so that the conciliation for which ECT
provides can proceed.
Russia signed the ECT in 1994, but has yet to ratify it pending drawn out negotiations
on the Transit Protocol. Gazprom has put forward three main arguments against
ratifying the ECT:
it would require that Central Asian states be given access to the Russian pipeline
system at subsidized internal tariff levels, and;
69
Dr. Andrei Knonoplianik, Energy Charter: Counter-acting through Inaction, Oil Gas and Energy,
March 2003.
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Gazprom dominates Russian production at the moment but a decline from existing
fields is forecast and Gazprom will need to develop other deposits mainly in Western
Siberia. Independent production has doubled between 1994 and 2004 to just under
100 bcm per year. Gazprom has been trying to buy up some of the independent
producers and exercises effective control over all exports of gas. Most of the exported
gas is routed through Ukraine but Yamal has diversified some of the gas and Blue
Stream into Turkey some more. The proposed Baltic pipeline will result in more
diversification away from Ukraine. Gazprom is effectively blocking any reforms of
the gas sector in Russia.
Algerian exports to Europe were 55 bcm in 2003 30 bcm by pipeline and 25 bcm by
LNG. Pipeline routes are to Italy and Spain (via Morocco) but the Medgaz pipeline,
which is under construction, will delvier gas directly to Almeria. Sonatrach dominates
the gas industry and although foreign companies area allowed to participate they may
do so only in partnertship with Sonatrach. However, Sonatrachs share is planned to
fall as part of the reform to encourage more foreign investment.
Norway is the second largest importer into the EU market and recent reforms have led
to the break up of the GFU and producers selling their gas directly. The offshore
transportation regime has also been reformed by the creation Gassco (operator) and
Gassled (owner) with open access and an entry exit methodology.
Azerbaijan will begin to supply gas to Turkey from Shah Deniz and Iran already
supplies gas.
The Energy Charter Treaty includes key transit provisions ensuring freedom and nondiscrimination of energy transit, but Russia has yet to ratify it because of Gazprom
opposition.
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Table 27 Current Status of Production and Wholesale Markets in the Pipeline Supply Area
Characteristic
Institutional
Market
Power
Access
Essential
Facilities
to
Status
Limited foreign investment in Russia so far. Algeria now open to foreign investment but Sonatrach must participate in all projects
Multitude of Producers
Dominance of Gazprom over all aspects of the Russia gas market over exports of gas by pipeline to Europe
Almost all producer countries have a dominant production company. Merger of Gazprom and Rosneft would create an even bigger
company and increase state control
True now in Norway following reform of GFU. Increasing in Algeria for example sales through the new Medgaz pipeline.
Customer pressure
Customers could stand to lose from market reform because of existing subsidies estimated to be $8 billion in Russia in 2002 (World
Bank)
Multitude of customers
Effective monopolies exist in most producer countries domestic markets so customer power is not a factor at present
Effective unbundling
EU activity in this area. Main success was break up of Norwegian GFU and possibly Russian contract with Italy.
Required by Energy Charter but little progress so far in Russia and the transit countries.
Gas prices in Russia are set by the Federal Energy Commission (FEC) and these include regional variations which implicitly reflect
distance related transportation charges. There is external pressure for cost reflective and non-discriminatory transport tariffs e.g. from
World Bank
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1.7
0.7
0.0
12.2
11.5
10.8
9.6
8.2
8.0
7.8
10.0
20.4
19.0
20.0
31.9
27.4
30.0
40.0
BCM
Source: IEA
Algeria was by far the biggest source of LNG for the European market in 2003. With
25.7 BCM with Nigeria supplying 10.1 BCM. (See Table 28).
Table 28 LNG Imports to Europe by Origin
BCM
Belgium
France
Greece
Italy
Algeria
3.4
9.0
0.6
2.1
Portugal
Spain
Turkey
Total
7.1
3.5
25.7
Nigeria
Qatar
Other
Total
3.4
9.0
0.6
6.7
4.6
0.6
3.9
1.0
10.1
1.9
1.8
1.9
1.8
0.6
14.7
4.5
39.5
Sonatrach is responsible for the entire exports of Algeria and therefore controls 65%
of all LNG exports to Europe in 2003. The partners in the Nigerian LNG export plant
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and Qatar Petroleum also had significant shares of LNG supply to Europe as can be
seen in Table 29 below.
Table 29 LNG Supplies to Europe Market Shares
Company
Sonatrach
NNPC (Nigeria)
Shell
Total
Qatar Petroleum
Eni
Other
HHI
Share (%)
65.0
12.4
6.6
3.7
3.0
2.8
6.5
4,496
The Asian financial crisis in 1997/8 which caused supply surpluses in the
Middle East.
In 2002 the delay in bringing the Dabhol plant on stream in India meant
shipments intended for Dabhol became available for spot sales.
The shut down of 17 nuclear power plants in Japan in 2003 led to a surge in
demand for LNG for gas-fired power plant
Some countries, including Korea and Spain in particular, have shifted from
importing LNG as base load towards using it for seasonal load, by buying
spot cargoes in winter.
The second driver of spot trade has been the re-emergence of the US LNG market, in
response to high prices, and the creation of arbitrage opportunities as a consequence.
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In 2002, Middle East and Algerian cargoes destined for USA were diverted to Europe
where prices were higher and in 2003 that situation was reversed with cargoes
diverted from Europe to USA.
This winter, Spanish LNG buyers, including Union Fenosa complain that they are
caught between Henry hub price and regulated tariffs in Spain. The going rate for a
spot cargo of LNG is the Henry Hub price less $1/mmbtu for transport and nondelivery costs. This makes the LNG more expensive than the regulated tariff rate of
$4/mmbtu.
A number of companies are building up assets on both sides of the Atlantic to take
advantage of the arbitrage opportunities:
Gaz de France and Sonatrach have a joint venture Med LNG and Gas
which was set up specifically to market LNG on both sides of the Atlantic.
Statoil has marketed LNG on both sides of the Atlantic from its Snohvit
terminal in Norway and has bought long term entry capacity at the US Cove
Point Terminal.
Shell which is one the worlds biggest LNG producers owns capacity at
Cove Point and Elba Island regasification plants in USA and recently
announced plans for a new plant in Italy.
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Several ships were built with no dedicated route in mind either by the companies
building up a portfolio approach to LNG or purely speculatively to cash in on the
arbitrage opportunities.
Furthermore, several older tankers are going to be freed from their current trade routes
in coming years. These tankers have been fully depreciated and are therefore more
profitable for use in the spot trade because only operating costs need to be considered.
4.5.3. Contract Development
A more flexible approach to pricing is emerging in the LNG industry:
Qatar has linked LNG prices to oil prices in Asia, Henry Hub in USA and
NBP in UK.
The Australian NW Shelf (NWS) project is continuing to sell gas with oil
indexation but using an S-curve which gives greater protection to the buyer
in the event of high oil prices. The formula used for the recent sale to China
is about 15% less than the older Japanese formula for an oil price of $25/bbl.
The NWS/China deal is thought likely to set a new benchmark for price renegotiations in Asia. A decrease in prices is expected, greater flexibility
(lower minimum bill) is being sought and more pricing flexibility is
expected to feature in renewed contracts.
European contracts are still predominantly linked to fuel oil and gas oil
prices (apart from UK as mentioned above). However, European contracts
are subject to re-negotiation every three years and there are some signs of
more flexibly contract terms. In some countries other indices are starting to
be included to reflect competition in the power sector. One example is the
contract between Trinidad and Tobago and Gas Natural of Spain which
includes the electricity pool price.
Excluding Algeria, the LNG gas contracts to Europe are shown in Table 30
below.
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IMPORTER
IMPORT
COUNTRY
BCM/yr
From
To
Abu Dhabi
BP
Spain
0.9
2002
2005
Egypt
GdF
France
5.0
2004/5
2025/6
Egypt
Union Fenosa
Spain
2.9, 3.6
2020
Egypt
BG Gas
Marketing
Spain
1.1
2005,
2009
2005
Egypt
BG Gas
Marketing
Italy
2.4
2008
2028
Egypt
Enel
Italy
3.2
2008
2028
Qatar
Edison
Italy
3.6
2007
2033
Qatar
Gas Natural
Spain
1.7
2001
2012
Qatar
BP
Spain
0.9
2001
2005
Qatar
ENI
Spain
1.0
2004
2024
Qatar
Endesa
Spain
1.1
2007/8
2027/8
Qatar
Gas Natural
Spain
2.0
2006/7
2026/7
Qatar
Exxonmobil
UK
2.8
2007/8
Nigeria
GdF
France
0.5
1999
2032/3
3
2021
Nigeria
Enel
France
3.5
1999
2021
Nigeria
ENI
Italy
1.5
2005/6
2025
Nigeria
Total
Italy
1.2
2007/8
2027
Nigeria
Transgas
Portugal
1.4
1999
2019
Nigeria
Transgas
Portugal
2.0
2005/6
2025/6
Nigeria
Gas Natural
Spain
1.6
1999
2021
Nigeria
Gas Natural
Spain
2.7
2002/3
2022/3
Nigeria
Iberdrola
Spain
0.5
2005/6
2025/6
Nigeria
Botas
Turkey
1.3
1999
2021
Trinidad and
Tobago
Enagas
Spain
1.6
1999
2019
Trinidad and
Tobago
Enagas
Spain
2.8
2003
2023
Trinidad and
Tobago
Union Fenosa
Spain
2.8
2004
2024
Oman
Shell
Spain
0.5
2002
2006
Oman
Union Fenosa
Spain
1.0
2003
2006
Oman
Union Fenosa
Spain
2.2
2006
2026
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Early 1990s
0.5-0.8
1.3-1.4
1.2-1.3
0.5-0.6
3.5-4.1
Early 2000s
0.5-0.8
1.0-1.1
0.9-1.0
0.4-0.5
2.8-3.4
Source: IEA
4.5.5. Summary
The global LNG business is smaller but much more diversified than the pipeline
supply area. Spot trade in LNG has been growing fairly rapidly and accounted for
7.6% of all LNG trade in 2002. We expect spot trade to continue to grow as a result of
spare capacity in infrastructure, more flexible contractual terms and a desire to benefit
from arbitrage opportunities in the Atlantic Basin in particular. Spot trade is not
expected to emulate the market for crude with a paper market as well as a physical
market and we do not expect spot trade to exceed 15-30% of total LNG trade.
Contractual terms are changing. In the Far East LNG prices are becoming less
strongly tied to oil prices, indexation is switching to gas spot prices in UK and USA,
and in Europe power prices are beginning to be included in the basket. Contract terms
are becoming more flexible with less rigid take or pay terms. Shipping capacity was a
bottleneck until very recently but new tanker deliveries will add to the number of
tankers available for spot trades
LNG capital costs have been coming down markedly as a result of technological
development and economies of scale.
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Market Power
Status
Algeria is now open to foreign investment but Sonatrach must participate in all projects. Generally welcomed elsewhere.
Multitude of Producers
Growing number of LNG producers worldwide with intense competition for new projects
Most countries in the LNG producing area have dominant production companies although western oil companies are also widely
represented
Producers generally remote from existing markets and hubs though this will change in UK and possibly Spain and Italy as new
LNG plant come on stream
There has been an increase in spot trade and shorter term contracts. Price indexation has move away from oil linkage especially in
UK and USA markets. European contracts are still linked to gas oil and fuel oil. However electricity pool price is included in
natural gas contract with Trinidad and Tobago contract.
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What will be the most important drivers/factors, between now and 2010-15, which
will determine whether these conditions (for a competitive market) will be met?
Whether these conditions will be met will depend on whether the identified barriers to
competition can be removed. In this section we draw upon the preceding sections
discussion of conditions in the current markets to draw out the main barriers to
competition which need to be addressed. The changes required in each of the key
markets will then be directly linked to the removal of the barriers to competition.
5.1. Barriers to Competition
The following sections list the barriers that we have identified for each market and
geographical area.
5.1.1. EU Production Market
Production within the EU is declining, as discussed above in Section 4 so that by 2015
only the Netherlands is likely to be a significant producer. Indigenous production will
be much less important than imports for the development of competition in the gas
market. The UKs production decline is projected to be fairly rapid, although there is
a lot of uncertainty over the projections. However, the UK is still likely to be an
important producer for the next 5 years at least
Despite the lower importance of indigenous EU production we identify two possible
barriers to competition in the Netherlands and the UK:
Dutch Small Fields Policy
The Dutch gas industry structure and small fields policy means that gas production
in the Netherlands operates as a partnership between the state and private industry.
The Government operates a cap on production to conserve reserves in Groningen and
encourages development of small fields by requiring Gasunie to buy gas from all
fields on offer at prices which are consistent with import prices.
UK Offshore Regulation
In the UK, the upstream gas industry is not subject to regulation by Ofgem in the
same way as the downstream industry as it is a fully competitive market.
It is the remit of the DTI to ensure that the UKs oil and gas reserves are fully
exploited if economically possible. As UK gas production declines it will continue to
be important that new fields coming onstream are provided with access to UK
upstream gas and oil pipelines and process infrastructure at fair and reasonable prices.
