Gas Market Reforms/Liberalisation and Regulations in Europe

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Gas Market Reforms/Liberalisation and Regulations
in Europe

• René Snijder
• International Gas Union (IGU)
• 3rd ASEAN3 Natural Gas Forum
• Kuala Lumpur, 19th January 2006

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INTERNATIONAL GAS UNIONCovers gt95 of World Gas
Sales Spokesman of the Gas Industry
www.IGU.org
Membership from 67 countries and 20 Associated
Members
Non Members
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Special project on Regulation

• High Level Workshops organized by IGU
• Amsterdam June 2005
• Florence (FSR) Sept 2005
• Washington (FERC) Dec 2005
• Paris (IEA) Jan 2006
• Kuala Lumpur March2006?
• Results
• IGU/Clingendael report to be presented at the
• Amsterdam World Gas Conference June 2006
• Strategic Round Table, moderator Dieter Helm
• Presented later at World Regulatory Forum 2006

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The Themes for Today

• Emerging global gas market
• EU policy and legislation
• EU regulatory instruments
• Structural changes in the Industry
• Status of liberalization
• Issues for debate 2006/2007

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World Gas Reserves Proven 180 Trillion m3R/P
ratio 66 years
48
1000 bcm
73
5
7
Europe
Russia
North America
14
Middle East
14
Asia Pacific Region
7
Africa
South and Central America
Data BP Statistical Review 2005
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Rise in European imports
Demand
Increasing demand and decreasing production
Source Blauwe boek 2005
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Middle East LNGSetting a New Global Cost
Benchmark ( per MMBtu)
Source Cambridge Energy Research
Associates. 31001-10
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Competing for Supply?

• Consumers and producers seek diversification
• Snøvit LNG to USA instead of EU?
• Canadian LNG to Asia
  USA?
• Shtokman to USA?
  EU?
• Central Asian gas to Asia Europe?
  
• Russian gas piped to China EU?
• Trinidad/Venezuela to EU USA?
• Algerian gas to USA
  EU?
• Qatar to EU and USA
  Asia?
• Iranian gas to India
  EU?
• Marginal transportation cost differences

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The world gas market

• The world gas market is emerging
• Regions are competing for supplies (sellers
  market)
• High prices lead to many new initiatives
• Regulatory uncertainties are being reduced
  (US,EU)
• Convergence of prices due to LNG
• A return to balanced markets soon?
• New supplies have lead times of many years
• Regional boom bust, destroying investor
  confidence?
• Regulatory competition might develop?
• The gas chain still requires coordination (but
  how?)
• Energy policy in support of security of supply
• Switching away from gas

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The Themes for Today

• Emerging global gas market
• EU policy and legislation
• EU regulatory instruments
• Structural changes in the Industry
• Status of liberalization
• Issues for debate 2006/2007

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EU energy policy Three
pillars
Environment
Competitiveness
Security of supply
Market where possible, government when necessary
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UK Type Market Design (role
model)

• Still most competitive gas commodity market in EU
• But till recently specific structure compared to
  EU
• Indigenous production met domestic demand
• Excess production and system capacity
• Limited interconnections with other TSOs
• One integrated transmission/distribution system
• But UK now import dependent, like continental EU
• Seeking adaptations to the regulatory system
• Energy Policy back, high on political agenda
• Align regulation with market developments

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Paradigm change?

• The competitive gas market the main EU priority
• Enhances security of supply because
• the liberalised and liquid open gas market
  will in the end provide all necessary signals for
  the investors
• (realistic expectation?)
• Supports the environment because
• Market based instruments for energy savings
  and emission trading/reduction will help to meet
  Kyoto
• (sufficient?)
• Recently Energy Policy fully back on the Agenda

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The Themes for Today

• Emerging global gas market
• EU policy and legislation
• EU regulatory instruments
• Structural changes in the Industry
• Status of liberalization
• Issues for debate 2006/2007

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EU regulatory framework (gas) simplified scheme
EU council
nationalimplementation(subsidiary)
European Parliament
EU commission
EUchanges toregulation
NEA
DGTREN
DGCOMP
ERGEG(CEER)
National regulators (govt regulators)
Madrid Forum
(National) MarketSurveillance(competition law)
Commission StakeholdersMember StatesRegulators
Abuse of market power
regulation
voluntary agreements
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EU policy and implementation(mile stones for the
gas industry)

• 1989 White Book (Delors)
• 1991 Draft electricity and gas directive failed
• 1996 Electricity directive
  EC/96/92
• 1998 Gas directive
  EC/98/30
• 2002 Green paper on Security COM/2002/321
• 2003 2nd gas directive
  EC/2003/55
• 2004 Security of supply directive EC/2004/67
• 2005 Gas regulation EC/1175/2005
• 2005 Storage guideline ERGEG GGPSSO
• 2005 Sector Inquiry DGCOMP

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1st and 2nd EU Gas Directives(1998 and 2003)

