Sample News Story
Ruhrgas warns of threats to European gas growth
28/06/1995
European gas demand may not grow in the way forecasters have generally predicted, according to Ruhrgas executive board director Burckhard Bergmann. Previously estimated increases of between one-third and 50% – depending on the forecaster – up until 2010 can no longer be taken for granted, he says, because factors exist which could depress demand, chiefly "discriminatory" energy taxation and a "misdirected" regulatory framework.
Three without Bergmann, speaking at a recent marketing conference, said that of the nine western European countries with no gas supply in 1970, only three remain without. Sales have since more than quadrupled. The rise in gas use has been greatest in the residential and commercial sector. Now 50 million homes – or 36% of the market – have gas heating. In 1994 gas became the main fuel for residential space heating in Germany – a position it already occupied in the Netherlands, the UK and Italy.
Portugal behind This picture, however, is not the same for all western European countries. In the Netherlands gas accounts for 49.5% of total energy consumption, while in Portugal gas use will not be possible until 1996. The achievements of the western European gas industry were due to "intense cross-border trade, cooperation on infrastructure and the build-up of imports from Algeria and the former Soviet Union".
Trading via grid The western European gas grid now extends for 18,500 kms with "a good half of gas supplies traded across borders using this grid". The development of a single European market for gas through the interlinking of western European countries is not paralleled in the European electricity market , where cross-border trade accounts for only 7% of total supplies. The western European gas industry is spending about DM 20 billion (over £10 billion) a year on infrastructure.
50% growth Yet Bergmann questioned whether natural gas will grow as fast or as far as has generally been predicted, making the point that while almost all of the western European gas demand anticipated in the next 10 years (until 2005) has already been covered through long-term contracts, forecasters are still predicting that gas consumption will rise by 30-50% until 2010. A level of market development resulting in additional demand of 75-80 mtoe by 2010, though previously anticipated, can no longer be taken for granted, he said.
New areas Penetration of the residential market cannot be expected to continue at the same level, he said, since it cannot be based solely on increasing the numbers of customers in areas already receiving gas. Instead this will require development of new areas where customer density is lower. As progress is being made with energy conservation in Germany, gas consumption per household is falling, with a consequent rise in connection charges. This picture is gradually being repeated in Europe "not least due to the relocation of energy-intensive industries".
Lower load factors Only in the power sector are prospects for gas "undiminished", he said, although there too it would be necessary to come to terms with lower load factors, improved technology and reduced costs of coal-fired power plants. Co-generation, though attractive, was a "limited development". There are "no ground-breaking developments" in terms of new markets while, at the same time, gas has to be supplied from ever more remote regions under increasingly difficult conditions. This calls for "more modesty by producing countries in their government take, more stringent cost-management at all stages of the gas chain, full exploitation of the market value and longer pay-back periods". He also noted an "emerging medium-term oversupply in north-western Europe".
"Lop-sided" tax Bergmann identified uncertain factors as energy taxation and the regulatory framework for grid energies. He attacked "lop-sided" gas taxation in Germany (see chart), where excise tax is levied at a rate of 20% of the import price, while dirtier fuels such as coal, lignite and nuclear remain untaxed. The different excise taxes in western Europe also lead to distortions in gas demand, he said, though some importing countries do not grant producers a right to "taxfall" profits. Regulation OK Bergmann feels that no emergency action is required on regulation, either at Brussels or national level. In Germany more competition would be "triggered by the market itself", though clearly not without some raised temperatures (see Gas Brief, page XIII). The EU debate, he said, is over the opposing concepts of negotiated third party access (TPA), which Ruhrgas appears prepared to go along with, or the "single-buyer concept" favoured by the French Decline In FSU Demand Depresses World Increase.
The fall in demand in the former Soviet Union (FSU) was the major factor influencing the world gas scene in 1994, according to the BP Statistical Review of World Energy, June 1995. The dramatic 7.6% decline in the FSU cancelled out growth in demand in the developing countries – what BP calls the emerging market economies, or EMEs. In these countries demand increased 6.8% (including South Korea up by 33%, Taiwan 31% and Indonesia 12.7%). In the UK demand increased 5.3%. The impact of the FSU meant world gas demand rose only 0.2%, but excluding the FSU world gas demand rose by a healthy 2.9%. In fact in Europe, gas has now overtaken coal to be the second most important fuel after oil.
Gas trade boom Introducing the review, BP chief executive designate John Browne said that all the indications were that the gas trade would become an even greater element in the energy balance in the years ahead. At present, well over half the gas consumed in the countries of the European Union is now imported, according to the review, and three-quarters of those imports come from suppliers outside the EU.
Growth on trend BP chief economist Peter Davies pointed out that the 2% increase in gas consumption recorded by the OECD countries was on trend, whereas the growth rate of the EMEs (not including eastern Europe) was just below the 10-year trend at 6.8%. He attributed the increases in the fastest growing markets of East Asia to the development of new supply infrastructure, which permitted gas rapidly to penetrate these expanding markets. Turkey was also growing rapidly from a small base, showing an increase of 30% in 1994.
Japanese summer The hot summer in Japan boosted demand for gas for air conditioning and cooling, producing a rise of 7.2%. The mild winter in Europe depressed growth in gas consumption, especially in France (down 4.6%) and Italy (3.3%), resulting in an overall European increase of only 1.7%. In the UK residential sector gas consumption was also hit by the mild weather, but 1994 (up 5.3%) was nevertheless a year of relatively rapid growth. BP identified the reasons for this as the coming on stream of new gas-fired power plants while, at the same time, gas prices to industrial users fell, prompting "a significant amount" of fuel switching from oil.