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The recently updated Infrastructure Code of Practice and DTIs Dispute Resolution
process provide the basis for new fields obtaining fair and open access terms.
In the past, there have been concerns about limitations on the flow of information
from upstream to downstream and within the downstream market which, it has been
alleged, have led to price volatility, market distortions and competition issues. This
was a recurring theme in some of the evidence given to the recent Trade and Industry
Committee Inquiry into Fuel prices.
Under a recent Voluntary Agreement with the DTI the production industry has,
through NGT, released more information to the market concerning gas flows into the
National Transmission System and the effect of planned maintenance in a prescribed
form and time. One final category of information under this Agreement, near to real
time flows, has just been released. It is too soon to have an opinion as to the
effectiveness of the changes in providing useful and timely information.
5.1.2. EU Wholesale Market
Development of completive gas wholesale markets, since the first Gas Directive came
into force in 2000, has been patchy and very disappointing in some countries. We list
below the main barriers to developing truly competitive gas wholesale markets in
Europe.
Availability of Transmission Capacity
The long term reservation of transmission capacity makes it difficult for new entrants
to obtain capacity. Many TSOs allocate capacity on a first come first served basis so
that all or a substantial proportion is booked out to incumbents on long term contracts
leaving little if any firm capacity available for new competitors. This should not be
necessary because when a new entrant wins a customer from the incumbent it does
not create a need for additional capacity but rather for the required capacity to be
transferred from the incumbent to the new shipper.
There is also a perceived lack of capacity particularly in cross border pipelines. In
many cases, it is not clear whether this is a physical constraint or purely a practical
constraint resulting from long term booking of capacity by incumbents. There are
seemingly some physical capacity constraints, notably most routes into Italy and some
into Spain70, but contractual constraints appear to be the main issue. Contractual
constraints work against the development of competition in two ways. First, they deny
capacity which is physically available to the market. Secondly, if a contractual
constraint is falsely perceived as a physical constraint it may lead to pressure for
unnecessary and inefficient investment to increase the physical capacity.
70
Real physical constraints can lead to solutions which are not conducive to, and may hinder, the
development of competition. For example, Italy using subsidies from TENS for new pipelines across
the Mediterranean and Spain limiting dependence on piped gas from Algeria.
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Inadequate administrative structures can also inhibit the ability of customers to change
suppliers. The process of switching supplier can be complex from the point of view of
the customer and often leads to administrative difficulties such as late and/or
inaccurate bills which are seen as a disincentive to switching.
Lack of Unbundling and Cross Subsidies
The integrated nature of gas distribution utilities means that scope exists for
companies to subsidise retail operations from other parts of the business such as gas
distribution or activities in non-gas related areas such as electricity or water supply.
State ownership can also be an issue here. Appendix 8 discusses the issue of state or
public ownership in more detail but it would seem that continued public ownership of
gas utilities could be a barrier to the development of truly competitive gas markets.
Firstly public companies may not respond to market incentives in the same way that a
private company would. There is not the same drive to maximise profits. Secondly
its decisions may be subject to political interference and not just based upon rational
economics.
The existence of public companies in gas supply might not matter if they were small
in number and they only had a marginal effect in market liquidity. This does not
appear to be the position at the moment.
Non Controllable Upstream Costs
The structure of costs along the gas chain can mean that a large proportion of the price
paid by end-users, covering gas costs, transportation, storage and distribution charges,
is beyond the control of the supplier leaving reduced scope for competition in price
terms.
5.1.4. Pipeline Supply Area Production
We have identified the following barriers to competition in the Pipeline Supply Area.
Dominant National Producers
Pipeline supplies to Europe are dominated by just three producing companies giving
rise to fears that producer countries could decide to control the gas market on similar
lines to OPEC control of the crude oil market. Gazprom dominates production in
Russia and is in a powerful position as a buyer of gas from other FSU states because it
can block access by those countries to the European market.
Restrictions on Independent Producers
Restrictions are placed on exports by independent gas producers. Independent Gas
Producers in Russia are currently denied access to export markets and are limited to
selling to the domestic Russian market at regulated prices, leading Gazprom a free
hand in the more lucrative export market.
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purchasing gas from Kazakhstan and Turkmenistan to supplement their own resources
and maintain their control over the export markets.
5.1.6. LNG Supply Area
Dominant National Producers
Although the LNG supply market is much less concentrated than the pipeline supply
area, with a relatively large and growing number of export countries involved. Many
of these countries production is still dominated by large national oil and gas
companies such as Sonatrach.
5.1.7. LNG Wholesale Area
Dedicated LNG Facilities
Despite a rapidly growing spot market most LNG infrastructure (liquefaction,
shipping and re-gasification plant) are still dedicated to specific import export
schemes and dedicated routes. Spare shipping capacity is starting to be available and
not tied to specific routes but nevertheless there are limits to the extent to which LNG
can be traded outside the traditional long term contract structure and we would not
expect to see spot trade exceed 15-30% of total LNG trade.
Lack of Terminal and Shipping Capacity
Lack of spare capacity at terminals and more specific in shipping has been a barrier to
competitive LNG trade in the near past though that situation is easing particularly in
reference to ships. However, spare capacity will need to be maintained as the size of
the LNG industry increases over the coming years.
5.1.8. Summary
We have identified some 24 barriers to competitive markets. Fourteen of these
barriers relate to the EU market itself and the remaining ten barriers relate to the
production and transit of gas by pipeline and LNG from the EU borders.
The following section goes on to discuss how these barriers may be removed.
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Market Sector
Production
EU
Market Power:
Pipeline
Supply
LNG Supply
Market Power:
Retail
Market Power:
Wholesale
Market Power:
Market Power:
Oil price escalation and anti competitive clauses in gas purchase contracts
N/A
N/A
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71
An independent agent can also be used but they would be relying on information provided by the
LDC.
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Changes Required
Main Drivers/Factors
Removal
of
anti-competitive
clauses
from
contracts
and
encouragement of shorter term
contracts
Many of the incumbent transmission companies are seen as resisting the release of
capacity to third parties since they argue that it is required for their own supply
companies to meet their obligations. The introduction of a market carriage regime
would go a long way towards removing this argument but in the meantime pressure
could be placed on the incumbents by requiring them to prove that their systems are
capacity constrained and to show evidence of the amount of capacity required to
supply their customers.
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72
The general approach adopted in the UK has been to distinguish between shallow and deep
reinforcement. Shallow is considered to be the full incremental cost of supplying the individual
customer, typically a short length of pipe from the main to the customers premises, and the cost of
that is generally charged to the customer. Deep reinforcement is where the transportation network
needs additional investment, but where the cost only partly relates to an individual customer. The cost
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In Germany, Austria and France there are multiple nodes and balancing
zones for example.
The Dutch Entry Exit system is complicated by the three gas quality
regimes. That also affects the German and French Systems.
Gassco has an Entry Exit system for capacity booking but the entry and exit
charges are all the same so its really a postalised tariff system.
SPP (Slovakia) and Botas (Turkey) have both recently introduced entry
exit tariffs. Both tariffs structures have multiple entry and exit points and
include a virtual national balancing point prior to the exit points to
distribution systems and storage facilities.
Entry-exit can work well for specific types of systems where there are multiple entry
points and the gas is flowing from different directions. However, where gas is
expected to flow through a number of different entry-exit systems, the layering or
pancaking of entry and exit charges can lead to excessive charges for transportation
and considerable complexity for the shipper. This will be particularly true of transit
gas from, for example, Russia going to the UK, which will have to transit several
different systems, accumulating multiple charges along the way. The problem with
entry-exit is that at the exit point of one system and the entry point of another system
2 charges will be paid and it is unclear that the cumulative charge will reflect the true
economic cost of providing that capacity73. For gas which is moving long distances
generally in one direction, a zonal pricing regime, as is common on most US
pipelines, is a simpler system. As the gas moves through each zone it effectively picks
up one charge and changing systems within a zone would not, in principle, result in
any charge being levied. One way around the layering of charges under entry-exit
maybe for transit gas to be levied a zero exit charge when transferring between
systems at country borders typically the only gas exiting at that point would be
transit gas. However, this may require some reconfiguration of entry-exit charges on a
particular system.
Transit Regimes
At the moment in some countries the transit pipelines are totally separate from the
pipelines carrying gas for domestic consumption (e.g. Belgium), or are subject to
of that is generally rolled in to the asset base and the transportation charges which are applied to
everyone.
73
In some cases the true economic exit charge could well be negative if the exit of the gas actually
alleviates a capacity constraint elsewhere in the system
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different terms and conditions and charges. In the former case this is likely to lead to
an under utilisation of capacity and in the latter to price discrimination either in
favour of or, more likely, against transit gas.
Ideally separate transit pipelines and/or separate transit arrangements should be
incorporated into the main domestic system within each country. However, the
different contractual arrangements could cause issues for one or both parties leaving a
legacy to deal with.
The UK is currently expanding import capacity both by pipeline and by LNG
terminals. The LNG terminal capacity expansion could be particularly important in
terms of bringing new gas supplies to the EU in that the gas is being imported
essentially from new supply sources Trinidad, Qatar, Nigeria, Malaysia. This in
contrast to the pipeline gas from the Netherlands and Norway is essentially gas that
would have ended up in the EU market anyway. The import of the LNG gas is
effectively shifting the supply curve for EU gas to the right, is being priced against
the NBP index and will lead to downward pressure on prices. In a few years time the
UK will have over 100 bcm of import capacity which together with the indigenous
production could mean that we will be re-exporting much of the imported gas, with
the Transco system essentially acting as a transit route for LNG into continental
Europe and the Interconnector in export mode. In terms of putting downward pressure
on UK prices and overall EU prices, the more LNG import schemes that are approved
and built in the UK the better. The UK could again become a net exporter of gas,
when account is taken of indigenous UK production plus LNG imports, which should
lead to UK wholesale prices being at a discount again to prices at Zeebrugge.
Storage and Balancing
The second EU gas directive provides for a choice of regulated or negotiated access to
gas storage facilities. In a competitive wholesale market, gas storage is a key element
in balancing gas flows and providing market flexibility. If it is concentrated in too few
entities, who can also set charges which are penal to potential competitors on the
supply side, then market flexibility is going to be denied to new entrants and the
development of competition inhibited. The starting point in the EU, therefore, should
be the presumption that all storage facilities should be subject to regulated TPA,
unless an exemption can be argued for on the grounds that there is sufficient
competition in storage and other forms of flexibility to make regulated TPA
unnecessary74. In addition, storage is an ideal asset where ownership could be
unbundled from operation. The incumbent gas company could still retain ownership
of the storage asset but the operation of it would be handed over to an independent
third party who would then sell the capacity, at a regulated tariff, to users. These users
would then have complete freedom to provide storage services in the secondary
market to other interested parties. Restrictions could also be placed on the amount of
capacity a primary user could book in any one storage facility.
74
For example, in the UK, there is no requirement for formal regulated TPA to storage since
competition is generally deemed sufficient in the market overall, when combined with the undertakings
required from Centrica as owner of the Rough storage facility.
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The lack of proper access to storage facilities is compounded by penal and onerous
balancing regimes, particularly ones where hourly balancing is used. On a gas
pipeline system, no matter how small, there is really no need for a balancing regime
that is shorter than daily. The pipeline operator potentially has other mechanisms
available to ensure that the system does not, on a real time basis, have too much or too
little gas, including arrangements with neighbouring pipelines through operational
balancing agreements and the adoption of rules that ensure that shippers schedule
their flows of gas as the operator requests.
Effective Gas Release
Many EU countries are reliant on imported gas from Russia and Algeria for the bulk
of their gas supplies. This can lead to concerns about security of supply with the
argument that powerful national companies are required to contract with the large
producer countries. With the EU diversifying its sources of supply, whether by
pipeline or LNG, the argument for powerful national companies carries much less
weight. Gas release programmes are being, or have been, instituted in many EU
countries with mixed success. Gas release is primarily seen as being a release of gas
from specific gas purchase contracts or from the portfolio of gas that the incumbent
supplier has. As we have seen from the example of the US and the state of Victoria in
Australia, effective gas release also involves release of sales gas as well as purchased
gas, whether it be sales directly to end users or to intermediates such as LDCs. The
release of gas sales at the same time as gas purchases quickly creates the conditions
where a multitude of buyers can choose from a variety of sellers.
The effective release of sales gas can also be encouraged by setting the incumbent
market share reduction targets with severe penalties if they fail to achieve them.
Additionally, the loss of sales in the industrial and commercial market in the UK by
British Gas was greatly enhanced by the requirement that British Gas had to publish
price schedules so that their competitors could see the prices they had to beat. These
are both effective methods of tilting the playing field against the incumbent.
Spot Markets and Hubs
The lack of liquid and transparent spot markets and hubs are seen, by some, as a
barrier to a competitive gas market. It is true that active spot markets and hubs are
associated with competitive gas markets but they are much less a driver, or cause, of
the competitive market, than a consequence of the fact that the conditions are right for
competitive markets to develop. Spot markets and hubs certainly help the functioning
of a competitive market, by ensuring that diverse sources of supply can reach the
market, but they should be seen more as a symptom than a cause.
