Sample News Story
Interconnector Comes Alive But Free Trade Stays in Coma
28/12/1994
Taking a collective deep breath, patting themselves on their backs for defying the conventional economic planning criteria most of their companies live by, and taking a good old fashioned "let’s just do it" leap of faith, a group of gas industry executives this month gave their backing to a project to link the British and Belgian gas grids. Like fattening food, it felt all the better for knowing that several would-be punters failed to join them because they just could not convince their managements of the economic viability of the scheme. According to its nine founding sponsors, a grid-to-grid pipeline will be built and ready to flow gas in October 1998 between Bacton, England, and Zeebrugge, Belgium. But at the founding meeting of their new company, the nine new shareholders of Interconnector (UK) Ltd kindly asked two Norwegian producing companies and one French gas utility to leave their meeting, conveniently bringing the volume of the proposed venture down to 20 Bcm a year (in export phase, 10 Bcm in import phase) and making 40" do just fine for size along the planned 240-km route. Whether that size was strictly intentional, or indeed whether the planned size and start up date will survive the serious planning work which must now be done with real volumes and known partners, rather than with notional ones, is another matter.
Egged on Political in conception, it was still just as political when it plopped out full of new life at its founding meeting in London on December 8, 1994. Politipipe (I understand a new name is being considered) was heralded by its greatest backer – and let’s face it, the man without whose zeal it never would have got off the ground – UK Energy Minister Tim Eggar, as "of great strategic benefit to the UK and the rest of Europe." He was quick to say why, too: "I firmly believe that Third Party Access [his capital letters] to existing pipelines on the continent is essential if the benefits of gas competition are to spread. It will be vital to the competitiveness of the European industry. The Interconnector will give an important stimulus to this process."
A few questions It is worth remembering that the project is not home and dry yet, however. Consider just a few questions it now needs to answer:
l Who buys gas from whom and where does it come from?
l How does it interface with the British grid?
l Who pays for reinforcing the British grid?
l How will the 1997 TransCo price review by regulator Ofgas affect this?
l Is the line really the right size?
l Is 1998 really the right year?
l Will free trade or other North Sea interlinks follow soon?
l Which partner will provide the CEO and which the chairman?
Frigg fried My fears that an Interconnector go-ahead would not coincide with winning UK approval for meaningful imports of Norwegian gas (Gas Matters, November 1994, page 32) have sadly proved correct. There is no better chance of a Frigg treaty today than there was before December 8. In fact the chances are now worse. Eggar’s tough stance against free trade with Norway, misguided as it is in the long run, nonetheless won out on this occasion. The Norwegians wanted the group to wait for some import progress; it chose not to. (National Power and BP, two of the principal potential beneficiaries of free trade, decided this was not the place to stand by their import principles and joined their comrades in saying good-bye to the representatives from Statoil and Norsk Hydro). This may not be the end of the matter for Politipipe, however. Whilst it has shed the baggage of a Norwegian treaty, it still depends on Eggar’s bunch negotiating a successful treaty with Belgium. Eggar’s man on the study group, chairman Sir Geoffrey Chipperfield, assured the nine that the treaty would not refer to the direction of flow, and those worried about imports relied upon this assurance. But UK energy ministers are not people to let little "assurances" get in their way. If Eggar gets too confident, and tries to stuff extra ideology into that treaty, he may find the going tough and the victims will be the Politipipe partners. They will have to try to see that this does not happen. At the same time, they would be well advised to try a bit of stuffing of their own ... like getting explicit permission to bring Norwegian imports into the line when they commercially see fit and not after a future energy minister negotiates (or blocks) yet another treaty. The same goes for any other country’s gas. They might also encourage Eggar to keep on blocking all the cheaper and easier links which could be built between offshore grids along the median line. Good luck, guys.
