THE ROLE OF A MARKET ENABLING INFRASTRUCTURE COMPANY LIKE GASUNIE FOR THE EUROPEAN MARKET Gerard van Pijkeren Katharina Ballmann N.V. Nederlandse Gasunie Key words: unbundling, strategy, integrated company Executive Summary Within a period of four years time the N.V. Nederlandse Gasunie has transformed itself from an integrated Dutch gas sale, trading and transport company to a European infrastructure company with newly built and acquainted assets, that participates in major infrastructure projects in Europe. Gasunie has become the first truly independent cross border gas infrastructure company in continental Europe, purely focussed on facilitating shippers and traders with transport of gas volumes, capacities and quality providing services with its infrastructure assets only. Background In 2005 the integrated company was split into a national regulated infrastructure company (still named) N.V. Nederlandse Gasunie and an international trading and gas sales company GasTerra. The integrated company was an example of a typical Dutch approach on how to deal with the large natural gas resources that were found in the sixties of the 20th century. The public-private cooperation between the Dutch state and Shell and Exxon (together shareholders of the former N.V. Nederlandse Gasunie) combined public interest on the one hand and technical capabilities and business knowledge on the other hand. This cooperation lasted for more than 40 years and resulted in a responsible approach for the optimal exploration of the Dutch natural gas resources (like e.g. the small field policy). The liberalisation of the European Energy market resulted in 2005 in the unbundling of the N.V. Nederlandse Gasunie. Introduction The aim of the paper is to describe the position and strategy of Gasunie in the emerging integrated gas market in Europe and the relevance of infrastructure companies like Gasunie for the European gas market. The paper elaborates on why and how Gasunie as one of the few independent infrastructure companies has established a strategy that could become successful. It will become clear that in fact the (semi) non regulated asset developments are paramount in Gasunie’s strategy to facilitate and open up the market. Furthermore the paper will assess the hurdles and success factors for the further development of the European gas market and its infrastructure company integrating the sustainable opportunities and threats. This year we are celebrating the 50th anniversary of the Groningen gas field. This onshore gas field with a size of 2800 billion m3 of natural gas has changed the history of the Netherlands and has greatly influenced the early development of a European gas market. When the gas field was discovered in 1959 by NAM (a 50/50 joint venture of Shell and ExxonMobil) the Dutch state developed (together with Shell and Exxon) plans to market this gas. As a result of this in 1963 N.V. Nederlandse Gasunie was founded to market and transport the natural gas. After an easy and swift gasification of the Netherlands (>98% of the households were connected to gas) in the sixties, Gasunie was an example for all other supplies in the European region as it exported to neighbouring countries, with deliveries to Germany, Belgium, France, Switzerland and Italy. Gas sales grew to more than 80 bln m3/year and the profits of the Groningen field had a large impact on the Dutch economy and society. Over the years Gasunie developed a transportation grid with a length of 12000 km entirely located in the Netherlands. Now with the acquisition of the German BEB network in 2007 with additional 3100 km Gasunie is one of the largest pipeline operators in Europe. The unbundling process in Europe, as initiated in the United Kingdom, became legally effective in 2005 when the Dutch government decided as a matter of principle to split N.V. Nederlandse Gasunie into the gas trading arm (now called Gasterra) and a separate infrastructure company Gasunie. After the splitting of Gasunie, although being the larger of the two remaining companies with regard to number of people working, the turnover of the infrastructure company was only a small fraction of the turnover of the trading company. Also the area of operations was much more limited. From being a large international player (in the “champion’s league” of the gas sales and trading business) the new Gasunie became only a “national champion” in gas transport. Primary driver of the changing energy markets in Europe was the liberalization process. The question was: could Gasunie as a “newly born” national oriented independent infrastructure company within this regulatory context establish a strategy that will support Gasunie’s ambition to grow and to become one of the prime infrastructure movers in the European gas market? Regulatory Developments in the European gas market The first General gas directives were adopted in the late nineties at the initiative of the European Commission (EC) to develop regulatory rules and procedures to establish a