The importance of developing spot markets lies in their provision of a liquid forward
market for gas purchases and sales. The availability of a number of willing buyers and
sellers of gas, coming together at a convenient point, or hub, allows parties to enter
into forward physical trades for days, months or years ahead. The liquid forward
market then provides confidence that the prices at which trades are completed are
truly representative of the underlying fundamentals in the market, in turn giving rise
to the development of gas price indices which can be used as the benchmarks for
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index pricing in longer term contracts, replacing other forms of indexation such as oil
price escalation.
The liquid forward physical market is usually soon followed by the introduction of a
futures market, over an exchange such as the IPE, and other forms of over-the-counter
derivatives such as options and swaps. These enable participants in the market to
hedge price risk if they require.
Gas Purchase Contracts
Escalation of prices in long term gas purchase contracts remains, at least outside the
UK, largely in line with oil prices. Until there are reliable alternative indices which
reflect gas-on-gas competition this is likely to remain the case. However, some of the
contracts contained so-called destination clauses, which limited the resale of gas by
the purchaser outside their own country. These are gradually being removed because
of European Commission action and a move to shorter term contracts, and a more
diverse choice of supplies, would render such clauses a relic of the past.
5.2.2. EU Retail
Introducing full retail competition is seen as a Medium to High priority. As was
discussed earlier, we do not consider that it is essential for competition to develop at
the retail level in order for the benefits of competition at the wholesale level to filter
down to retail customers. However, the extension of competition to the retail sector
has the following benefits:
It exposes supply operating costs to market forces, although these are typically
less than 10% of the total gas bill;
Regardless of any effect on the price, it allows gas consumers to chose their
supplier and therefore should promote better service standards;
It reduces the ability of the incumbent gas supplier to cross-subsidise between its
competitive and monopoly customers;
It overcomes the problem of defining where the boundary between the competitive
and monopoly markets should lie; and
Accompanied by effective unbundling of transportation and supply, the regulatory
authorities can ensure that the distribution network charges are set at an efficient
level which would limit the ability of the incumbent to cross-subsidise between
transportation and supply.
The changes required for retail competition in the EU are summarised in Table 35 and
described in more detail in the following sub-sections:
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Changes Required
Main Drivers/Factors
Overcoming
resistance
from
incumbents and concern about the
possible high cost of introducing
retail competition
Removal
of
exclusive
arrangements, shorten duration of
contracts and institute gas sales
release programmes.
Proper
legal
unbundling
of
transportation, supply and storage.
Privatisation of state owned
businesses.
Reduction
of
distribution charges to eliminate
excess profits and inefficiencies
Distribution TPA
For competing suppliers to enter a particular distribution market requires the rules for
transportation of gas on the distribution system to be clearly laid out and present at
least a level playing field to compete against the incumbent. In the UK, Transco was,
until recently, an integrated transmission and distribution system so the Network Code
covered all the required transmission and distribution aspects. In the last few months,
4 distribution networks (DNs) have been sold to third parties, but the intention is that
the single integrated Network Code will remain in place. However, in other EU
countries transmission is often split from distribution and many of the smaller LDCs
are struggling to put in place a coherent distribution Network Code and are fearful of
the cost of introducing competition. A separate distribution Network Code need not be
that complicated. It has to deal mainly with supply point administration (see below)
and with the nomination and allocation of gas flows between shippers or users of the
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system. Unlike a transmission network code it does not, and should not, require a
balancing regime, where much of the complexity of a network code is involved75.
Gas Sales to LDCs
Pipeline companies, in their role as wholesalers, can dominate the sales of gas to
LDCs and enter into very long term exclusive agreements. This can affect the
development of wholesale competition in much the same way that the minimum bill
in the US prevented LDCs purchasing gas from alternative sources. As noted in
section 4, the German cartel office, the Bundeskartellamt, has recently completed an
investigation of 750 contracts and has judged 75% of them as anti-competitive
because they make it impossible for new entrants to gain access to the customers.
All contracts are judged anti-competitive if
they have a duration of more than two years and oblige the buyer to buy more than
80% from the supplier; or
they have a duration of more than four years and oblige the buyer to buy more
than 50% from the supplier.
One argument is that the exclusive long term sales agreements with the LDCs are
necessary to allow wholesale pipeline companies to enter into long term gas purchase
agreements with the producers76. However, this misses the fundamental point of the
gas chain that someone, somewhere has to buy long and sell short, thereby bearing
the risk both on price and volume. With the traditional non-competitive approach of
back-to-back contracts from producer to the LDCs, most of the risk is left with the
end users and, to a lesser extent, on the volume side the LDC. There is some price risk
with the producer related to the oil price. In a competitive, flexible trading market the
risk is shared more evenly along the gas chain and the cost of that risk can be priced
into the specific contracts. Volume risk largely disappears since contracts become
shorter term and gas can be bought and sold easily between all participants and is
replaced by price risk77. In turn price risk can be hedged by all participants in the
market if they so desire.
Breaking the contractual link between the wholesaling pipeline companies and the
LDCs should be seen as part of an effective gas release package dealing with the sales
side as well as the more usual gas purchase side.
Administrative Structures
75
The balancing of gas flows on a daily basis requires that inputs to and offtakes from a system are
metered on a daily basis. While the inputs to a distribution system will be measured daily or more
frequently almost all end user offtakes will measured infrequently. In a distribution system, therefore,
one of the main daily activities will be the allocation of gas flows coming into the system between
shippers or users, with the simplifying assumption that whatever quantity of gas comes into the system
is effectively consumed (allowing for shrinkage).
76
However, most of the gas purchase contracts have regular price and volume re-opener provisions in
them, which largely mitigates any risk they may have of any significant take-or-pay liabilities
77
There is almost 100% certainty that gas can be bought and sold for any given period, it is just that the
price is very uncertain.
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As part of the Distribution Network Code efficient supply point administration (SPA)
is a key element. The essence of a SPA system is a database of which supplier is
supplying which end user and the tracking of any changes. Most LDCs will already
have a meters database which can be used as the basis for this and with some
amendments can serve as the SPA system. It should also be relatively inexpensive to
add on a simple load forecasting model which would deal with the nominations,
allocation and reconciliation process. In Northern Ireland, Phoenix Natural Gas (with
80,000 customers) have put in place all the necessary administrative structures
including a network code, a SPA system and load forecasting model to deal with retail
competition for less than 1 million.
Unbundling Transportation and Supply
New entrants can be put at a significant competitive disadvantage where the
incumbent distribution company remains not only the owner and operator of the
distribution pipes but also a large competing supplier of gas. As operator of the
distribution pipes the tariffs for transportation of gas can be set at a level which allows
the incumbents supply business to be cross subsidised and effectively operated at zero
profit or even be loss-making, against which new entrants would be unable to
compete.
The first step to dealing with the possibility of cross subsidies is to require the
complete legal unbundling of transportation and supply and to ensure that the supply
business operates on a commercial basis. It would be preferable for the supply
business to be broken up or sold off in each distribution area but this may not be
possible. Whatever is the process of unbundling, the regulatory authorities should
ensure that the distribution tariffs are set at an efficient level and do not contain any
costs that were not incurred in the delivery of the gas nor allow for excessive profits
to be made. If they are set at an efficient level then the possibility of any cross
subsidies would be removed.
Upstream Costs
A large proportion of the retail gas bill is outside the suppliers control, including gas
costs, transport fees and taxes, making it difficult to undercut the incumbents prices.
In reality, competition at the retail level comes down to efficiency selling and billing,
but also, if the opportunity is there, of more efficient gas buying. That is why it is
important that competition is fair, and there are no cross subsidies, and also why the
introduction of full wholesale competition, together with firm regulatory oversight on
transmission tariffs, is the key factor.
5.2.3. Pipeline Supply Production
Because of the dominance of supplies to the EU by a few countries and largely state
owned companies introducing more competition in this area is seen as a High Priority.
The changes required are summarised in Table 36:
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producers,
Restrictions
on
exports
independent producers
by
Changes Required
Main Drivers/Factors
The changes required are described in more detail in the following sub sections:
Dominant National Producers
Although the GFU has now been broken up in Norway, the other key suppliers to the
EU Russia and Algeria have dominant national producers in Gazprom and
Sonatrach, basically under state control. In addition, the potential pipeline suppliers
from the Middle East and the FSU also largely comprise dominant state owned
national producers. Privatisation of these companies, and placing them on an equal
footing with foreign investors, would be preferable but resistance from their
governments would almost certainly be strong.
Restrictions on Independent Producers
In each of the pipeline supply countries there are independent producers. In Russia,
Gazprom controls the supply network tightly and does not allow independent
producers to supply gas outside Russia. In Algeria, where there are a number of
foreign multinationals involved, Sonatrach maintains control over exports and gas
tends to be sold under national contracts. Ideally independent producers would be
allowed to sell their gas directly but the prospect of that in the near future seems
unlikely unless major reforms of the wholesale market are undertaken.
Foreign Investment
In order to develop the reserves and maintain and/or increase production, most of the
pipeline supply countries will require significant amounts of foreign investment. This
is particularly true of Russia if they are to develop the remote reserves for the Yamal
pipeline and the planned Baltic pipeline. While it will be necessary for the appropriate
legal and tax structures to be developed, the requirement for foreign investment
provides an opportunity for the EU to seek the changes required in terms of reducing
the power of the national producers and removing the restrictions on independent
producers.
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Changes Required
Main Drivers/Factors
No
transmission
connections
directly with specific (FSU in
particular) countries with abundant
gas reserves. Inhibits diversification
of EU supplies
Could
encounter
powerful
resistance from Gazprom and
Russian Government
The changes required are described in more detail in the following sub sections:
Regulated TPA
In both the producer and transit countries there is a lack of true TPA to the pipelines.
The principal concern here is with the gas flowing from Russia where the pipeline
systems are largely under the control, direct or indirect, of Gazprom, even through
Ukraine and Belorussia. From Algeria the pipelines are controlled more by the buyers
such as Eni in Italy and Enagas in Spain. Ukraine is particularly important in this
respect since currently over 25% or 77 bcm of gas imported into the EU flows through
Ukraine and by 2015/16 the volume of gas will have increased to between 120 and
170 bcm. In the past few years there has been constant discussions on reform of the
Ukraine transit system with control passing to a consortium of companies, of which
Gazprom is usually included but Ruhrgas are also often involved.
Export Pipeline Capacity
The pipeline exporting gas from Russia and on through Ukraine as well as from
Algeria and into Spain and Italy are running close to capacity. In Russia in particular
the pipeline system is reportedly not in good condition. Because of the need to
increase capacity as EU demand grows, while EU supply falls, there are opportunities
for foreign investment to fund the expansion. This could involve equity investments
by EU pipeline companies as well as bank lending.
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78
Annual Report on the Implementation of the Gas and Electricity Internal Market {SEC(2004) 1720}
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Interoperability is a key issue for achieving a truly competitive market and the work
of EASEE-Gas will be instrumental in developing Common Business Practices in
areas including harmonisation of business rules, communications standards and units
of measurement and addressing differing gas quality specifications.
Performance of National Energy Regulators
Proactive regulation at the national level by the regulatory authorities is seen as a key
institutional driver for change. In terms of the international experience this was a
common theme in the US, UK and Victoria. Few countries would seem to have
proactive regulatory authorities. If some regulators are less active than others that
could lead to some member States lagging behind in liberalising their own gas
markets and that could hinder the development of the EU wide competitive gas
market.
Views have been expressed on the need for a Europe-wide energy regulator, along the
lines of FERC in the US. Whilst this has not been taken forward, the creation of the
European Energy Regulators Group for Electricity and Gas goes some way towards
achieving a more harmonised approach to energy regulation in the EU, which should
assist in the development of a competitive market.
5.2.6. Risks and Costs of Changes
The opponents of moving towards a competitive gas market often point out that there
are significant risks and costs involved in liberalising the market. They argue that risk
will increase because supplies will no longer be secure without long term contracts,
that the large producers such as Gazprom will be able to dominate even more
European utilties if the power of the utilities is reduced in their home markets and that
the necessary infrastructure will not be built. Upon closer inspection, none of these
arguments hold up and are not supported by the experience in the US and UK
markets, nor in the State of Victoria in Australia.
In respect of security of supply, the general effect of liberalisation will be to introduce
alternative supplies into the market and encourage diversification. Buyers of gas, such
as utilities, will not be locked into one supplier and will seek alternative supplies.
Sellers of gas will also seek a wider variety of buyers so that their risk is diversified.
While it is true that there may be fewer long term contracts to underpin the
construction of new pipeline infrastructure the combination of mechanisms such as
open seasons and rolled-in tariff treatment is usually sufficient to ensure that the
pipelines get built. The US has enjoyed the construction of more capacity from
Canada, new pipelines within the US to take gas from the Rockies to California and
other markets, more interconnections with Mexico and, more recently, a plethora of
plans for new LNG regasifcation terminals. The UK similarly is seeing the
construction of 2 new import pipelines, expansion of Interconnector import capacity
and at least 3 LNG regasification terminals. In the State of Victoria an interconnection
with New South Wales was built and also one with South Australia.