Corridor evacuees The Norwegians, having placed membership conditions on a group which needed to accept no conditions from anybody (and whose core backers gave every impression of having caucused beforehand), then gave up the chance to influence matters from within – which they could have done by simply staying on as speculators like the rest – and had to leave the group. Joining the Norwegians in the corridor was Gaz de France, also with a request for time on the table, but time for a different purpose; it just wanted to be able to give its board a better case for the leap of faith. The 12 were then 9. The three evacuees could have beneficially used the time, however, to discuss another prospective pipeline project. For landing the next Norwegian export line in France is one of the options Norway is actively considering at present (see map page 7). The location for this project must have seemed poetically ironic, too, in London last week: Dunkirk, the French port from which the British had to order a famous evacuation during World War II, is the very place the three Politipipe evacuees may end up. However, if Dunloop (or, since it’s French, we could just as well call it Dunkoduc or Gazoderque) is built, that wartime evacuation will be more than ironic. A lot of sunken ships may be reluctant to share their seabed with a pipeline.
Big fish But let me not dwell on Politipipe’s little problems. Surely it is much more significant that it attracted as founding members Ruhrgas of Germany (no doubt with different things in mind for the line than Eggar’s ideological export) and Gazprom, a most surprising member, especially as it is here without Wingas, the partner with which it has being trying for the past several years to buy North Sea gas. Nor let us forget the third newcomer to the group, British utility National Power, who it appears did indeed have this project in mind when forming an alliance with Ruhrgas in October (Gas Matters, October 1994, page 18). And what about British Gas, the company several pundits thought had turned down the project a few short weeks ago (a rumour which turns out to be a misreading of the signals)? BG, fooled all (and angered some) of its partners who were expecting it to book 3 Bcm at most and jumped in with a booking of 8 Bcm a year, a figure which looks suspiciously like BG wanted a majority share of the planned 15 Bcm capacity, but which at 40% still makes it far and away the largest owner/shipper in the line (see table below). I am not surprised to learn that many believe that chairman Dick Giordano himself called the play (no doubt with better paid leadership and guidance from CEO Cedric Brown) and called it primarily on strategic grounds but not without a good shove, too, I bet, from BG E&P which could have a lot of gas to sell across the waters. It is clear from looking at the list of who chose not to play, majors like Mobil, Shell, Esso (all there in shadow through Ruhrgas, though) and Amoco, not to mention Bacton terminal owners like Phillips and Arco, that this call remained a hipshoot, not a numbers game.
How they did it It is nonetheless an achievement to have got nine big companies to agree to come play in the traffic in the Channel and is an achievement largely brought about by dropping the most serious objection raised by would-be shippers in the first round of enquiries in 1993. That was the rule that only the seven members of the study group (two now sadly departed) could be owners of the project. Once the project was restructured to allow shippers to be investors, booking firm capacity and signing on to that share of equity looked the only way to go. This may still make it hard for these owners to find other shippers to use up their spare space, but that does not seem to have bothered the founding nine. The objectionable notion that shippers must fill their space or give it back to the "pool" was modified, too. Any of the equity shippers can trade their capacity, with each other or with outsiders (dare I say "third parties"?), but if they wish they can put the spare into a pool which the pipeline company will endeavour to sell, splitting the profit between the pool and the shipper releasing capacity.
Bypass Bacton Other crazy ideas were also dropped or eroded, so that it is possible to bring gas directly from the offshore to Bacton, treat it to pipeline spec and put it into the Interconnector without paying entry and exit charges to TransCo at Bacton. Thus the "only grid-to-grid" rule imposed by the UK Government was quietly discarded. Furthermore, and more importantly, it was decided to explicitly allow for reverse flow (something that can happen anyway through trades and swaps), and for design pressure reasons this is only at half the capacity until extra compression is installed at Zeebrugge, a move which will no doubt be delayed until it is called for. As many analysts came up with credible import scenarios for the line, and this was a clearly stated objective of Gazprom, National Power and Ruhrgas at least, the explicit allowance of imports was also important. They even got the nine to accept a condition in the Memorandum requiring at least the cheapest reverse flow option (at a whacking cost of less than 1% of total cost). At the end of the day, however, the producers had to convince themselves that this was a dry hole risk that would at worst give back some cash (a simple logic test most E&P companies still fail when it comes to infrastructure evaluation), and the other companies had to decide that there was some value in having rights to a link – or at least rights to a say about how the link would be used – between Britain and a key European hub.
