Pierre Noël recently wrote in Financial Times about the need for a single market in natural gas in Europe. In fact, it’s already been a month since, but I was too busy to respond to it then. I liked his piece, but I feel compelled to emphasize some points which he doesn’t bring up at all. At the same time, I see his claim about Europe already enjoying a diversified gas supply as extremely misleading. The only country in Europe that has a diversified gas supply is Spain. While the country gets 40 % of its gas from Algeria, it also imports LNG from Qatar, Nigeria, Libya, Oman and Trinidad and Tobago. The rest of Europe gets their imports mainly from Russia and some from Algeria. Moreover, Algeria’s Sonatrach and Gazprom have signed a “memorandum of understanding” that will potentially see the two companies engage in joint ventures and asset swaps in third countries. This trend is bad news for Europe’s attempts to diversify its gas sources to new independent producers.
Dr. Noël is right to point out that the political debate is too much focused on Nabucco. The pipeline is not only unlikely to be built and supplied with gas, but even if built, it’s relatively little of comfort on a larger scale. One estimate of future gas demand calls for additional imports of 250 bcm/y by 2020, while Nabucco could only bring in 30 bcm/y of new capacity. On the other hand, I see much more potential for new LNG imports. Although countries such as Iran might be out of scope for investment for a long time, there should be room for additional imports from Qatar which has the fourth largest proven gas reserves in the world. The country already exports over 5 bcm of LNG to Spain.
As Dr. Noël points out, the main reason why there’s no competition in Europe’s gas markets is not because of Russia’s domination by its market share, per say. However, he doesn’t exactly say why there is no competition. More importantly, he doesn’t say how the “integrated and flexible” gas market should be created. Policymakers will need detailed instructions.
To my understanding, there’s no competition because most of the supply (by some estimate over 90 %) is based on long-term agreements. As long as this is the case, no other producers will be seriously interested in the European gas market. Ignoring opportunities in the spot pricing market is the reason why Europe doesn’t have a flexible gas market. European policy makers defend their state-owned national champions and long-term agreements with the argument that unbundling the market into small players would lead to less negotiating power with the large gas producers, particularly Gazprom. But as long as the long-term agreements cover over 90 % of the total procurement, there will be neither competition nor diversification of supply.
Gas markets, like electricity markets should be technically much easier to liberalize in Europe than in the U.S., because the market has a small number of large state-owned companies. In the U.S., the market structure was much more complex prior to liberalization. The European market structure and the regulatory framework needs urgent revision to encourage third party access, if future demand for gas is going to be satisfied in a reliable and efficient manner.