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As was pointed out earlier in this section, it is not the overall risk in the gas market
that changes, but the parties who bear the risk changes. Instead of the end user and, to
a lesser extent, the producer in monopolistic markets who bear almost all the risk, in a
competitive market the risks are spread more evenly along the gas chain.
There are costs involved, however, in introducing competition. These can include
costs of restructuring companies, investment in new systems and practices and the
requirement to restructure contracts, particularly long term gas purchase contracts. In
the US and, to a lesser extent, in the UK there were large take or pay liabilities which
had to be bought out. In the UK these were borne by the shareholders of British Gas,
while in the US there was a sharing of these costs between producers, pipelines and
end users. In the EU, contract restructuring costs should be less of an issue since most
of the long term contracts are thought to contain provisions for price and volume reopeners on a reuglar basis. In addition, the introduction of properly structured and
effective gas release schemes would go along way towards alleviating any potential
liabilities. The regulators also have recognised that the introduction of TPA, in
particular, requires investments in new systems and business practices and have
generally allowed properly incurred costs to be recovered through transmission and
distribution tariffs.
It has also been shown above that the costs of introducing retail competition need not
be nearly as great nor complex as is generally thought.
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used the DTI reference case forecast for oil price of $30/bbl (real 2004 prices) and
tested the sensitivity of the constrained case (the only case with gas prices linked to
oil) to $20/bbl and $40/bbl (real 2004 prices).
6.1.4. Probability of Scenarios
The scenarios are not intended as predictions of the future. They are a device for
understanding the impact on the UK in terms of gas costs and security of supply
resulting from different levels of competition in Europe and the wider global gas
markets.
As mentioned above the Fully Competitive case is not a realistic view of the position
in 2015/6. As its name implies it is a somewhat idealistic view of how the market
would function if all of the changes we have identified are implemented. Whilst all
these changes may eventually be made, we do not consider it achievable within a
timeframe of 10 years or so. However, by comparing more realistic scenarios with the
ideal world created in Fully Competitive we have endeavoured to provide insight into
the importance of what is at stake for the UK in terms of European liberalisation.
The Constrained and Most Competitive cases are intended to cover the range of
outcomes that could be reasonably expected to arise in the period to 2015/6. The Most
Competitive case is achievable if the actions described in Section 4.5 are pursued
energetically. The Constrained case is only likely to arise if liberalisation is not
pursued vigorously beyond mere compliance with the Gas Directives.
6.1.5. Quantification of Scenarios
In Section 6.2 below we provide a narrative summary of the scenarios which is based
on the foregoing discussion of characteristics of competitive markets and the changes
needed to bring them about in the European gas industry and beyond.
Each of the scenarios has to be interpreted for purposes of modelling. Some of the soft
issues in the scenarios such as market dominance and the level of pressure brought to
bear by regulators are not directly represented by parameters in the model. However,
they can be represented by their resultant impact on quantifiable measure such as the
extent to which gas is freely traded, gas on gas competition develops and economic
rent is squeezed out of the gas chain.
The main variables which can be flexed in the model to reflect the scenarios are
Gas Demands
Oil prices
Exchange rates
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Transportation tariffs
Demand
We have used a conventional view of gas demand in Europe, for 2015/16, which is
broadly consistent with forecasts by IEA. The UK demand forecast of 103.3 bcm is
based on forecasts supplied by the DTI (taking a 30%/70% weighted average of the
projections for 2015 and 2016). For the Most Competitive scenario a sensitivity case
has been added, with slightly higher demand, assuming greater demand for gas in the
power sector in Germany, Italy and other countries. We have also increased UK
demand to 118.2 bcm based on NGT assumptions.
Table 38 Gas Demand in Europe by Scenario (Net of Producers Own Use)
BCM
2002
Base
Austria
Belgium
Bulgaria
Croatia
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Luxembourg
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
UK
Grand Total
7.5
15.9
3.8
2.8
9.6
4.4
4.5
41.7
90.2
1.6
13.4
4.3
70.0
1.2
48.9
13.0
3.1
18.8
7.4
1.1
20.5
0.9
3.0
17.6
92.8
498.2
13.4
18.4
5.7
4.3
13.4
5.0
9.5
71.1
109.1
6.8
15.2
6.6
100.6
1.5
55.8
16.5
6.4
29.3
12.1
1.6
46.4
1.3
3.6
58.9
103.3
715,9
Most Competitive
Sensitivity
13.4
18.4
5.7
4.3
13.4
5.0
9.5
71.2
120.0
6.8
15.2
6.6
103.0
1.5
55.8
18.0
6.4
29.3
12.1
1.6
47.6
1.3
3.6
58.9
118.2
746,8
All forecasts summarised in Table 38 are net of producers own use. Also shown are
actual demand figures for 2002 the last year for which net figures are available from
IEA.
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Oil prices
We have used the DTI assumption for oil prices of $30/bbl (real 2004 prices) and
tested the sensitivity of the constrained case (the only case with gas prices linked to
oil) to $20/bbl and $40/bbl (real 2004 prices).
Exchange Rates
The exchange rates used to convert $ figures to and equivalents were the average
of the 5 years 1999 to 2004. The :$ rate therefore is $1.585 and the :$ rate is
$1.033. These do, of course, represent a significantly stronger $ than is currently the
case. However, we would not expect a materially weaker $ to result in lower p/therm
or /MWh prices, since a sustained period of $ weakness would result in resource
costs being higher in real $ terms than we have assumed in our production supply
costs and pipeline tariffs, leaving and prices little changed.
Supply and Infrastructure
The Fully Competitive and Most Competitive cases both assume plentiful supplies and
infrastructure. In the Fully Competitive case the pipeline supply area is extended by
new pipelines from Egypt to Turkey and from Nigeria to Algerian and on to southern
Europe. Supplies from the Caspian can transit Russia using TPA in this case as well
via Turkey and the Nabucco pipeline. In both the Most Competitive and Constrained,
Russia does not introduce TPA. Caspian gas can be routed via Turkey and, in the case
of Most Competitive, in the Nabucco pipeline to Austria. Russia is able to continue to
buy supplies from Caspian area producers to supply its own exports to Europe. Table
39 summarises the new pipeline infrastructure by scenario, whilst Table 40 and Table
41 summarise the LNG liquefaction plant and regasification plant included in the
model respectively.
Transportation Charges
As discussed in section 4.3.3 there is currently a wide variation between tariffs in
Europe when compared on the basis of charge per 1000 cm per 100km for the same
volume of load and load factor. Future tariff levels will depend among other things on
the effectiveness of regulators and we have made the following assumptions in the
three scenarios
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Capacity
(bcm)
25.0
Yes
Yes
No
10.0
10.0
Yes
Yes
No
No
No
No
Nigeria to
Algeria and
MGE Pipeline
15.0
Yes
No
No
Caspian direct
access to Europe
61.0
Yes
Nabucco
Medgaz
Extension to
France
15.7
15.0
Yes
Yes
Yes
Yes
No
No
Yes
Yes
No
North European
Gas Pipeline
Galsi Pipeline
Egypt to Turkey
Pipeline
Fully Competitive
Most Competitive
Constrained
TAG Pipeline
Upgrade
34.0
Yes
Yes
No
Turkey to
Greece to Italy
Pipeline and
Reverse
11.0
Yes
Yes
No
Langaled
pipeline Norway
to UK
49.4
Yes
Yes
Yes
BBL pipeline
Netherlands to
UK
17.2
Yes
Yes
Yes
Belgium to UK
Interconnector
Upgrade
24.1
Yes
Yes
Yes
Total Capacity
287.4
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Capacity
(bcm)
24.0
11.2
5.2
5.6
4.8
Plant
ARZEW
SKIKDA
Gassi Touil
SOYO
BIOKO
Fully
Competitive
Yes
Yes
Yes
Yes
Yes
Most
Competitive
Yes
Yes
Yes
Yes
No, USA only
Constrained
Yes
Yes
Yes
No, USA only
No, USA only
10.6
9.8
10.0
2.8
ELNG
SEGAS
?
MARSA EL
BREGA
Yes
Yes
Yes
Yes
Yes
Yes
No, Asia only
Yes
Yes
Yes
No, Asia only
Yes
Nigeria
30.0
Yes
Yes
Yes
Nigeria
Nigeria
6.8
6.8
Yes
Yes
Yes
Not go ahead
Yes
Not go ahead
Nigeria
Norway
Oman
14.3
5.6
4.8
Yes
Yes
Yes
Yes
Yes
Yes
Not go ahead
Yes
Yes
Qatar
Qatar
22.0
31.3
BONNY
ISLAND
BRASS RIVER
NNWA
FLOATING
LNG
OK LNG
SNOHVIT
MINA AL
FAHAL
RAS LAFFAN
QATARGAS
Yes
Yes
Yes
Yes
Yes
Yes
Trinidad
and
Tobago
UAE
22.4
ATLANTIC
LNG
Yes
Yes
Yes
1.7
DAS ISLAND
Yes
Yes
Yes
YEMEN
9.4
Yemen LNG
Yes
No, supplies
Asia only
No, supplies
Asia only
Venezuela
6.7
VENEZUELA
Yes
Total
Capacity
245.8
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Capacity
(bcm)
10.0
13.0
11.4
Plant
Fully
Competitive
Yes
Yes
Yes
Most
Competitive
Yes
Yes
Yes
Constrained
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
France
Greece
7.1
2.2
ZEEBRUGGE
FOS SUR MER
MONTOIR DE
BRETAGNE
Fos Cavou
REVITHOUSSA
Italy
Italy
8.3
6.0
BRINDISI
MARINA DI ROVIGO
Yes
Yes
Yes
Yes
Yes
Yes
Italy
3.5
Yes
Yes
Yes
Italy
3.0
LA SPEZIA
(PANIGAGLA)
ROSIGNARIO
Yes
Yes
Yes
Italy
Italy
Italy
Italy
7.0
4.0
8.0
8.0
GIOIA TAURO
MONFALCONE
TRIESTE
TARANTO
Yes
Yes
Yes
Yes
Yes
Yes
Not go ahead
Not go ahead
Not go ahead
Not go ahead
Not go ahead
Not go ahead
Italy
Netherlands
8.0
9.0
SYRACUSE
ROTTERDAM
Yes
Yes
Not go ahead
Not go ahead
Not go ahead
Not go ahead
Portugal
5.8
GdP
Yes
Yes
Yes
Spain
Spain
Spain
Spain
10.5
10.5
9.2
9.2
BARCELONA
BILBAO
CARTAGENA
CASTELLON
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Spain
Spain
Spain
3.9
5.3
10.6
FERROL
HUELVA
PUERTO
SAGUNTO,VALENCIA
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Sweden
2.0
BALTIC LNG
Yes
Not go ahead
Not go ahead
Turkey
Turkey
UK
UK
6.2
5.5
13.9
6.0
ALIAGA (IZMIR)
MARMARA
ISLE OF GRAIN
DRAGON LNG
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
UK
UK
9.9
10.0
SOUTH HOOK
CALOR GAS
Yes
Yes
Yes
Not go ahead
Yes
Not go ahead
Total
Capacity
227.0
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In Fully Competitive all long term contracts are removed and there is full gas to
gas competition.
In Most Competitive the existing long term contracts are extended for Russia
but other suppliers move to shorter contracting and spot. Although contract
volumes remain in force pricing is assumed to move to market related basis
with no linkage to oil prices.
In Constrained gas contracts are extended after their existing terms for all
contracts and the link between gas and oil prices is retained.
US Gas Prices
The European Gas Model includes scope to simulate the impact of arbitrage in the
Atlantic Basin LNG market. This requires assumptions to be entered for LNG
terminal capacity in USA and for US wellhead prices.
We have based our assumption for US gas prices on a recent report by the US
Department of Energy79. For our Fully Competitive and Most Competitive cases we
have taken the US gas price from the DOE reference case whereas as for our
Constrained case we have taken the DOE Restricted Supply case as this is includes
restrictions on LNG imports which is consistent with our Constrained Case.
As European gas prices are set by pipeline gas imports in Fully Competitive and Most
Competitive scenarios, LNG imports and hence the US gas price does not influence
European prices in these two scenarios. Consequently, the DOE Reference case is of
less relevance to this study than the DOE Restricted Supply case. Nevertheless we
give a brief a brief synopsis of the Reference Case below.
DOE Reference Case
The DOE Reference case projects that lower 48 wellhead gas prices will decline from
the 2003 level of $4.90 per 1000 cu ft to $3.60 per 1000 cu ft (2003 prices) by 2010
and thereafter will rise to $4.16 per 1000 cu ft by 2015 and $4.79 per 1000 cu ft by
2025. This assumption was used for both the Fully Competitive case and the Most
Competitive case.
79
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Growth in consumption is led by the electric power sector based on the assumption
that all new-build plant will be gas-fired80.
Total production grows by about 9% over the period to 2015. Growth in gas
production comes mainly from unconventional sources including tight sands, shale,
and coalbed methane. An important assumption in this regard is that technological
progress will continue at historical levels so that the projected wellhead price is
sufficient to make production from these unconventional sources economic.