Just an idea Now back to my point about what remains to be done. All that has happened is that a study group has been turned into a proper company and one with a set mission in life: to build a 40", 240-km pipeline, with a 20 Bcm capacity, to be ready to flow by October 1, 1998. This would now cost around £440 million (up from the £390 million estimate participants signed on to when they bid), or £447 million if you take Ruhrgas’ figure of DM 1.1 billion. The first board meeting, or one shortly thereafter, can decide to do something else ... such as go back to the 15 Bcm people were planning around or move the start-up to a more realistic date. The board needs unanimous agreement to change the date or size of the line so may be tempted to put those decisions off for a bit. Also the smaller players may not want to go below 1 Bcm so down-sizing may not even be an option. Re-timing is more likely. If supply is not ready, there may be little point in rushing the line. Furthermore, Statoil is definitely going to build another link from Sleipner/Troll to the continent in 1998 (followed by another in 2000), and must do so because it has already sold the gas and has real customers and real producers which are linked by real contracts, and which need defined pipeline capacity. The Politipipe partners, on the other hand, are not in this position, they can wait a bit; there is a good case for avoiding a bidding war for 1997-98 on lay barges. More important than offshore considerations, however, will be the serious planning of volumes, routes and grid connections which the shippers plan to make in Britain. The new board (all nine have seats) must also now pick a chief executive and a chairman. BG may want the first slot but it would be wiser to settle for the second and let one of the producers put in someone who has laid a pipeline, on time within budget, (and who is less prone to making public relations gaffes).
Ofgas is watching Assuming that a competing line from St Fergus to Bacton is not the most economic solution, BG TransCo is going to have to reinforce (loop) its grid to cope with the extra volume going through the British grid. Furthermore, regulator Ofgas is going to have to approve the manner and degree to which this cost is put into, and a return earned from, TransCo’s rate base. (Rate base?!!! who said that? I mean asset base, upon which rates of return allowed by the price limiting formula derived from the charging methodology chosen are calculated). Ofgas is scheduled to review, by March 1997, the entire structure and level of the regulated pipeline tariff which it imposes on TransCo. In 1995 Director General Spottiswoode will begin a consultation process on the basis of this review, in which even the religious icon of the economically correct, the RPI-X methodology, will be subject to review. The shippers/owners of Politipipe had better get used to traipsing in to see the regulator if they wish to run serious post-1997 economics on their project, regardless of whether it is an export or import scheme.
At TransCo Leaving the regulatory issues to one side, TransCo also has a big job ahead: it has to figure out where to expand its system and what it will cost. Lots of figures have been bandied about, which I understand derive from actual studies for the Interconnector study group, but these have been based on scenarios where TransCo has to guess where the gas is coming from. It has looked, for example, at a situation where a mere 50% of gas comes through the grid to Bacton from St Fergus (with the rest coming mostly straight into Bacton and about 20% coming from other inlets), to ones with a 70-80% input at St Fergus. This work throws up costs for grid reinforcement (lineage and compressors) of between £350 million and £800 million at the two extremes of these studies. Of course, if gas doesn’t all neatly flow from coastal terminal to Interconnector, but is, more practically, swapped around by producers internally as well as amongst themselves, then some gas is not going to physically flow to Bacton from another terminal, but take a different route to market; St Fergus gas goes to Manchester, Manchester’s gas goes to Zeebrugge, for example. Now what is the cost? Now who pays? Now what reinforcement is needed? Better yet, five years into Politipipe, gas comes into Bacton from Zeebrugge – how does this affect the reinforcement plan? How do you keep from building infrastructure that isn’t going to be needed five years after it is built (and long before it is paid off?). These are no longer esoteric questions for the Interconnector group, they are uncertainty problems facing real life investors.
