EU GAS MARKET
positively as the most liquid market. I don’t want to comment from the source or the producer to the wholesale and end con-
yet on the other studies which we have running on market sumer market.
liquidity developments … we are just in the middle of those.
NH:Nowthat’safunction,isn’tit,ofvirtualintegrationwhich,
NH: But there are some profound political obstacles, aren’t aswe’veheard,issomethingthatmaynotsurvivemuchlonger.
there, to the development of a European market, which it OM: I don’t think so. You see E.ON and RWE having long-term
seems to me as an outsider, stem largely from quite different contracts with the large European gas producers/suppliers, or
perceptions.Arewetryingtoachieveamarketorarewetrying other big transportation companies in Germany, so I think this
toachievesecurityofsupply? is also a long, historical relationship, which is an advantage if
you need additional volume of gas to have this relationship.
NH: Wouldanybodyaddtothatorchallengethat?
CL: I would say that if you’re the original historical supply in
an area, if you have all that local knowledge, you have that
local information, you have the arrangements probably
throughout the gas chain, everything that you need in order to
carry out that business, and then it becomes extremely difficult
for somebody else to enter that market. The interesting thing
that we experience now is that the only way in which that com-
pany in that local market can now grow and expand is by going
into other markets or selling other products, and inevitably they
Heinrich Hick, European Commission
will start to lose market share in whatever is their home market.
And so these same companies that at one time were seen as
HH: We are working on an internal energy market. The Third the bad incumbents trying to keep everybody else out, of
Energy Package is meant to address the most serious structur- course they will still try to be competitive in their own markets
al impediments to the internal market. The Commission has and protect their own markets but, at the same time, they face
been pushing for ownership unbundling to just eliminate an the same problems as new entrants in their markets. They’re
inherent conflict of interest between supply and transmission. new entrants in other people's markets.
And this is obviously a very controversial issue [but] I’m confi-
dent that, with the adoption of the Third Energy Package, we NH: Butisitachallengefortheincumbents?
can create this structure for the emergence of a single and liq- CL: It’s a challenge for the incumbents, and if we look at what
uid competitive European energy market. That definitely happened in the UK, it started off with one big incumbent
remains the vision of the Commission. [and] there was a lot of effort pushed into ensuring that it was
made easier for the competition to enter the market. At the
NH: That’s the vision. Let me just ask the traders then. John, retail end there were price schedules, so that the price at which
whatdoyouthinkoftheThirdPackage? British Gas could sell its gas had to be the same for any group
John Woodley (JW): You could almost say, and in fact I think of customers throughout the whole of the country so competi-
some people would say, that vertical integration is de facto tion could come in and they could see what the prices were and
evidence of market failure, so we think it’s just a natural they could ‘cherry pick’.
progression – not necessarily something that regulatory or
political action has to do for you. If you create a market NH: Wetalkedabouttheopportunities,thestrengthsandthe
structure, I think companies tend to break themselves up and challenges. Colin mentioned one obvious one, which is moving
they tend to become specialists at certain parts of the value intonewterritories.Whatotheropportunitiescanbeidentified?
chain. OM: I think the LNG market is certainly a market with high
investment costs of course, but in the medium to long-term it
NH: Do you think, in view of what you say about the natural could be an interesting market to have alternative sources for
tendency of companies to unbundle themselves as markets gas and therefore I think the key players with the financial
develop,thatthereisaneedforintervention? power have a lot of opportunity to invest in that market. This is
JW: Everybody knows what the causes of market failure are. what we can see today.
You can look them up on the Internet. When those occur, yes, CL: Yes, I’d agree with that, as LNG is clearly a key growth
the regulator should step in and address them. area for Europe, indeed for the world, and the key from a trad-
ing perspective, is to ensure that LNG is actually going to be
NH: Right, let’s be a little more specific. What are the fungible with pipeline gas. At the moment that’s extremely dif-
strengthsfacedbythekeyplayers? ficult to do and it’s only those players who have the arrange-
OM: When we talk about strengths of a key player, I think one ments in place already who are able to do this easily. But it’s a
strength is the customer relationship based on a long-term and growth area and I think we can see many of the larger compa-
historic connection [especially in Germany] ... To change the nies moving into that side.
supplier is very unpopular, so this is probably one of the OM: The other thing is that maybe one of the challenges
strengths, the access to almost all levels of the gas supply chain they’re facing and what we can see at the moment in the
70 SEPTEMBER 2008 COMMODITIES NOW
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