The Reference Case assumes that gas from North Slope will come on stream from
2016. Consequently the contribution of Alaskan gas in 2015 is minimal.
Canadian imports are projected to decline from 110 BCM in 2003 to 88 BCM in 2009
and then increase back to 105 BCM by 2015. USA continues to be a net exporter to
Mexico, even though the case includes an LNG import terminal in Baja California
which exports gas from western Mexico to the USA from 2006.
The Reference Case assumes that, with the exception of the facility at Everett,
Massachusetts, three of the four existing U.S. LNG terminals (Cove Point, Maryland;
Elba Island, Georgia; and Lake Charles, Louisiana) are expected to expand by 2007;
and additional facilities are expected to be built in New England and elsewhere in the
lower 48 States, serving the Gulf, Mid-Atlantic, and South Atlantic States, including a
new facility in the Bahamas serving Florida via a pipeline. Another facility is
projected to be built in Baja California, Mexico, serving a portion of the California
market. Total net LNG imports to the United States and the Bahamas are projected to
increase from 16 BCM in 2003 to 153 BCM in 2015.
Table 42 Key Outcome of DOE Reference Case
BCM
Total Consumption
Of which electric power
Production
Imports
Of Which Canada
Mexico
LNG
Average Lower 48
Wellhead Price $/mcm
(2003 dollars)
2003
769
175
675
114
110
-12
16
176
2015
986
296
736
248
105
-10
153
147
80
The DOE considers that coal plant will become competitive for new build towards the end of the
outlook period, i.e. later than 2015.
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2003
769
175
675
114
110
-12
16
176
2015
916
247
722
188
112
-7
83
181
Other Cases
The DOE Report also considered sensitivities to the pace of technological
development.
In the slow oil and gas technology case, advances in exploration and production
technologies are assumed to be 50 percent slower than those assumed in the reference
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case, which are based on historical rates. (Note the same assumption regarding
technology is made in the Restricted Supply Case). Wellhead gas prices are about 7%
higher in this case compared with the reference case.
The rapid technology case assumes 50 percent faster technology progress than in the
reference case, resulting in lower development costs. Wellhead prices are 9% lower
than the Reference Case.
The study also considered a range of assumptions for world oil prices. However, the
impact of varying the oil price on gas wellhead prices is minimal.
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Demand
Supply
Infrastructure
and
Oil Price
Most Competitive
Constrained
EU Liberalisation
Fully reformed
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Most Competitive
Constrained
Yes
Yes
Yes
Yes
Yes
Yes
Only in UK
Lack
of
anti-competitive
contracts between producers
and buyers
Yes
Yes
Yes
Yes
Yes
No
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Most Competitive
Regulators have succeed in advancing liberalisation within
most countries
Laggard countries under pressure because of reciprocity
issues
Energy mix left to market to determine
Customer pressure
Effective Unbundling
Constrained
Regulatory efforts continue to be frustrated in some
countries which adopt lax regulation
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Regulated
TPA
to
transmission
networks,
storage and LNG
Regulated
Transmission,
storage and LNG charges
Balancing regimes
Gas Quality
Investment
interconnectors
pipelines
in
and
new
transit
Most Competitive
TSOs operate on national basis. Gas can be shipped across
boundaries but not easily as in Fully Competitive case
Some concentration in ownership of networks but this does
not inhibit competition in supply since networks are
effectively regulated and unbundled from suppliers
Implemented as result on second and third gas directive
Constrained
Difficult to arrange transport over several countries.
Some TSO still operate unreasonable balancing systems
TSOs remain powerful local monopolies with ability to
influence governments and are able to protect their supply
affiliates
Implemented but not always enthusiastically by some
member states
Market Driven
Market driven
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Most Competitive
Regulators have succeed in advancing liberalisation in the
distribution sector
Constrained
Regulatory efforts continue to be frustrated in some
countries which adopt lax regulation
All over EU
All over EU
Customer pressure
Effective Unbundling
Development
of
public
awareness on ability to switch
suppliers
Procedures in place
Procedures in place
Smooth
procedures
suppliers
administrative
for
switching
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Most Competitive
Foreign investment is encouraged in all pipeline producer
countries
Constrained
Foreign involvement limited especially Russia
Broken up
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Multitude of Customers
Most Competitive
Regulators are set up but real reform is hampered by
political problems such as cross subsidy of domestic
markets
Largely accounting separation only
Multiple supplier but one company still retains 50% of
market share
Customer Pressure
Market Driven
Market driven
Restricted
Proactive regulation
Effective unbundling
Regulated
TPA
to
transmission networks and
storage
Regulated transmission and
network storage charges
Incentives to invest and make
capacity available
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Most Competitive
Foreign investment is encouraged in all LNG producer
countries
Constrained
Foreign involvement limited
Broken up
Most Competitive
The LNG spot market continues to grow in importance
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Constrained
Spot LNG remains a marginal market compared with long
term contracts
Lack of spare capacity chokes off development of spot
trading
With some exceptions the traditional buyer/seller model for
LNG sales continues to apply in Europe
www.energymarkets.eu.com
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Constrained Case
Most
Competitive
MC
Sensitivity
Fully
Competitive
WACOG
Spot Price
21.3
27.1
23.1
21.7
18.9
31.0
17.1
19.9
21.1
19.5
10.8
12.3
21.1
20.8
10.8
12.5
14.6
15.3
11.6
16.3
22.0
17.7
17.6
31.7
23.0
20.3
17.7
11.6
37.4
22.8
10.9
13.8
8.2
20.6
14.6
11.7
13.8
8.2
21.7
15.5
14.0
13.8
9.1
16.1
14.2
Hungary
Ireland
Italy
Luxembourg
20.1
18.2
36.6
22.4
24.3
18.6
18.0
36.6
19.7
24.6
11.9
21.1
24.6
10.0
16.9
11.9
21.4
26.1
11.8
17.2
12.9
12.1
18.2
14.1
17.4
Netherlands
Poland
Portugal
Romania
Slovak Republic
23.7
19.0
21.7
18.8
19.8
26.1
11.5
12.7
16.5
15.8
16.1
9.8
20.5
20.0
8.6
16.5
10.7
21.5
20.0
8.8
12.7
9.2
17.6
11.2
11.7
Slovenia
Spain
Sweden
Switzerland
Turkey
22.8
18.3
18.8
28.0
20.5
30.6
18.8
32.8
13.2
13.6
14.1
20.5
13.3
16.0
14.4
21.1
16.2
15.0
12.7
15.2
23.5
31.4
34.9
31.5
14.1
20.4
14.1
22.0
11.2
16.6
Austria
Belgium
Bulgaria
Croatia
Czech Rep
Denmark
Finland
France
Germany
Greece
UK
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Constrained Case
The key features of this scenario are:
Contracts remain in place and are extended beyond their current contract
periods;
The US wellhead price based on the DOEs Restricted Supply Case which
includes limited LNG import capacity in the USA and heavy reliance on US
production from unconventional sources resulting in a wellhead price of
31.6 p/therm.
In general the spot price is higher than WACOG that is marginal costs are higher
than the long term gas contract price based on a $30/bbl oil price. In this case gas
costs are being driven by LNG and many European countries are competing with
America for supplies. The UK spot price is around 31.5 p/therm reflecting the
effective role of the USA, as the marginal supplier, with an opportunity cost of 31.6
p/therm. The resulting spot price in UK in the summer is 30.1 p/therm which is the
wellhead price in the USA less a saving in LNG shipping costs of 1.3 p/therm.
Table 54 Constrained Case Sensitivities to US Wellhead Price
P/Therm Real 2004
Prices
DOE Reference
Restricted Supply/
Faster Technical
Development
Restricted Supply
High US Wellhead
UK Spot Price
Q3
Q4
US
Wellhead
Q1
Q2
25.8
28.9
28.0
30.5
29.0
32.1
25.5
28.6
25.5
28.6
27.0
29.9
31.6
36.5
32.0
37.0
33.6
38.6
30.1
35.1
30.1
35.1
31.5
36.4
Average
Table 54 shows the sensitivity of UK spot prices to US wellhead prices. The table
includes three cases in addition to the Restricted Supply case which is our base
assumption for the Constrained Case. The DOE Reference case includes significantly
higher LNG import capacity in the USA than in the Restricted Supply case with a
wellhead price of 28.8 p/therm. We have also considered a wellhead price of 28.9
p/therm which could arise from the Restricted Supply case combined with a faster
pace of technological development which would reduce the cost of production from
unconventional sources.
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Finally we have considered a wellhead price of 36.5 p/therm which is higher than any
of the DOE cases to cover a wider range of possible outcomes.
In all the cases considered the US wellhead price sets many of the European spot gas
prices in the summer months with storage costs further increasing winter spot prices.
Table 55 Sensitivity to Oil Prices (Real 2004 Prices)
P/Therm Real
2004 Prices
Spot
Price
$20/bbl
$30/bbl
$40/bbl
Belgium
Bulgaria
Croatia
Czech Rep
18.9
31.0
17.1
19.9
20.3
18.3
24.6
16.9
18.9
16.4
21.3
27.1
23.1
21.7
22.0
24.7
29.7
29.5
24.5
27.9
Denmark
Finland
France
Germany
Greece
17.7
11.6
37.4
22.8
18.6
17.7
12.6
29.4
19.3
17.8
17.7
17.6
31.7
23.0
20.1
17.7
23.1
34.2
27.0
22.7
Hungary
Ireland
Italy
Luxembourg
Netherlands
18.0
36.6
19.7
24.6
17.8
36.6
17.7
23.2
18.2
36.6
22.4
24.3
18.6
36.6
27.4
25.5
26.1
11.5
12.7
16.5
15.8
19.3
13.7
17.2
15.7
23.7
19.0
21.7
18.8
28.5
24.5
26.6
22.0
20.5
14.9
20.1
19.8
22.8
24.7
25.6
30.6
18.8
32.8
34.9
31.5
18.3
18.8
25.2
17.7
31.4
18.3
18.8
28.0
23.5
31.4
28.7
18.8
31.0
29.8
31.4
Austria
Poland
Portugal
Romania
Slovak
Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
UK
Table 55 shows the sensitivity of WACOG to the oil price assumption of $20/bbl,
$30/bbl and $40/bbl. The oil price has a direct impact on contract prices because in
this scenario it is assumed that gas prices continue to be linked to oil product prices.
Spot prices, are not materially affected by the oil price since they are determined by
the cost of production and transportation as described above.
The low oil case ($20/bbl) reduces WACOG by between 1.2 and 6.4 p/therm
depending on the country. The variation arises partly because of differing oil
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Gas contracts are retained and the Russian contracts are extended beyond
their current contract terms
Contracted gas prices are rebased to market levels and the link with oil is
broken
There is some liberalisation of the Russian market with open access for
independent gas producers but Russia blocks gas from the Caspian except
along the route through Georgia, Turkey and the Nabucco pipeline.
There is sufficient flexibility in this scenario for pipeline supplies to set the gas price
in Europe. The marginal cost of production at the wellhead in Russia is $20/mcm (3.4
p/therm). There are four transportation routes for Russian gas to reach Germany:
The Brotherhood pipeline via Ukraine and Slovakia. and Czech Republic to
Waidhaus on the Czech/German border.
An alternative route for gas from the Brotherhood pipeline is from Slovakia to
Baumgarten on the Slovak/Austrian border and from there to Germany in the
WAG pipeline (Russian gas also flows to Italy via Baumgarten)
The newer Yamal Europe pipeline which transits Belarus and Poland to Frankfurt
Oder on the Polish/German border
The proposed North European Gas Pipeline (NEGP) which includes a sub-sea
crossing of the Baltic from Vyborg in Russia to Griefswald on the German coast.
Transportation charges along these routes are built up using the following
assumptions.
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This results in transportation costs for Russian gas to Germany as follows, based on a
3.4 p/therm wellhead cost:
70.4
12.1
15.5
Brotherhood
via Baumgarten
and WAG
63.4
10.9
14.3
Yamal-Europe
55.9
9.6
13.0
NEGP
58.0
10.0
13.4
The summer spot price in Germany in this scenario is 14.0 p/therm set by Russian gas
delivered along the Brotherhood/WAG route the cheapest route with available
capacity - less some second order effects. The winter price is determined by Russian
supply with higher transportation charges along the Brotherhood/Waidhaus route.
The spot price in the UK is 18.7 p/therm in the summer and 22.2 p/therm in the
winter. The differential in the summer price is equivalent to the cost of transport from
Germany to the UK via Belgium and the interconnector.
The sensitivity case, which is based on higher demand (some 30 bcm higher than the
base case), has a German summer spot price of 15.2 p/therm set by Russian gas
delivered via Waidhaus while the winter price is set by Netherlands which provides
the required swing to meet winter demand. Spot prices also increase, maintaining
roughly the same differential with German prices as in the base case.
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The German and UK prices in the base case and sensitivity are summarised in the
following table.
