A Gas Opec Fear Bolsters European Insecurity

European energy: A new nervousness

By David Buchan

Such is Europe’s new nervousness about the security of its energy imports that a recent low-key agreement between two of its main outside suppliers, Russia’s Gazprom and Algeria’s Sonatrach, was enough to cause a minor panic in some quarters. The agreement in August focused mainly on technical cooperation in liquefied natural gas and on possible asset swaps and joint projects.

But Italy, which buys about a third of its gas from Russia and another third from Sonatrach, was sufficiently alarmed to demand that the European Commission check with Moscow and Algiers that their companies were not planning to collude on their sales strategy to the European Union.

The prospect of a “gas Opec”, or a cartel of producers of gas as well as of oil, developing still seems fairly remote. For one thing, there is generally a closer tie between supplier and customer in gas carried by fixed pipeline than exists in the oil market, where producers have a far more distant relationship with consumers. So gas exporters are less likely to behave as oil exporters regularly do and curtail supply to raise prices. For another, Europe is gaining new sources of gas via liquefied natural gas (LNG) shipments from countries such as Qatar, Egypt and Nigeria, and nothing undermines cartels like new entrants to the market.

But the threat of anything like a gas Opec developing outside the EU comes as a convenient additional justification for those energy companies seeking consolidation inside the EU, such as Gaz de France and Suez. France proposed this merger earlier this year primarily to thwart the possibility of Enel, the big Italian utility, making a bid for Suez.

It seems to have succeeded in this aim, though the merger itself remains very controversial with the left in France – not because it would create a French national champion that would be difficult to take over but because merging state-owned with publicly-held GdF would automatically involve privatising the latter.

However, in order to provide an extra rationale for their merger, the two companies point to the Gazprom-Sonatrach agreement as a reason for gas buyers such as themselves to bulk up. “The bigger you are, the better you can negotiate”, says the head of Suez.

Of course, such logic would ultimately lead to all gas buyers in the EU, which imports more than half its total gas consumption, forming a gas-buyers’ cartel, something that would flout all EU anti-trust law.

However, relying on the size of its own gas consumption market and the two big utilities that now dominate it – Eon and RWE – the largest EU state, Germany, has carved out something of a special position with Gazprom. Indeed Eon gained a stake in Gazprom, through its acquisition of Ruhrgas. In August, the two comp­anies consolidated their relationship with Eon contracting to Gazprom gas up to 2035 via the North European Gas Pipeline that is to be laid on the Baltic seabed from Russia direct to Germany. This route will bypass traditional transit routes such as Poland and the Baltic states that are smarting at being left out of the deal.

The result is that, while developing a common energy policy towards Russia is a stated goal of EU policy, many experts believe that the emerging Russo-German special energy relationship makes such a goal unattainable in practice.

However, the big energy companies in Germany, along with those in many other EU states, have been under investigation for the past year by the Brussels anti-trust authorities for a series of what Neelie Kroes, the competition commissioner, recently called “serious malfunctions” in the market. These included dominance by relatively fewcompanies with too much scope to raise prices; combined ownership of supply and infrastructure by companies which therefore have the ability to keep new entrants out; and insufficient cross-border connection and competition.

Overall, the commission measures the lack of real integration in the EU energy market by the fact that prices between different national markets diverge by more than 100 per cent, and that cross-border trade in energy is only 10 per cent of total consumption.

The easiest solution to undue market concentration is, of course, not to let it occur in the first place – in other words, to prevent the mergers that create it. Brussels has the power to vet and, if need be, to forbid such mergers, but only has jurisdiction in takeovers with a sizeable cross-border dimension. Therefore it has found it hard to thwart the creation of national energy champions, where the merging companies are nationally focused.

One trend it dislikes is local electricity companies acquiring local gas companies, because gas is a prime fuel for electricity, and a gas-owning electricity company can thus deny fuel to any new electricity rival. It stopped just such a gas/electricity merger in Portugal, but could only do so because an Italian company happened to be involved in the mooted merger. Brussels would have thus had to stand by and watch Gas Natural take over Endesa in Spain, until the former’s bid for Endesa was topped by Germany’s Eon.

Since then, the European Commission has been striving to stop the Spanish government and regulator trying to keep Eon out of Spain. In order to avoid anti- competitive energy mergers, prevention may be better than cure – but it is not necessarily much easier.

This article was published by David Buchan in the Financial Times on 23 October 2006.