• 1st EU Directive 1998
• Separate gas directive (2 years behind
  electricity)
• Gradual market opening for larger customers
• Administrative unbundling network/trading
• Negotiated TPA
• 2nd EU Directive 2003
• Full market opening 2007
• Legal unbundling TSO
• Regulated TPA for TSO (storage also nTPA)
• Harmonised responsibilities regulatory bodies
• TPA exemptions for major new investments

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Gas regulation 2005

• Based on 2nd Directive further detailing
• Entry/Exit for tariff and capacity
• Transparency requirements TSO
• Congestion management TSO
• Unbundling requirements TSO
• Further detailing possible at EU level

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Storage Guidelines(GGPSSO)Voluntary Madrid
agreement

• Based on 2nd Directive further detailing
• Defining capacity to be offered under TPA
• Defining services to be offered (unbundled)
• Transparency requirements
• Congestion management and trading
• Interoperability with networks
• Will it remain a voluntary agreement?

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Security of supply directive

• Coordinating Committee when severe disruptions
  occur (met 4/1/06 for 2nd time)
• Obligation on Member States to report national
  security of supply measures
• DGTREN will monitor
• Directive in line with the limited mandate on
• executive powers for the Commission
• (no energy chapter yet in Treaty)

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The Themes for Today

• Emerging global gas market
• EU policy and legislation
• EU regulatory instruments
• Structural changes in the Industry
• Status of liberalization
• Issues for debate 2006/2007

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Mergers and acquisitions

• EU incumbents lost their captive markets, thus
• Seek economies of scale (horizontal mergers)
• Seek economies of scope (gas/electricity)
• Seek vertical integration (upstream)
• Seek a wider portfolio (diversification)
• Cross borders for market expansion
• Reject ownership unbundling (loss of purchasing
  power)
• Merging towards a few EU champions (oligopolies?)

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Increasing cross-border activities
Examples

• Gas distribution assets in the UK US
• LNG terminal

• Transmission pipes in Slovakia, Lithuania,
  Latvia, Estonia and Romania
• MND (Czech R.) involved in storage
• Pending majority stake in Hungarian MOL

• BBL
• Gasunie
• Fluxys
• E.ON/Ruhrgas

• BBL participation (20 stake)
• UK Gas Management Services

• NEGP
• Gazprom
• E.On Ruhrgas
• Wingas

• Transmission and/ or distribution assets in
  Germany, Belgium, Slovakia, Russia, Germany,
  Hungary, Mexico, Canada, Italy and India

• Involved in storage in o.a. Austria and the UK

• Interconnector
• Amerada Hess BP
• BG ConocoPhillips
• Distrigas ENI
• E.ON/Ruhrgas Gazprom
• International Power Total

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Investments committed/planned
Pipeline planned and under construction
Firm planned
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25
55
LNG
Planned Firm

5



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Size in BCM/y
x

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LNG

15



All projects require 20-30 billion investments




10
7
LNG
8
5
8
Size can vary significantly per source
construction also often modular
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Investments in new supplies

• Will the EU gas chains become too fragmented
• in the future due to regulation to coordinate
• timely investments?
• What coordination mechanisms are still needed
• Commercial LT contracts, in a revised form?
• Vertical upstream integration?
• Major players for portfolio management and
  negotiating power?
• Standard exemptions from TPA for major new
  investments
• What role for the governments/EU?

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The Themes for Today

• Emerging global gas market
• EU policy and legislation
• EU regulatory instruments
• Structural changes in the Industry
• Status of liberalization
• Issues for debate 2006/2007

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Annual EU Benchmarking
Commission (ERGEG)

• 2005 Benchmarking exercise by EU
• 2nd Directive not yet fully implemented
• Disappointing progress in the markets
• But no clear measurable objectives set!

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Sector Inquiry DGCOMP

• First firm results sector inquiry 16th February
  2006
• Initial findings confirmed requirements for
  action
• Market concentration (oligopoly)
• Vertical foreclosure (long term contracts)
• Lack of market integration (cross border trade)
• Lack of transparency (available capacities)
• Price issues (o.a. oil indexation)
• DGCOMP wants 2/3 rules changed for nat. mergers

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The Themes for Today

• Emerging global gas market
• EU policy and legislation
• EU regulatory instruments
• Structural changes in the Industry
• Status of liberalization
• Issues for debate 2006/2007

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More major EU legislation?

• Sector inquiry will set the scene
• End of 2006 decision on third package
• Its content unknown, likely issues are
• Further (ownership?) unbundling
• Release of LT contracted volumes?
• Capacity release, because of congestion?
• Standards for switching?

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Value Chain Across Borders(Market Power)
Production
ConsumerMarket
Transit
PolicyandRegulations
PolicyandRegulations
PolicyandRegulations
WTO, Treaties, compatible regulation
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Effective and efficient regulation rather an
Art than a Science

• Despite liberalisation and the emerging
• global market, energy remains (geo)politics
• Regulation that is not based on realistic
• market behaviour, will fail to meet the energy
• policy objectives
• Regulation has to be customer oriented
• and at the same time investor friendly,
• balancing short and long term interests

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See you in Amsterdam!

• 23rd World Gas Conference and Exhibition
• June 5 9 2006
• www.igu.org