Table 57 Most Competitive: UK and German Spot prices
P/Therm Real 2004
Prices
Germany Base
Case
Germany
Sensitivity
UK Base Case
UK Sensitivity
Spot Prices
Q1
15.2
Q2
15.2
Q3
14.0
Q4
14.0
Average
14.6
15.4
16.2
15.2
15.2
15.5
22.2
23.7
22.2
23.7
18.7
20.3
18.7
20.2
20.4
22.0
66.2
11.4
14.8
Brotherhood via
Baumgarten and
WAG
55.6
9.6
13.1
Yamal-Europe
55.9
9.6
12.7
NEGP
53.1
9.1
12.6
The German summer spot price is 12.9 p/therm set by Russian gas delivered via
Baumgarten. The winter spot price of 16.2 p/therm which is seasonal differential of
3.3 p/therm set by storage.
The UK spot price 15.2 p/therm in the summer and 17.3 p/therm in the winter. The
differential between UK and German spot prices is 2.3 p/therm, compared with 5.8
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UK Spot Price
Q1
14.9
17.3
Germany
UK
Q2
16.2
18.7
Q3
12.9
15.2
Q4
12.9
15.2
Average
14.2
16.6
2015/16
2003
Fully
Competitiv
e
Most
Competitive
Most Comp
Sensitivity
Constrained
Indigenous production
73
Netherlands
108
UK
75
Other
63
18
33
74
18
27
77
18
30
74
18
39
256
113
119
125
131
135
68
30
209
127
71
255
127
60
276
127
61
247
127
54
4
0
237
61
20
488
38
14
494
37
15
516
30
15
474
26
26
18
21
37
2
0
10
1
39
45
10
13
21
114
14
17
40
13
102
15
17
40
13
106
14
17
30
14
111
532
716
715
747
715
Total
Production
Pipeline Imports
Russia
Norway
Algeria
Caspian
Other
Total pipeline
LNG Imports
Algeria
Qatar
Egypt
Nigeria
Other
Total LNG
Total Supply
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532
716
716
747
716
14
100
77
89
62
There are significant new supplies from Caspian and other pipeline areas and
expanded LNG in all scenarios which helps to contain Russian dominance of the
import mix. Caspian and other supplies could reach 81 BCM in the Fully Competitive
case represesenting some 12% of European demand. The equivalent figure in Most
Competive is 52 BCM (for both the base and higher demand sensitivity) and 45 BCM
in the constrianed case as Caspian supplies are limited.
LNG imports could almost treble by 2015/16 to 114 BCM in the Fully Competitive
case and slightly less in other cases.
Russia continues to be the biggest source of supply in all scenarios. In Fully
Competitive some 29% of European demand is met from Russia, compared with 25%
in 2003, although in this case there would be a number of producers contributing to
the total, not just Gazprom. In the other scenarios the Russian contribution ranges
from 35% to 37% of demand.
Algerian pipeline supplies increase from 30 BCM in 2003 to 71 BCM in 2015/16 in
the Fully Competitive case supported by the Medgaz pipeline to Spain with an
extension into France and the Galsi pipeline to Italy. In the Most Competitive and
Constrained case we have excluded Galsi and in the Constrained case the Medgaz
pipeline is not extended into France. This results in Algerian imports by pipeline of 60
BCM in Most Competitive and 54 BCM in Constrained.
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Figure 11 European Gas Flows in 2015/6 Constrained $30 Oil Price Case
2 0 1 5 /1 6 C O N S T R A IN E D $ 3 0 C A S E E U R O P E A N G A S
FLO W S
LNG
5.4
N a tu ra l G a s M a in E x p o rte rs
A lg e ria
N e th e rla n d s
N o rw a y
R u ss ia
U n ite d K in g d o m
O th e r
LNG
4 .8
LN G
25.0
0 .6
IR E
4.6
14 .8
T e l: + 4 4 ( 0 ) 2 0 82 32 1 57 0
8 .9
LNG
S o u rc e : E u ro p e a n G a s M o d e l F lo w R e s u lts
U n its: S ta n d a rd B C M
C o p yrig h t E n e rg y M a rke ts L im ite d
3 3.0
NET
9 .1
26.0
0.5
BEL
G ER
10 .8
LNG
6 0.1
1.2
6.0
18 .0
1 .2
LNG
1 .8
42 .1
10 .0
AUS
10.0
SPA
2.4
2.1
9.9
6 .0
13 .0
9.9
MOR
ALG
34 .3
TU N
L IB
2.2
15 .3
0.5
CRO
C AS
BUL
5 .6
2.2
IT A
34 .3
44.1
2 3.9
2 6.1
LN G
10 .0
1 6.2
ROM
S LN
0.9
3 1.5
0.6
HUN
5 .0
8 .2
7.0
FR A
SLK
C ZE
0.5
1.2
1.4
SW I
3 0.3
1 14.2
3 .0
0.3
9 .1
3.4
RUS
49 .9
8 .9
LU X
48 .1
POL
3 0.5
2 .0
0.2
0.3
3.0
2.0
8.0
9 .2
1.3
9.5
DEN
6 .0
UK
21 .0
1 .3
44 .8
49 .4
w w w .e n e rg y m a rk e t s.e u .co m
POR
F IN
SWE
NOR
GRE
1 2.6
TU R
1 .4
1 2.8
LN G
LN G
2 0.7
1 .2
9.6
IR N
LN G
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2015/16 M O ST
S E C AS E E U R O P E A N
S T C O M P E T IT IV E B A
AS
GA
S FLOW S
AS
35.0
LNG
5.6
4 .8
0 .6
IR E
LN G
44 .8
49 .4
3 3.7
8.0
9 .2
3 4.9
NET
2.9
14 .8
1 2.8
26.0
0.2
BEL
G ER
5.4
4 3.0
1.2
9.8
1 .2
LN G
3 .0
10 .0
4 .9
10.0
SPA
8.4
1.6
13 .5
9.9
MOR
AL G
34 .4
TU N
2.7
IT A
34 .4
L IB
1 5.4
RO M
10.1
0.1
CRO
39.9
2 5.9
16 .0
C AS
BUL
6 .3
LN G
16 .0
2.6
2 6.1
6 .0
9.9
S LN
0.9
2 7.8
0.6
HUN
7 .8
AU S
7.0
FR A
1 .8
3.0
34 .1
1.4
SW I
3 0.4
S LK
C ZE
4.8
1.2
9 .9
18 .0
8 9.1
3 .0
0.3
LNG
RU S
32 .7
4 .4
LU X
50 .0
POL
3 7.5
4 .4
LNG
POR
9.5
DEN
6 .0
UK
21 .5
3.4
F IN
1.3
SWE
N OR
G RE
1 4.0
TU R
0 .7
1 2.8
LN G
LN G
2 8.8
10.2
1 .2
9.6
IR N
LN G
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Algeria
Netherlands
Norway
Russia
United Kingdom
Other
LNG
25.0
5.3
IRE
LNG
49.4
13.0
UK
14.1
44.8
LNG
0.9
6.0
4.5
1.6
0.3
14.8
5.0
LNG
33.0
0.3
2.5
1.5
25.0
0.9
SWI
34.2
FRA
13.7
AUS
0.8
31.5
2.9
9.9
9.4
35.0
15.0
9.9
ALG
35.0
10.0
LIB
1.2
1.3
CRO
34.6
CAS
1.0
LNG
6.5
5.4
3.7
11.8
34.4
5.5
BUL
GRE
1.4
ITA
ROM
4.3
LNG
TUN
1.4
15.3
1.2
SLN
SPA
16.0
12.3
HUN
32.1
SLK
3.6
18.0
10.7
MOR
41.8
17.6
7.2
CZE
0.9
LNG
3.2
4.3
7.2
LUX
LNG
RUS
GER
BEL
1.4
48.1
POL
4.2
7.2
POR
24.6
NET
3.2
9.5
DEN
4.2
www.energymarkets.eu.com
FIN
0.4
SWE
NOR
5.0
TUR
22.8
IRN
EGY
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In section 4.3.5 we showed that Russia and hence Gazprom supplied 49% of all
imports to Europe in 2003. In all scenarios we expect Russian exports to increase in
absolute terms but to decline as a percentage of total imports as new supplies come on
stream from other areas including the Caspian and global LNG. In the Constrained
case Gazproms share of total European imports is around 42% by 2015 assuming
Gazprom retains 100% interest in all exports to Europe.
Furthermore non-Gazprom production could reach as much as 37% of total Russian
production by 2015 and some of this gas could be exported to Europe in the Most
Competitive and Fully Competitive cases. In the following table we have assumed
that non-Gazprom exports account for 20% of Russian exports to Europe in the Most
Competitive case and 35% in the Fully Competitive case. This would result in
Gazprom market shares of 34% in the Most Competitive case and 23% in Fully
Competitive.
Table 61 Russia/Gazprom Market Share of European Imports by Scenario
BCM
Total Imports
Russian Imports
Of which
Gazprom
Gazprom Share
2003
Most Competitive
Constrained
276
135
135
Fully
Competitive
603
209
136
597
255
204
585
247
247
49%
23%
34%
42%
Similarly Sonatrachs market share is likely to decline markedly from 20% in 2003 to
13% to 16% depending on scenario (see Table 62).
Table 62 Algerian/Sonatrach Market Share by Scenario
BCM
Total Imports
Algerian
Pipeline
Algerian LNG
Total Algerian
Sonatrach Share
2003
Most Competitive
Constrained
276
30
Fully
Competitive
603
71
597
60
585
54
26
56
20%
26
97
16%
18
78
13%
31
85
15%
Norwegian exports to Europe are expected to increase in absolute terms but decline
slightly in percentage terms from 25% to 21% or 22% (see Table 63).
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2003
Most Competitive
Constrained
276
68
Fully
Competitive
603
127
597
127
585
127
25%
21%
21%
22%
15%
12%
12%
12%
7.3. UK Supplies
Shows the breakdown of gas supplies to UK by scenario. UK consumption increases
by 9 BCM between 2003 and 2015/16 (except in the sensitivity to the Most
Competitive case where the increase is 24 BCM). However the increase in UK
consumption is offset by decline in exports in the Interconnector and, in the Fully
Competitive case, in exports to Ireland (Ireland is supplied by a combination of
imports from Norway via the UK and indigenous gas).
In all cases Norway is the main contributor with volumes constrained by the capacity
of the Vesterled and Langeled pipelines. Netherlands is an important contributor both
via the BBL pipeline and, in the Most Competive sensitivity when UK demand is
higher, also via the Interconnector. In order to supply this amount of gas the
Netherlands imports increased quantities of gas from Russia.
In all scenarios LNG provides slighly less than a quarter of UK supplies, with the
origin of the LNG varying between scenarios.
The model shows that UK in 2015/16 could have a fairly diversified portfolio of
supplies. The breakdown of supplies in shown in Table 64 and Table 65 shows the
same information as percentage market shares
The largest single contributer is Norway, which despite being a non-EU country is for
all intents and pursposes subject to EU law. The reliance of Russia is between 4% and
14% depending on scenario. However, that simple statement understates the
importance of Russian supplies since it remains a major supplier to Europe as a whole
and security of supply for the UK cannot be considered in isolation from Europe.
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2015/16
2003
Fully
Competiti
ve
Most
Comp
MC
Sensitivity
Constrained
101
18
4
18
9
18
14
18
14
44
13
1
10
4
49
11
0
3
19
49
20
0
3
20
49
8
4
3
14
10
104
Total supply
93
103
UK Consumption
4
0
Exports (Ireland)
12
0
Exports (via
Interconnector)
* Net of gas used in the petroleum industry
0
108
103
5
0
0
123
118
5
0
0
110
103
5
1
Production*
Russia
Norway
Netherlands
Algeria
Qatar
Nigeria
Egypt
2015/16
2003
Fully
Competitive
Most
Comp
MC
Sensitivity
Constrained
Production
94
17
17
15
16
Russia
Norway
Netherlands
Algeria
Qatar
0
6
0
0
4
42
13
1
8
45
10
0
11
40
16
0
13
45
7
4
0
0
0
100
10
4
10
100
3
18
0
101
2
16
0
101
3
13
0
100
Nigeria
Egypt
Total supply
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appears to respond fairly well to the price signal, showing strong export nominations
when the Zeebrugge price is higher than NBP and vice versa.
Figure 14 Comparison of Spot Flows With the Price Differential Between Zeebrugge Hub and
NBP
7.0
1.5
6.0
1
5.0
4.0
3.0
2.0
0
1.0
Pence/Therm
0.5
0.0
-0.5
-1.0
-2.0
-1
-3.0
-4.0
Ja
n01
Ap
r-0
1
Ju
l-0
1
O
ct
-0
1
Ja
n02
Ap
r-0
2
Ju
l-0
2
O
ct
-0
2
Ja
n03
Ap
r-0
3
Ju
l-0
3
O
ct
-0
3
Ja
n04
Ap
r-0
4
Ju
l-0
4
-1.5
The analysis presented above is on a monthly basis and so disguising some detail in
terms of the Interconnector shippers responses to changes to prices on a daily basis. It
does however, give a reasonably concise overview of how the Interconnector allows
shippers to respond to price signals.
However, as Ofgem indicated in its review of high gas prices in Britain, there have
been occasions when shippers response to price signals has not been as efficient as
one might expect and raised the question as to why gas supplies imported from
Europe had not increased more quickly when GB prices had increased above
European levels.
