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Energy Policy 27 (1999) 17—24 European natural gas: market forces will bring about competition in any case Marian Radetzki Professor of Economics, University of Luleas , Sweden, President of SNS Energy, PO Box 5629, 114 86 Stockholm, Sweden Abstract The purpose is to analyze the emergent commercial forces that promote increasing competition in the European natural gas market. The paper begins by describing the traditional market organization, along with its monopolistic elements and inflexibilities. It goes on to illuminate the destabilizing frustration among producers with fast growing supply potential, caused by the limited growth in demand under prevailing market arrangements. Two emergent commercial forces promoting competition are then dealt with. The first is the increasingly widespread effort by large consumers to procure gas on improved terms by circumventing the national transmission companies. The important role played by Wingas in this respect is reviewed in detail. The second is the impending impact of the Interconnector, a gas pipe between the UK and the continent, which becomes operational during 1998. The paper argues that these commercial developments are undermining existing monopolies and will bring about increasing competition, even if the formal regulatory regime stays intact. ( 1999 Elsevier Science Ltd. All rights reserved. Introduction nature of the gas market since the early 1990s, that competition is popping up in a number of unexpected A ministerial decision at the European Union level, places, forcing change on existing agents and institutions, reached at the end of 1997, was to adopt a European Gas and that these developments will continue and gain force, Directive. The Directive is being hailed as an instrument irrespective of what happens to formal deregulation, ab- of critical significance for the introduction of some com- dication of state ownership, and political action to sup- petition into an industry characterized by substantial press commercial or statutory monopolies. In this elements of monopoly, public ownership and far-reach- perspective, the efforts to deregulate can be seen as ing state intervention. Its provisions are seen as tools that a rearguard action by politicians recognizing the inevit- will assure greater flexibility and a more efficiently func- ability of what is already taking place, and the Directive tioning gas market. can at best be seen as a lubricant to the process. The Directive has been adopted as a compromise, in The paper proceeds as follows. Section 2 describes the the face of opposition from those who have hitherto traditional structure of the (West) European gas market, reaped the benefits of monopoly. Its ultimate content, and discusses the reasons for the extended perseverance and implications, remain to be seen, for it has yet to pass of this structure. Section 3 analyzes the increasing through the European Parliament which may propose restlessness and frustrations felt by many agents whose amendments, and will then only gradually be enacted goals and ambitions had been thwarted by the rigid into national laws. A companion paper (Percebois, market. It is argued that these frustrations are destabiliz- 1998) nevertheless makes an attempt to clarify the ing the prevailing arrangements. Section 4 displays Directive’s likely impact on the European gas market a series of commercial actions, caused by these frustra- developments. tions, but also by evolving external circumstances, that The present paper adopts a different perspective. It are gradually undermining the prevailing gas market argues that market forces have undermined the staid structure, and bring about an increasing degree of 0301-4215/99/$—See front matter ( 1999 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 9 8 ) 0 0 0 4 0 - 8 18 M. Radetzki / Energy Policy 27 (1999) 17—24 competition. It is shown how even the most protected monopolies are jumping on the competitive bandwagon once they become aware that existing arrangements are crumbling. Section 5 summarizes the discussion, and briefly points to the likely implications of an increasingly competitive market. It also draws attention to some recent actions by leading gas suppliers to the European market, which, if permitted to come to fruition, might reverse the trend towards competition and help reestab- lish market power by the few. The traditional gas market arrangements in Fig. 1. Main features of the traditional West European gas market Western Europe1 The gas market in Western Europe is of relatively investments of a pipeline network to supply the Euro- recent origin. It emerged on a significant scale only in the pean market. late 1960s, after the large Dutch Groningen field went With these preconditions in view, the structure of the into production. For at least 10 years, until the late 1970s, emergent market (Radetzki, 1990) depicted in Figure 1, when gas from Algeria, Norway and the USSR started to comes as no great surprise. At the center were the nation- flow to Western