At last Europe puts its foot on the gas

The European Commission keeps on surprising. Two years ago sceptics said there was no possibility of a second gas directive being agreed because key member states would veto it. The second gas directive was agreed.

Once it had been agreed, sceptics said that it didn’t matter: the big hitters in European gas and power had worked out how to render it irrelevant. They knew how to continue to remain dominant incumbents and lock out competition. Last year two EU directorate-generals — transport and energy (DG Tren) and competition (DG Comp) — made clear they wouldn’t tolerate the status quo.

DG Tren launched a new benchmarking exercise designed to measure real progress towards liberalisation — member state by member state — and, having consistently suggested they might not need a third directive, began to hint that they might after all — and would act, if required. DG Comp launched a power- and gas-sector investigation and followed it up this year with dawn raids.

And there have been further smaller initiatives, which might just be straws in the wind. For example, the German regulator has started to bare its teeth. Recently it required the latest phase of an E.ON Ruhrgas gas release programme to attach to its terms guaranteed transportation capacity. Gas made available to non-incumbents with the ability to move the volumes as well? That is radical.

But, if there are positive developments, the reality is that the pace of liberalisation is slow — perhaps too slow for companies like my own, BG Group, with ambitions to develop a stronger European downstream business over the next decade.

We already have a diverse supply portfolio ranging from Trinidad to West Africa and Egypt, and with the potential to source gas over time from Libya, Nigeria and Algeria as well. We are also one of the leading players in Atlantic Basin LNG, and aim to have two new LNG import terminals in Europe up and running over the next five years — one in Milford Haven, South Wales, another at Brindisi in South East Italy.

Of course we want to increase our ability to access markets in Continental Europe for our own commercial reasons, but our business goals are aligned with the European Commission’s energy policy. Policymakers want security of energy supply and the downward pressure on prices that greater competition through liberalisation can bring. BG Group can help deliver supply security by offering diverse sources of gas supply, and, by building our presence in Continental Europe, we can be one of the companies that can provide competition to the big incumbents.

So, what’s good for us is good for the Commission and, of course, good for the consumer.

There are a handful of measures that can make a real difference to the competitive landscape in European gas markets and move us significantly along the road to the goal of a single European gas market. They are these:

In companies with both transmission and supply activities there should be full ownership unbundling. Transmission System Operators (TSOs) should not

be in a position where the temptation

is to favour the supply arms of their

own businesses. Unbundling would incentivise these new TSOs to invest in and maximize the efficient use of networks. This would solve problems of conflict of interest, lead to fairer management of capacity and allow new players into parts of the market they cannot currently penetrate.

We need effective regulated Third Party Access (rTPA) on all pipeline capacity, including transit pipelines, with congestion management and robust ‘use it or lose it’ mechanisms in place. Access to capacity, particularly transit capacity, is crucial to enable trading across markets. Though in theory we now have rTPA in place, it cannot be argued that it is effective.

We need the consistent application of regulation between Member States to ensure that there are not artificial impediments to the free flow of gas across, between and within markets.

We need rTPA for storage too, where competition is insufficient. For the company seeking to operate flexibly and take advantage of opportunities across the EU the ability to store gas at strategic locations is essential. Too often potential players are arbitrarily locked out of pipelines and denied access to storage, even where there is capacity.

Although the conclusions of the June energy council appear to endorse our recommendations, I acknowledge that none of these can be achieved overnight — indeed some would require a third directive, and we all know that that would be a long-term project.

However, were the European Commission to resolve to pursue these measures, we might just find that behaviours begin to change in advance of new legislation reaching the statute book, as incumbents see that they cannot continue to stall progress and begin to plan ahead for a more transparent and competitive future.

The latest green paper on security of supply, published by DG Tren in March of this year, was given a mixed reception by experts in the gas industry, and it isn’t hard to see why.

On the one hand, the green paper amounts to a robust reaffirmation of the Commission’s belief in a transparent, open and — ultimately — single European gas market and argues sensibly for some common codes and standards right across the piece. On the other hand, there are references to gas stocks and a strategic review of the EU’s energy-mix, which could be interpreted at best as measures designed to weaken the effectiveness of market forces and at worst to enable officials to shape the nature of the energy mix across Europe. These would be retrograde moves.

The European Commission has been braver and more vigorous in its pursuit of liberalisation in recent years than it has

often been given credit for. Supporters of a more nationalistic energy policy are wrong

to claim that supply security and liberal-isation cannot co-exist. In fact, more openness and transparency will bring in a greater diversity of gas supply, strengthening security.

The Commission should keep up the good work and take those next critical liberalising steps. And, if it does, we at BG Group will be four square behind it — not just because it will be good for business, but because it will be good for consumers too.

For further information contact Philip Murphy, Head of Corporate Affairs, Europe and Central Asia (phil.murphy@bg-group.com) or Claire Pinborough, Government Affairs Analyst (claire.pinborough@bg-group.com)