And then? So, that deals with the simple Great Britain matters. What about the continent? Gas will have to go somewhere to someone after it lands in Zeebrugge. With Ruhrgas and Distrigaz the only utilities on the continent side of the channel to be shippers, buyers are going to have to be sought. At present, that means finding big buyers who are used to buying on long term, secure contracts. OK so far, but will this allow fluid trading? Unlikely at first. More likely will be some healthy swapping and even, perhaps, summer storage intake as well as winter security to cover for the very types of supply interruption which Russian and Algerian customers fear right now. This trading regime will need to be worked out.
Back in Norway Now, whilst these issues are taxing brains in our new London-based pipeline company, more definite plans are being hatched from Norway. Plans which, I think it is fair to surmise, have actually been made much easier by Politipipe decisions made this month. Norway must decide how to take its next two gas pipelines to its (existing) markets. With Britain still a closed shop, there is no need to plan routes there. But, with an urgent need to bump up capacity to France, and an eventual need to get more gas into Germany as well, Norway must decide three things: l go east or west? (east means Europipe II); l if west, Zeebrugge with Zeepipe II or; l Dunkirk? It must then decide when? If the first line is needed in 1998, the second has to be built by 2000. But is it best to go for 1999 or 2000? We will know early next year.
Try France The Norwegian government has already told Statoil that its cute solution of taking a line straight from the Troll terminal at Kollsnes to the Europipe tunnel near Emden (the tunnel was built for two lines) is ruled out. Thus the next line has to originate at Sleipner or to the nearby twin riser 16/11-S, 16/11-E. Until December 8, I would have bet on a western course, landing at Zeebrugge. I still think west is best, but now I think that it will be more tempting to make a strategic case for giving Belgium a miss, going straight to France at Dunkirk, which only involves an extra 60 kms but where the link to Paris would be more direct once it is built. This would enable the Norwegians to avoid some Belgian transit costs (they have already contracted for a great deal of transit). But here’s the rub: landing at Dunkirk is another strategic call, which must be made by two companies which only recently chose not to make a strategic call.
Not the same These companies, especially GdF, of course can argue that deciding on the Dunkirk leg it is not the same game at all. In the case of Politipipe you had to stump up for an empty pipe that might one day get gas from somebody to take somewhere. In the case of Dunloop/Gazoderque the gas is largely contracted and the investment in new facilities in France carries known risks: Statoil and Gaz de France are used to building new terminals and pipelines for contracted volumes. Furthermore, diversity of landing points is served by going to France, even if it is just 60 kms away from Zeebrugge. But this option will have to be art worst, marginally less economic than Zeepipe II to win out.
Case for Zee II The economic case for Zeepipe II as opposed to Dunloop/Gazoderque is strong: Statoil already has a terminal and site in Zeebrugge, so landing there is thus an incremental expansion project, laying in a known channel, expanding a known terminal (and without having to hire any more people to run it). The route to Blaregnies is also an existing corridor for Norwegian transit gas. Blaregnies itself is an important French import hub. And Dunkirk? Well, it is not even on the hi-cal gas grid; its citizens burn lo-cal * Dutch gas. Thus it requires a new, greenfield terminal, connected to a pipe which must come through whatever debris exists from the war, and which will also need a new grid link to the Blaregnies-Paris hi-cal line; there are almost no incremental investment advantages. Now, that may all make sense, especially to French eyes, but the problems must be considered. To tip the balance, Distrigaz could offer a Netra-type pipeline joint venture (Gas Matters, November, 1994 page 18) such as Statoil and Norsk Hydro have with their German importers Ruhrgas and BEB. Such a JV could take over and expand, or just loop, the transit line from Zeebrugge to Blaregnies. Still, for now, the strategic front runner is Dunkirk, if only it can prove its economic viability. Maybe Distrigaz should offer a Netra deal to Statoil and GdF and run a line to Dunkirk as part of the package.
* Often forgotten by many, there are two grids in Europe. Dutch Groningen quality gas (9.24 kWh/scm) has its own grid in the Netherlands, Belgium, France and Germany. High-cal gas, such as Norway’s (11.55 kWh/scm) or Algeria’s (11.28-11.64 kWh/scm) flows into the same countries through a parallel grid going to different customers, usually, but not always, in distinct regions.