Ofgems analysis indicates that the main reasons for high gas prices are:
high oil prices feeding through to British prices, predominantly via the pipeline
link to the rest of Europe. Most gas contracts in Europe link prices to oil - this
happened in Britain before competition was established
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declining UK gas supplies. Winter gas supplies have fallen more quickly than
the market was expecting.
Ofgems further analysis into European gas supplies and the use of the interconnector
confirmed that the interconnector appeared to operate as would be expected in
response to relative prices in Belgium and Great Britain. Ofgems analysis concluded
that no company using the interconnector sought to manipulate the direction of flow.
The analysis identified a number of other factors that provide some explanation for
the time it took for the interconnector to begin importing gas. These include higher
demand due to cold weather in several European countries and an increased
requirement for gas to be placed into store in Europe ahead of winter because of
operational problems on the interconnector before the period covered by the probe.
However, Ofgem was not, on the basis of the information available to it, able to
answer a number of important questions.
The first is whether any of the European gas companies withheld surplus gas
supplies and prevented more gas flowing to the UK.
The third is whether their decision to continue to place gas in store, rather than
sell it to the UK, was reasonable given their forecast customer demand and
supply contracts for that winter.
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UK Spot Price
Q1
32.0
22.2
23.7
17.3
Q2
33.6
22.2
23.7
18.7
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Q3
30.1
18.7
20.3
15.2
Q4
30.1
18.7
20.2
15.2
Average
31.5
20.4
22.0
16.6
www.energymarkets.eu.com
The Constrained Case results in a UK spot price of 31.5 p/therm set by arbitrage with
USA in the LNG market. On a range of reasonable assumptions for US prices the UK
spot price could fall within a range of 27.0 to 36.4 p/therm. Under this scenario many
European countries prices are closely linked with US prices, since US prices are the
main driver of LNG spot prices, which in turn are the marginal supplier to much of
Europe. European contract gas prices would remain linked to oil prices in the
Constrained case. A +/- $10bbl change in oil prices could impact on contract prices,
and hence on the weighted average cost of gas in continental Europe, by up to +/- 6
p/therm.
It is important for Europe to secure adequate low cost supplies from Russia, FSU and
other sources. The alternative is that potentially higher prices result from Europe
competing with the US for LNG supplies.The Most Competitive case would bring in
sufficient supplies to Europe to lower prices in general. For the UK the gas price
would be around 20.4 p/therm, or 11.1 p/therm less than in Constrained case. Supplies
from Russia are now the key in setting spot prices, with LNG supplies becoming a
price taker, as opposed to the price setter in the Constrained case.
Once access to adequate low cost gas is secured the greatest scope for containing gas
prices lies in reducing transportation charges. It is particularly important for the UK
placed almost at the end of the east-west supply chain that access to and the pricing of
transportation along the supply route is secured at an efficient cost. In the Fully
Competitive case, prices fall to 16.6 p/therm, partly because of access to lower cost
sources of gas but also due to this continued downward pressure on transportation
tariffs by the regulatory authorities across Europe.
The Fully Competitive Case, would not only help contain gas prices, through greater
pipeline capacity and increased liberalisation and competition, but also improve
security of supply to Europe because there is a much more diversified range of supply
countries contributing to supply. Russia will contribute a significant proportion of
European gas requirements under any scenario because of its reserve position.
However, in Fully Competitive, the Russian share is limited to less than 35% and
more importantly the gas is produced by a wider range of producers because of the
assumed break up of Gazprom and independent gas producers can market their gas
directly to Europe.
European imports are currently dominated by three producers Gazprom, Sonatrach
and Statoil who control 84% of imports. The combined market share of these three
producers to decline to 69% in the Constrained case, 59% in Most Competive and
51% in Fully Competitive.
The UK would have a fairly well diversified supply portfolio in all scenarios with
Norway providing the greatest single source of supply providing between 42% and
45% of UK supply in 2015/16 compared with 6% in 2003. Reliance on Russian
supplies ranges from 4% in Fully Competitive to 14% in Constrained. However,
Russia is a major supplier to Europe in all scenarios and security of supply for Europe
as a whole will be highly dependent on Russian supply.
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Based on the above, what, if any, action (including influencing strategies) should
the UK Government consider in order to facilitate the development of competitive
gas markets?
What actions are needed by the EU and Regulatory Authorities in Member States?
Outline a series of options and recommendations both for the UK Government and
the EU and Regulatory Authorities in Member States
Outline a strategy for the UK Government for the implementation of the agreed
recommendations
8.1. Options and Recommendations
The possible options and recommendations are linked directly to the barriers to
competition and the changes required in key markets as described in section 5. For
each barrier and change required, options for action by the UK Government will be
considered together with its priority or value and finally its achievability. These are all
summarised in Table 67, 68 and 69 below. Each barrier and change required has been
given a short title and a code.
The changes required in the key markets can be divided into the EU area and the
Pipeline Supply Area, since the actions that the UK Government can undertake will
differ between the two areas. Direct action that the UK Government can take is
relatively limited since almost all the changes required are outside the UK. Much of
the actions, therefore, will be limited to influence and persuasion, although under
certain circumstances it may be possible in the future for direct legal action to be
taken under EU Competition Law.
8.1.1. EU Markets
Key Changes
A number of the recommended changes required, especially at the EU Wholesale
market level, go well beyond the Second Gas Directive and further than has been
suggested at the Madrid Forum. If these changes are to be implemented, therefore,
most, if not all, of the other countries in the EU and the European Commission will
have to be persuaded of the merits of the changes. This is particularly true of the first
4 in the EU Wholesale list, which deal with access to essential facilities. These cover:
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Market Carriage TPA and Capacity Availability - Introduce market carriage TPA
model to provide more flexibility in capacity booking including UIOLI, and allow
rolled in treatment for capacity expansions
Storage and Balancing - Presumption that all storage should be regulated TPA.
Simplified balancing regimes, with daily being the minimum balancing period
These are all considered to be a High priority with achievability being High or
Medium.
The only action which is in the direct control of the UK Government is the
recommendation to increase the importance of the UK as a transit country, since
planning permission can be granted for additional LNG terminals and developers can
be encouraged to seek sites in the UK. The clear intent of this, however, would be to
re-export any imports of gas to bring additional supplies to the EU market.
The remaining changes will all require a case to be made before the relevant parties
(EU governments and Commission).
The remaining 3 changes on the EU Wholesale deal with the issue of market power:
Spot Market and Hubs - Spot markets and hubs will develop once the conditions
for effective competition are in place
Some progress is already being made in these 3 areas and the recommendations here
generally are in line with existing EU policy. The main thrust for here would be to
intensify the existing policy.
In respect of the changes required in the EU Retail market, we would suggest that
these are of slightly less importance than the reforms in the EU Wholesale market.
The changes cover both market power and access to essential facilities:
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Information
While persuading the relevant parties of the case for some of these changes is
obviously important, the next steps, following agreement, would be to try and
implement the reforms. One of the major problems is the informational advantage
the incumbent gas companies have over the regulatory and competition authorities as
well as governments. There is also the presumption that the incumbents are innocent
until proven guilty. If progress is to be made the problem of informational advantage
and presumption of innocence need to be reversed.
As an example of this, the incumbents often argue that there is insufficient capacity
available on their systems to allow third parties to transport and hence supply gas, or
that there really is price competition but customers dont want to change supplier.
These issues need to be turned around so that the incumbents are required to prove
that all the capacity is being utilised and that there is real price competition. There is
at least, from our analysis, prima facie evidence of significant economic rent being
earned, particularly in the retail market. One method of getting the required
information would be to institute an EU wide benchmarking study for a number of
key areas:
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There are a number of features of the European gas market that may either
contravene the competition rules or be worth investigating. It would therefore be
useful to examine these issues in more detail.
Not Taking Gas Under Contract
Most gas in Europe is purchased under long term take-or-pay contracts. If the
contract volume is not taken in any period, the purchaser has to pay for the gas. These
payments are credited against future purchases when the gas is actually taken.
It is possible that not taking all the gas under a contract, when there a willing buyers
for it in the market be construed as limiting production.
Capacity Trading
One of the areas of concern is the difficulty of obtaining capacity rights to use EU
transmission systems. This is often because the existing gas suppliers have contracted
all of the existing capacity for themselves, leaving no capacity available to new
entrants. There are two key issues here. Firstly, were the arrangements for allocating
capacity fair and non-discriminatory? Secondly, is the lack of available unused
capacity on a secondary market an anti-competitive constraint?
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There is no restriction on which roads transit vehicles can use, and transit vehicles
can use the same roads as the indigenous population;
Where there are charges for the use of roads, the same tolls apply to all similar
vehicles.
These same principles should apply to gas networks. Gas transit should be sold on the
same terms and conditions as internal transportation.
New Investments
Regulators should have in place rules to ensure that an appropriate return is made on
new investment in networks. Provided these rules are in place there should be an
incentive to ensure that all network operators make the necessary investments to meet
future requirements, whether these are for the national market or for transit gas.
Providing the necessary framework is in place, then if the network operators fail to
provide sufficient capacity, could it be argued that they are limiting production?
Different Returns in Different Markets
The Competition rules suggest that applying dissimilar conditions for equivalent
transactions may be evidence of abuse of a dominant position.
Many utilities are now operating either as suppliers or transporters in more than one
country. Terms and conditions often vary between countries. Can one use
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Foreign Investment - Put in place legal and tax structure to encourage foreign
investment
The second set of changes required cover the area of access to infrastructure,
expanding capacity and diversification of sources of supply:
New Pipeline Connections - Promote the construction of new pipeline links and
try and reduce the influence of the incumbent producers
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Geopolitical Issues
In respect of trying to deal with the dominant producers / suppliers in the Pipeline
Supply area, the actions are more related to influencing them and their governments
and also negotiating reforms and restructuring of their gas industries. Clearly,
Gazprom is seen as a major factor affecting alternative supplies coming to the market,
whether they are from independent producers within Russia, or from other FSU
countries. Promoting attempts to supplement Gazprom and Russia, as outlined above,
will assist in bringing alternative supplies to the EU but reform within Russia will still
be important. Gazprom and Russia do require a significant amount of external
investment to develop the reserves and infrastructure to supply the growing EU
market. The funding of this investment by EU investors, the commercial banks and
multilaterals, such as the EBRD, could be linked to appropriate reforms in respect of
regulated TPA and removal of restrictions on independent producers.
The Energy Charter Treaty (ECT) is important in this respect as well. The ECT is
very clear on the importance of freedom of transit and non-discrimination.
Unfortunately Russia has yet to ratify the ECT in its parliament.
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EUW1
EUW2
EUW3
EUW4
EUW5
Title
Barrier
Changes Required
Change
Priority
Achievability
High
High
Competition Law
Initiate benchmarking study
High
Transit Regimes
High
High
High
Influence through EC
Information Publication
Harmonisation of TPA
in the EU
UK Government Action
Plan
Medium
Influence through EC
Initiate benchmarking study
Low (EU)
Influence through EC
Competition Law
High (UK)
Medium
High
EUW6
Low
High
Information Publication
EUW7
High
High
Competition Law
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Title
Barrier
Changes Required
UK Government Action
Plan
Change
Priority
Achievability
EUR1
Distribution TPA
Medium
High
Influence through EC
EUR2
High
High
Influence through EC
Competition Law
EUR3
Supplier Switching
Medium
High
EUR4
Unbundling of
Transportation and
Supply
Proper
legal
unbundling
of
transportation, supply and storage.
Privatisation of state owned businesses.
Cost reflective distribution charges to
eliminate
excess
profits
and
inefficiencies
High
High
Upstream Costs
EUR5
- 211-
Influence through EC
Influence through EC
Initiate Benchmarking study
Competition Law
Medium
Medium
www.energymarkets.eu.com
Title
Barrier
Changes Required
Change
PSP1
Dominant National
Producers
PSP2
Restrictions on
Independent Producers
UK Government Action
Plan
Priority
Achievability
Medium
Low
EU to negotiate restructuring
in return for investment
High
Medium
EU to negotiate restructuring
in return for investment
Enforce ECT
PSP3
Foreign Investment
High
Medium
EU to negotiate restructuring
in return for investment
PSW1
Regulated TPA
High
Medium
EU to negotiate restructuring
in return for investment
Enforce ECT
PSW2
Export Pipeline
Capacity
High
Medium
EU to negotiate restructuring
in return for investment
PSW3
New Pipeline
Connections
High
High
Encourage UK companies to
invest
PSW4
Gazprom Market
Control
Medium
Low
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LOW
EUW3 (EU)
MEDIUM
EUR1
EUR5
PSP1, PSW4
LOW
EUW6
HIGH
PRIORITY FOR REMOVAL OF BARRIERS
MEDIUM
The matrix is known as a GE9 matrix, which is described in more detail in Appendix
11. The appendix also uses a paired comparison analysis to rank each change required
to achieve an overall ranking of the importance and achievability of each change. This
is shown in Table 71.
