OXFORD INSTITUTE FOR ENERGY STUDIES

Natural Gas Sector Reform in Europe: an overview

Professor Jonathan Stern Director of Gas Research Oxford Institute for Energy Studies

Workshop “Natural Gas Liberalization in Germany: Kick-start or Dead End?” Berlin, September 15, 2006 1

OXFORD INSTITUTE FOR ENERGY STUDIES

OIES Natural Gas Research Programme WHO WE ARE: a gas research programme located at an independent academic research institute in Oxford*, specialising in conventional energy research WHO WE ARE NOT: z

consultants

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sellers of exclusive, high price business reports

WHAT WE PRODUCE: independent research on national and international gas issues Information about our programme and its publications can be found on our website: http://www.oxfordenergy.org/gasprog.shtml *Oxford Institute for Energy Studies is an educational charity

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OXFORD INSTITUTE FOR ENERGY STUDIES

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Research Programme: sample publications Gas Prices in the UK: Markets and Insecurity of Supply*, Philip Wright Future Natural Gas Demand in Europe – the importance of the power sector, Anouk Honoré The Future of Russian Gas and Gazprom*, Jonathan Stern Pricing and Demand for LNG in China, Akira Miyamoto & Chikako Ishiguro A Global LNG Market: is it likely and if so, when? James T Jensen The Gas Exporting Countries Forum: is it really an OPEC for gas? Hadi Hallouche *published by OUP, others free to download

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OXFORD INSTITUTE FOR ENERGY STUDIES

Research Programme: work in progress z

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Liberalisation of the Turkish Gas Market: progress and problems, Yesim Akcollu The Potential Contribution of Natural Gas to Sustainable Development in South Eastern Europe, Aleksandar Kovacevic The New Security Environment for European Gas Jonathan Stern Gas and Power in Southern Europe - Iberian Peninsula and Italy, Anouk Honore US Natural Gas Prices: scenarios to 2015, Michelle Foss The Evolution of Gas Trading in the UK, Patrick Heather Algeria’s Gas Future, Hadi Hallouche 4

OXFORD INSTITUTE FOR ENERGY STUDIES

Gas Sector Reform: an unpromising future?

Nearly 20 years after the idea was first advanced and 8 years after the first Directive was approved, where does Europe stand: z on liberalisation and competition z on mergers and market concentration

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OXFORD INSTITUTE FOR ENERGY STUDIES

Gas Sector Reform According to DG COMP: preliminary conclusions (11/2005) z

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MARKET CONCENTRATION: incumbents remain dominant in their national markets largely controlling production/imports VERTICAL FORECLOSURE: limited liquidity because of long term vertical contracts denies new entrants long and short term gas supply INSUFFICIENT MARKET INTEGRATION: cross border sales are limited by incumbents’ hesitancy + lack of capacity in cross border pipelines TRANPARENCY: lack of frequent, reliable information to facilitate access POSSIBLE ANTI-COMPETITIVE EFFECTS OF: traditional market value/oil linked price formulae 6

OXFORD INSTITUTE FOR ENERGY STUDIES

Gas and Electricity Utilities: from ““National National Champions” League” Champions ” to ““Champions Champions League ”

THE CHAMPIONS LEAGUE eg: E.ON/ Ruhrgas (+ Endesa?), RWE, EdF, GdF/Suez, ENI, Enel THE UEFA CUP eg: Vattenfall, Centrica, Gas Natural THE NATIONAL LEAGUES “Champions League” companies face competition in their own markets, but are so large and financially powerful that their position is very difficult to challenge – they will always be “winners”. The gap between them and the others is so large that only mergers can offer promotion.

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OXFORD INSTITUTE FOR ENERGY STUDIES

Weak Policy, Weak Regulation and Champions League Market Power has: z z

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Limited the scope for competition Largely prevented any significant new entrants Stifled the emergence of gas to gas pricing and hence the development of exchanges The current questions are: • does any of this matter? • if it does, can anything be done? 8

OXFORD INSTITUTE FOR ENERGY STUDIES

Different Views on Whether Energy Reform Matters YES: z For “big picture” EU economic growth YES z At a time of high energy prices, anything which can reduce prices is good z For national governments – yes; especially those with high prices NO: z Despite what the British say, energy prices are not crucial to competitiveness z “Reform” has been replaced on the energy agenda by “security” and “sustainability” (carbon) issues

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OXFORD INSTITUTE FOR ENERGY STUDIES

If Energy Reform Matters: what can be done? “BIG IDEAS” – major change: z Ownership unbundling z “Break-up” of Champions League companies z A European super-regulator

Not “new” ideas, not acceptable to many member states, not within the competence of Brussels(?) “BUSINESS AS USUAL” – incremental change: z Gradual improvement of TPA and increase in competition leading to.. z more trading and development of exchanges z Improve transparency, contractual rigidity z Focus on regulatory detail: storage, quality issues 10