truly- cross border internal energy market. Because the gas markets were very much nationally organized and were widely varying in the conditions for access to the grids, the EC set an agenda (Madrid and Florence Forum- first meeting in1999) in order to achieve agreement of relevant stakeholders. Gasunie, still an integrated company at that time, was fully aware of the further potential of the emergence of a European internal market, and functioned as one of the initiators and frontrunners in the Madrid process to establish the Guidelines of Good Practice. In 2002 the Guidelines of Good Practice were established, dealing with access conditions to the networks. However the guidelines were voluntary and therefore needed to be formalized through regulation 1775 in 2005 in order to establish a minimum set of standards for network access. The goal of the European regulation was to end the dominant position of the integrated gas companies: It wanted to guarantee non-discriminatory access to networks for new market players, and provide unbiased incentives for investments, which will guarantee security of supply. The EU regulations as a matter of fact and common practice were “translated” into national regulations: Reducing costs for the Dutch society is the main aim of the Dutch regulator, which they attain by imposing tariff reductions and scrutinizing investment proposals to make sure they are needed and will be used. Simultaneously, the liberalisation originating from EU legislation aims at improving and increasing competition. Finding the balance between the two is necessary and only then will allow a European gas market to emerge and an efficient pricing mechanism will benefit the European citizens. Instead of balancing each other it is often seen that the different goals rather hinder each other and create conflicting incentives. While for the first goal more infrastructure is needed, especially cross- border interconnection capacity, that might not be utilized fully and thus appear unnecessary to a national regulator. For the second goal, cost limitation and reduction, new investment proposals from national grid companies may be rejected by national regulators as their goal is to safeguard national citizens from excessive cost. The regulatory environment is a crucial aspect of the business environment for ownership unbundled companies as they have strong self interest in the optimal utilization of their infrastructure and must earn their regulated return entirely from their services, whereas integrated companies in theory don’t need to profit from these activities. As they are the main users of their network they earn their money primarily elsewhere in the value chain (i.e. trade and production). Stability and predictability are key factors in a successful regulatory regime. Still, more attention is needed to align the goals of national regulators and European competition legislation to prevent them from conflicting. This process is now in progress with the establishment of structured and coordinated regulatory developments on a European level. Fundamental market changes in Europe For some years now the demand and supply position is changing significantly in Europe. Indigenous European supply is in decline and with the current energy demand trends in Europe continue at least at the actual level. It is expected that the gas import from outside Europe will grow up to 80% by 2030- therefore flows from Russia, Norway and the Middle East (LNG) are going to be of increasing importance in the future. The accommodation of the new supply requires new investments in pipelines, storages and LNG terminals. The Netherlands, in casu the network of Gasunie, seemed perfectly positioned to accommodate an eminent part of those new gas flows mainly from the North and East towards the South and West of Europe. Strategy development In the first half of 2005 Gasunie was looking for answers to give direction to the “new” Gasunie: “Where do we stand today”, “what happens in the market”, “where do we want to go”, “how do we get there” and “which value will we create” helped us finding a new direction. Given the regulatory conditions, the fundamental market changes and Gasunie’s core capabilities gave direction to a new strategy for Gasunie. The new mission of Gasunie reflects this: “Gasunie wants to deliver secure and reliable gas transport and other services to all market parties on a non-discriminatory, transparent and objective basis, and to contribute to the security of supply of the European gas market”’. Gasunie’s goal was and is to become a leading gas infrastructure and services player in Europe: with a clear focus on developing activities that contribute to long term safe and reliable delivery of gas in the European market, with leading transmission assets Europe. As a new stand alone infrastructure company it was clear that a growth strategy in Europe could only be successful if it reflected the needs of the customers and was sufficiently rooted in the business.