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Code
Title
Change Required
EUW1
EUW5
PSW3
EUR4
Unbundling of Transportation
and Supply
EUW3(UK)
Transit Regimes
EUR2
EUW4
EUW2
PSW2
10
EUW7
11
PSP3
Foreign Investment
12
PSW1
Regulated TPA
13
PSW4
14
EUW3(EU)
Transit Regimes
15
PSP2
Restrictions on Independent
Producers
16
EUR1
Distribution TPA
17
PSP1
18
EUR3
Supplier Switching
19
EUR5
Upstream Costs
20
EUW6
Spot markets and hubs will develop once the conditions for
effective competition are in place
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Out of the top 10 changes required, 6 relate to the EU Wholesale market, focussing
particularly on access and availability of transmission capacity and the flexibility on
gas supplies both in terms of volumes and contractual terms. Changes in the EU Retail
market are of less importance, apart from the requirement to unbundle transportation
and supply and reforming the gas sales contracts to LDCs. In the Pipeline Supply area
the focus is very much on expanding pipeline capacity both in terms of diversification
through new connections and privatisation of existing pipelines.
It is perhaps not too surprising that 3 of the top 5 ranked changes relate to acesss to
and availability of capacity, effective gas release and unbundling, all of which were
seen as integral in the introduction of competition in the US, UK and Victoria in
Australia. In addition, the other 2 in the top 5 new pipeline connections and more
transit through the UK - are designed to increase the EUs diversity of supplies, also a
key factor in the US and the UK.
In trying to achieve these changes in the EU, where the UK Government cannot take
direct action, a key factor will be redressing the informational advantage the
incumbents have over regulators and governments, through a detailed and thorough
benchmarking study together with the aggressive use of EU competition law.
Alongside this a programme of influence and persuasion of the reforms required can
be undertaken at EU and national government level.
In the Pipeline Supply area, apart from promoting UK company involvement in
infrastrucuture developments, the strategy would be more concerned with negotiating
for reform within the producer and transit countries and implementation of the Energy
Charter Treaty.
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9. CONCLUSIONS
Defining a Competitive Market
In terms of defining what a competitive gas market is, two key areas were identified.
The first was open access to the essential gas facilities and second the issue of market
power. For the purposes of the analysis the gas market was divided into three distinct
markets the producer market, the wholesale market and the retail market and three
distinct geographies the EU25, plus accession and candidate countries, the Pipeline
Supply Area and the LNG Supply Area.
The combination of three markets and three geographies produces nine possible submarkets. Not all of these, however, are important in the context of introducing full
competition into the EU gas market. Three markets initially were considered to be of
Low or Medium to Low importance the Pipeline Supply and LNG Supply retail
markets and the LNG Supply wholesale market. On further analysis, the EU
production market will assume much less importance as UK production in particular
declines, leaving the Netherlands as the only major EU producer. While some market
reforms would still be desirable, in terms of their importance, they would not be likely
to have a significant impact. Similarly the introduction of competition into each
individual LNG Supply production market was not considered to be critical since the
LNG suppliers are beginning to compete against each other for access to the EU
market and more spot trades are being undertaken, increasingly at spot market prices,
creating a competitive market for LNG supply as a whole. The four key sub-markets
where reforms would be more critical, therefore, were the EU wholesale and retail
markets and the Pipeline Supply production and wholesale markets.
International Experience
The US, UK and Victoria in Australia provided examples of how competitive markets
have developed. A common theme in all these markets was the development of the
underlying market structure. This involved effective gas release on both the purchase
side, from producers, and also on the sales to end users, easy access to and availability
of transportation capacity and the unbundling of transportation, supply and storage at
least at the legal (or physical) level and for the most part at the ownership level as
well. Market size and diversity was helpful in the context of the US and the UK, while
in the small Victoria market, diversity was created through privatisation and
restructuring. A strong commitment and fervour for the introduction of competition
was also a common theme for the regulatory and governmental authorities. It was also
concluded that in the US and the UK, the introduction of competition at the retail
level was not integral in the development of a competitive market, while in the much
smaller market in Victoria it was a key factor. In all three markets, however, the focus
was very much on getting the structure of the wholesale market correct.
Current Conditions in Key Markets
Market dominance continues to be a major issue in the EU wholesale markets. Many
national markets continue to be dominated by the incumbent gas company. We are
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also seeing the advent of powerful pan-European gas and power companies with high
profile strategies based on acquisition and investment programmes aimed at
controlling large sections of the physical infrastructure and access to end users via
ownership of distribution companies. The implementation of the 2nd Gas Directive
may go some way towards limiting any market dominance but on its own we do not
believe it goes far enough. Major producers are also trying to establish market
positions but they are somewhat behind the gas and power companies in terms of
sales. Whilst there are some banks trading, notably absent from the market are the
independent wholesalers such as Enron, Dynegy and other US companies who were
trying to enter the market a few years ago.
Legal unbundling of transportation, storage and supply has largely been implemented
but how effective this has been in creating a level playing field for new entrants is
uncertain. Gas release schemes have also been introduced, which represents some
progress, but their real effectivenes is uncertain. Better progress is being made in
respect of gas contracts with more flexibility being introduced, the removal of
destination clauses and the German cartel office declaring 75% of the 750 contracts
between the TSOs and LDCs as anti-competitive.
The main issues regarding third party access relate to the allocation of capacity. Many
TSOs operate a first come first served system which effectively denies access to
capacity to new entrants. Transit is generally treated separately from domestic
transportation. Capacity in transit lines is frequently booked up under long term
contracts and there are cross-subsidies between transit and domestic charges. Analysis
suggests that cross-border capacity is generally under utilised, except maybe into
Italy, and that there are also large discrepancies between transmission tariffs within
EU countries for transportation of similar loads and distances. Whilst relatively high
tariffs may be justifiable in growth markets where there is an intensive capital
requirement, there is less justification for differences among more mature and well
established gas markets where costs should be broadly similar. It is certainly noticable
that tariffs are lower where regulators have taken an active role in forcing out
inefficiency and economic rent than in countries where independent regulators have
been less forceful in regulating tariffs.
Balancing regimes also differ between countries with hourly and daily balancing and
evidence of overly penal charges with considerable scope for network operators to
adopt a regime that implicitly favours their associated supply business. Progress is
being made on the publishing of conditions for access to both LNG terminals and
storage facilities with a mixture of regulated and negotiated TPA. The issue of
network development under a TPA regime is being dealt with largely on an ad hoc
basis. The UK and Italy have better developed systems based on rolled in rates but
joint ventures, open seasons and applications for TPA exemptions are all being used.
A more consistent, coherent approach across the EU could be useful.
At the institutional level the regulatory authorities in some countries would appear to
be more proactive than in other countries, particularly where state ownership is still
important. Germany has only recently established a regulator but the cartel office has
been active.
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The process of introducing competition to the retail sector is in its infancy in Europe,
outside the UK. Experience so far shows that just changing the law to allow
consumers to change supplier does not necessarily lead to effective competition.
Many companies are finding it difficult to enter certain markets and there has been a
low rate of customer switching overall. However in Spain there has been some
significant switching of industrial and commercial customers amid a situation of over
supply and a price war. In Italy the Letta decree is forcing down the market share of
Eni with Edison proving to be the main competitor.
Apart from access to infrastructure and gas supplies, adequate systems are also
required, at the LDC level, to ensure smooth switching process and to ensure that
information flows are maintained to support proper customer billing. In addition it
should be noted that a large proportion of customers bills are for components which
are beyond the control of the gas supplier (gas and transportation costs and taxes).
This makes it difficult for new entrants to undercut the prices offered by the
incumbent company and makes the financial advantage of switching questionable in
relation to the potential problems and worries that switching can bring.
Analysis by EML indicates prima facie evidence of a significant amount of
inefficiency and/or economic rent in the distribution and supply sector in particular,
making the cross subsidisation of the supply side by the incumbents pipes business
much easier to achieve. This would indicate that distribution is yet to come under
effective regulatory control and supply to small users (households and small
industrials) has not been subjected to competitive pressure.
Europe (EU25 plus Romania, Bulgaria and Turkey) imported just over half its gas
supplies in 2003. Russia accounted for half of the imports, Norway 25% and Algeria
20%. Russia and Algeria will increase the imports in the next 10 years but new
pipeline supplies are expected from Libya, Iran and the Former Soviet Union
countries in the Caspian Sea area (Turkmenistan, Azerbaijan, Kazakhstan and
Uzbekistan). Europe will remain highly dependent on gas flowing from Russia
through the Ukraine to Slovakia although alternative routes through Belarus and
Poland (Yamal) and direct to Turkey under the Black Sea (Bluestream) are now
flowing gas with volumes expected to increase over the next few years. A third route
to Germany under the Baltic Sea (North European Gas Pipeline) is also planned
although the timing of this project remains subject to uncertainty.
Gazprom dominates Russian production at the moment but a decline is forecast and
Gazprom will need to develop other deposits mainly in Western Siberia. Independent
production has doubled between 1994 and 2004 to just under 100 bcm per year.
Gazprom has been trying to buy up some of the independent producers and exercises
effective control over all exports of gas.
Algerian exports to Europe were 55 bcm in 2003 30 bcm by pipeline and 25 bcm by
LNG. Pipeline routes are to Italy and Spain (via Morocco) but the Medgaz pipeline,
which is under construction, will deliver gas directly to Almeria in Spain. Sonatrach
dominates the gas industry and although foreign companies area allowed to participate
they may do so only in partnertship with Sonatrach. However, Sonatrachs share is
planned to fall as part of the reform to encourage more foreign investment.
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Norway is the second largest importer into the EU market and recent reforms have led
to the break up of the GFU and producers selling their gas directly. The offshore
transportation regime has also been reformed by the creation Gassco (operator) and
Gassled (owner) with open access and an entry exit methodology.
Barriers to Competition
Some 24 barriers to competition in the key markets were identified as part of the
analysis. These are summarised in Table 72 below
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Market Sector
Production
EU
Market Power:
Wholesale
Market Power:
LNG Supply
Market Power:
Market Power:
N/A
N/A
Market Power:
Pipeline
Supply
Retail
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Alternative Scenarios
Table 73 summarises the approximate breakdown of the UK gas price under each of
the alternative scenarios Constrained, Most Competitive and Fully Competitive.
Table 73 Summary of UK Spot Prices 2015/16
P/Therm Real 2004
Prices
Constrained Case
Most Competitive
Most Comp Sensitivity
Fully Competitive
UK Spot Price
Q1
32.0
22.2
23.7
17.3
Q2
33.6
22.2
23.7
18.7
Q3
30.1
18.7
20.3
15.2
Q4
30.1
18.7
20.2
15.2
Average
31.5
20.4
22.0
16.6
The Constrained Case results in a UK spot price of 31.5 p/therm set by arbitrage with
USA in the LNG market. On a range of reasonable assumptions for US prices the UK
spot price could fall within a range of 27.0 to 36.4 p/therm. Under this scenario many
European countries spot prices are closely linked with US prices, since US prices are
the main driver of LNG spot prices, which in turn are the marginal supplier to much
of Europe. European contract gas prices would remain linked to oil prices in the
Constrained case. A +/- $10bbl change in oil prices could impact contract prices, and
hence weighted average cost of gas in continental Europe, by up to +/- 6 p/therm.
It is important for Europe to secure adequate low cost supplies from Russia, FSU and
other sources. The alternative is that potentially higher prices will result from Europe
competing with the US for LNG supplies. The Most Competitive case would bring in
sufficient supplies to Europe to lower prices in general. For the UK the gas price
would be around 20.4 p/therm, or 11.1 p/therm less than in constrained case.
Once access to adequate low cost gas is secured the greatest scope for containing gas
prices lies in reducing transportation charges. It is particularly important for the UK
placed almost at the end of the east-west supply chain that access to and the pricing of
transportation along the supply route is secured at an efficient cost. In the Most
Competitive Case the general pattern is for prices to get higher the further west in
Europe the country is. Price differentials between countries in this scenario will in
considerable part be driven by transportation tariffs but will also be affected by
contractual and physical constraints on the pipeline systems.
The Fully Competitive Case would not only help contain gas prices, by greater
pipeline capacities and increased liberalisation and competition in Europe, but also
improve security of supply to Europe because there is a much more diversified range
of supply countries contributing to supply. Russia will contribute a significant
proportion of European gas requirements under any scenario because of its reserve
position. However, in Fully Competitive, the Russian share is limited to less than 35%
and more importantly the gas is produced by a wider range of producers because of
the assumed break up of Gazprom and independent gas producers can market their gas
directly to Europe.
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Code
Title
Change Required
EUW1
EUW5
PSW3
EUR4
Unbundling of Transportation
and Supply
EUW3(UK)
Transit Regimes
EUR2
EUW4
EUW2
PSW2
10
EUW7
11
PSP3
Foreign Investment
12
PSW1
Regulated TPA
13
PSW4
14
EUW3(EU)
Transit Regimes
15
PSP2
Restrictions on Independent
Producers
16
EUR1
Distribution TPA
17
PSP1
18
EUR3
Supplier Switching
19
EUR5
Upstream Costs
20
EUW6
Spot markets and hubs will develop once the conditions for
effective competition are in place
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