Industry Example: The European Market for Gas Professur für BWL, insb. Internationale Wirtschaft Folie 1
Agenda 1. Characteristics of the gas market 2. The National Markets for gas 3. EU Liberalization Policy 4. Some data 5. Summary & Outlook Professur für BWL, insb. Internationale Wirtschaft Folie 2
1. Gas market Gas Market Production Exloration, production, processing, gathering, Upstream transportation Long distance transport: Pipelines (onshore/off-shore) LNG Downstream transportation National distance transport Regional transport Distribution Storage Professur für BWL, insb. Internationale Wirtschaft Folie 3
1. Particularities of the gas market Substitute to oil pricing accordingly Gas reserves in Europe are limited, dependency on other world regions gas production: oligopoly: Russia, Norway, Algeria, further reserves in politically instable regions Thus: strong bargaining power of producers Long-Distance transmission: High investment for pipelines take or pay contracting for periods lasting 20-25 years Professur für BWL, insb. Internationale Wirtschaft Folie 4
1. Differences: electricity vs. gas Gas is a heterogeneous good as opposed to the homogenous good electricity Gas can be stored EU can only influence downstream sector Strong dependency on gas producers! Professur für BWL, insb. Internationale Wirtschaft Folie 5
1. Impact on Regulation Impact on competition and regulation: Competition is possible if trading companies have access to transport networks Transport networks as bottlenecks that need to be regulated but in the case of long-distance transmission networks debated as often alternative networks exist (case of Germany) construction of additional pipelines might be economically viable (WINGAS) Professur für BWL, insb. Internationale Wirtschaft Folie 6
Agenda 1. Characteristics of the gas market 2. The National Markets for gas 3. EU Liberalization Policy 4. Some data 5. Summary & Outlook Professur für BWL, insb. Internationale Wirtschaft Folie 7
2. Initial situation: national gas markets Different national structures: High degree of concentration in France (Gaz de France), also Italy and Belgium Germany: several hundred companies Horizontal and vertical interweavement through long-term contracts (demarcation contracts) UK: highly liberalized 1972 privatisation of national gas corporation since 80s third party access to the networks, reorganized in 1994: unbundling, opening for end consumers 1996: over 60 companies, high customer switching Professur für BWL, insb. Internationale Wirtschaft Folie 8
Agenda 1. Characteristics of the gas market 2. The National Markets for gas 3. EU Liberalization Policy 4. Some data 5. Summary & Outlook Professur für BWL, insb. Internationale Wirtschaft Folie 9
3. Liberalization efforts Objectives of EU Energy policy Create an internal market in the energy field Reinforce security of supply and the competitiveness of the European economy.. and respect environmental protection Professur für BWL, insb. Internationale Wirtschaft Folie 10
3. Liberalization efforts The beginnings: Directive on price trans-parency (90/377/EEC) Transparency of prices First EU Directive: Natural Gas Directive (98/30/EEC) Unbundling Access to the network (negotiated vs. regulator access) Gradual market opening Second EU Directive: Natural Gas Directive (2003/55/EEC) Acceleration directive Key European legislation to establish the Internal Market Professur für BWL, insb. Internationale Wirtschaft Folie 11
Agenda 1. Characteristics of the gas market 2. The National Markets for gas 3. EU Liberalization Policy 4. Some data 5. Summary & Outlook Professur für BWL, insb. Internationale Wirtschaft Folie 12
4. Market Opening Basic Data (2005) Professur für BWL, insb. Internationale Wirtschaft Folie 13 Source: EC, Report 2005
4. Economic Aspects of Liberalizing the European Electricity Market Total market share of the biggest three producers (electricity) Source: EC (2005) Report on Progress in Creating the internal gas and electricity market Professur für BWL, insb. Internationale Wirtschaft Folie 14
4. Key Players -Presence of largest companies in selected individual member states Source: EC, Report 2005 Professur für BWL, insb. Internationale Wirtschaft Folie 15
4. Customer response Source: EC (2005) Report on Progress in Creating the internal gas and electricity market Professur für BWL, insb. Internationale Wirtschaft Folie 16
4. Price Development - Gas (Industrial consumers) 9 8 7 6 5 4 3 2 1 0 Average gas prices for industrial consumers in /GJ 1997 2005 EU (15 Länder) Belgien Dänemark Deutschland Spanien Frankreich Luxemburg Niederlande Österreich Portugal Finnland Schweden UK Source: Eurostat Professur für BWL, insb. Internationale Wirtschaft Folie 17
Agenda 1. Characteristics of the gas market 2. The National Markets for gas 3. EU Liberalization Policy 4. Some data 5. Summary & Outlook Professur für BWL, insb. Internationale Wirtschaft Folie 18
5. Summary Re-regulation of transportation networks Implementation is slow Insufficient infrastructure for cross border exchange Long term contracts setting fixed prices prevail transmission to distributors, then to end-consumer Pricing varies strongly across Europe and also within countries Who benefits from reregulation of transmission field? Producers vs. consumers Over-regulation of transmission networks? Professur für BWL, insb. Internationale Wirtschaft Folie 19
5. Trends and developments Production level firms integrate forward: GAZPROM: stake in Wintershall Beginning of the 1990s: Wintershall entry on the German market (BASF and GAZPROM as shareholder) subsidiary WINGAS own high-pressure pipelines (transmission) supplying distributors and directly the final consumer (buying permissions to use distribution networks if no demarcation contracts in existence) April 2006: GAZPROM wants to take over CENTRICA (U.K.) GAZPROM increases its stake in WINGAS to 49% GAZPROM in negotiations with E.ON Ruhrgas, RWE concerning transmission and distribution & building of gas power plant Professur für BWL, insb. Internationale Wirtschaft Folie 20
5. Trends and developments Backward Integration: E.ON Ruhrgas 6.5% stake in GAZPROM Negotiations with GAZPROM to participate in gas field in return for a stake of GAZPROM in operations in Eastern Europe BASF RWE 24% share in Siberian natural gas field, via Wintershall: additional 10% fields development company Negotiations for joint projects in gas production, pipelines GAZPROM & Wintershall & E.ON Ruhrgas Pipeline in the baltic sea, from 2010 onwards Professur für BWL, insb. Internationale Wirtschaft Folie 21