European consumers in substantial al transmission companies. Most of these, eg Gaz de quantities, the Dutch exports constituted a major pro- France, Distrigas in Belgium and SNAM in Italy, were portion of total supply. state-owned statutory monopolies insofar as imports and Several factors explain the structure of the emergent onward sales were concerned. Others, like Ruhrgas in West European gas market in the 1970s and 1980s. This Germany, were privately owned, predominantly by en- was the OPEC heyday, a period during which the energy ergy companies like the oil multinationals, or Ruhrkohle, sector became heavily politicized, and security of supply and held very dominant positions in their national gas was on top of the political agenda. Political involvement markets. was seen to be essential for regulation of supplies believed The upstream supply too, was heavily concentrated to be scarce, and for handling the relationships with and had a dominant government ownership. In Algeria producers like Algeria and the USSR, deemed to be and the USSR, of course, gas exports were an integral politically unstable. Oil prices were at historical peaks, part of the government. In Norway, exports were tightly and so were, by contagion, the prices of other energy coordinated by a triumvirate, comprising Statoil, the products. The gas projects under development from state-owned petroleum company, and junior partners, which Europe was to be supplied, were huge, and each Norsk Hydro and Saga, in which the government held constituted a very significant addition to the small over- strategic ownership positions too. And Gasunie, the sup- all market. Long-term contracts between sizable and plier of gas produced in the Netherlands, half-owned by well-established parties, with secure prices, were seen as the government, held statutory monopolies in all direc- essential to assure the investments in gas production and tions: as exporter, importer and wholesale trader. transport, and the demand for gas. The multinational oil The public involvement in most national transmission companies took a lead in the development of gas produc- companies permitted a variety of government interven- tion facilities in the Netherlands and the North Sea. tions with different purposes in view. For instance, there These companies, along with state owned energy enter- was an implicit political understanding that dependence prises in Europe, were also heavily involved in the huge on imports from the USSR must be constrained. Obversely, the governments of France and Italy encour- aged their transmission companies to pay excessive pri- ces for Algerian gas as a kind of implicit foreign aid Until about 1990, East European gas supply was dominated by (Mossavar-Rahmani et al, 1987). Large-scale purchases barter contracts with the USSR. These arrangements are of little rel- evance for the present account. In more recent years, the East European of gas formed part of national trade policies, with regular gas markets have become increasingly integrated with those in Western requirements for counter-trade, as in the case of the Europe, to form the European gas market under investigation in this French agreement in 1987 to import Norwegian gas from paper. With the exception of some erratic exports from Norway, the the Troll field (Estrada et al, 1988). UK market remained, until the present, secluded from the rest of Europe. For this reason, the UK too, is not dealt with in the present section. For a fuller account of the antecedents of the West European gas In some cases, the statutory monopoly rights did not apply to market, see Heren (1998). imports for own use. M. Radetzki / Energy Policy 27 (1999) 17—24 19 The powerful position of the national transmission Emerging frustrations companies was widely regarded by the exporters as a guarantee that the purchase obligations under long- The decision by Saudiarabia and other Middle East oil term contracts would be fulfilled. Exporters at the time producers in early 1986 to allow oil prices to fall by about were hesitant about launching large-scale production half led to a dramatic and uncomfortable decline in the investments, until such guarantees had been obtained. gas rent, and, even more important, to a fundamental The strength of the national transmission companies was change in the perspective on the European energy also regarded as essential to ensure sufficient bargaining market. stamina for obtaining favorable import prices. Import prices of gas to Western Europe (CIF import- The ownership and sole access to pipes by the national ing country’s border) declined from an average of transmission companies (and local distributors), pro- $3.7/mmBTU in 1984—1986 to $2.3 in 1987—1989, or by vided these agents with considerable market power vis- almost 40% (BP Review of ¼orld Gas, 1991), and have a-vis their customers. Monopolistic price discrimination remained at the lower level for most of the time during became the convention, with each customer category the 1990s.

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