US above trend In the US 1994 gas consumption growth was just above trend, according to BP, at 1.5%. The first quarter of the year saw a surge in gas consumption resulting from an exceptionally severe winter. In January, gas consumption hit an all-time high, with the average US gas consumption for the month of January the highest since January 1973. The US is still pre-eminent in volume growth because of the absolute size of the market, despite "relatively modest growth rates". Over the five years between 1989-94, the growth in the US gas market – which BP estimates at 45 mtoe – was equivalent to the addition of another gas market the size of Italy.
Russian bubble Despite a 1.8% drop in gas production in the FSU, world gas production still increased slightly in 1994. This was in the face of the fall in FSU gas consumption of 7.6%, which BP says is accelerating. Gas production in Turkmenistan fell 45.5% in 1994 owing to limited pipeline transit capacity through Russia. Russian supplies have been diverted from the shrinking home market to export markets, displacing gas which was formerly exported from Turkmenistan via Russia. In 1993 Turkmenistan produced more gas than the UK; in 1994 it was down to about half the UK production rate. BP points out that in addition to displacing Turkmen exports, a large volume of Russian gas was stored during 1994; the evidence is, the review says, that "a large and growing gas bubble" exists in Russia.
Production up Excluding the FSU, gas production worldwide rose by 3.8%. The exception was the Netherlands, where gas production was reduced because of weak demand in its core export markets and strong growth in competing supplies. Some major producers recorded significantly increased production. Australia produced 15.1% more as the North West Shelf volumes built up; with Pagerungan building to plateau and Bontang expanding, Indonesian production was up 10.2%; as major new fields came on stream in the UK its production rose 7.8%; India’s Bombay High built up, giving rise to an increase of 6.8%; and the first full year of production from Norway’s Sleipner East field meant an increase in 1994 of 6.1%.
Prices down Gas prices fell in all the key regional markets in 1994. One reason, especially in Europe (down 4.8%) and Japan (down 11.8%), was the weakening oil price in 1993, to which gas prices were linked but effectively lagged behind. However, over the course of 1994 some key long-term gas sales contracts, with prices linked to oil products, were renegotiated in both these markets, with the effect of raising the price of gas slightly. The full impact of these increases was not reflected in the 1994 data, but will show up later. The very cold weather in the US maintained gas prices during the first half-year at around the same relatively high levels seen since late 1992, but the second six months saw wellhead prices down 9.9%. The price of imported gas fell even further, by 16.4%, as Canadian capacity expanded.
Asian growth Curiously, the increase in total world gas demand almost matched the figure for the rise in total world energy demand of 2.8%, excluding the FSU. The fastest total energy growth – mirroring economic growth – was seen in Asia, with China, India and much of the rest of east Asia recording energy demand growth rates of between 5-10%. China emerged in 1994 as the world’s second largest energy consumer, exceeded only by the US.
The overall picture BP has established three categories for looking at the overall energy picture in its review: world, FSU and rest of world (ROW). This serves to point up vividly how contractions in the energy markets in the FSU can tend to mask the growth in markets elsewhere (see total energy table). Thus overall world energy consumption totalled just 0.9% in 1994, well below the 10-year trend rate of 1.6% per year. But when the FSU data is removed, the picture is a very different one – up 2.8%. BP suggests that this points to a "resilience in energy consumption" and "implies that world energy consumption will continue to rise steadily" once the structural changes in the FSU economies are completed. . Bergmann predictably slammed "general third party access" and claimed that EU proposals have been superseded in Germany by actual market developments. He called for the continuation – and honouring – of long-term import contracts to ensure the viability of future large-scale projects.
Gas as commodity He said an efficient merchant company (like Ruhrgas) would continue to be a better option for a producer than trying to market gas directly, but marketers must be prepared to act faster and flexibly as gas is increasingly becoming a commodity, like oil. "We at Ruhrgas no longer market natural gas," he said."We market the brand product ‘Natural gas from Ruhrgas’."
ing conference, gave a résumé of “the brilliant career of natural gas”, and pointed out that of the nine countries in western Europe which had no gas supply in 1970, only three remain without. Gas sales have since more than quadrupled.
The rise in gas use has been greatest in the residential and commercial sector, to the extent that 50 million homes – or 36% of the market – now have gas heating, said Bergmann. In 1994 gas became the main fuel for residential space heating in Germany – a position it already occupied in the Netherlands, the UK and Italy.
This picture, however, is not the same for all western European countries, said Bergmann. He contrasted the case of the Netherlands, where gas accounts for almost half (49.5%) of total energy consumption, with that of Portugal, where gas use will not be possible until 1996. He attributed the achievements of the western European gas industry to “intense cross-border trade, Cooperation on infrastructure projects and the bold build-up of imports from Algeria and the former Soviet Union”.
The western European gas grid now extends for 18,500 kms, said Bergmann, with “a good half of gas supplies traded across borders using this grid”. The development of a single European market for gas through the interlinking of western European countries is not paralleled in the European market for electricity, where cross-border trade accounts for only 7% of total supplies. The western European gas industry is spending about DM 20 billion (over £10 billion) a year on expanding the infrastructure. Bergmann suggested natural gas would be “the fastest growing energy in the years to come”.
Bergmann questioned whether natural gas will in fact grow as fast or as far as has generally been predicted, making the point that while almost all of the western European gas demand anticipated in the next ten years (till 2005) has already been covered through long-term contracts, forecasters are nevertheless still predicting that gas consumption will rise by between one-third and 50% until 2010. A level of market development resulting in additional demand of 75-80 mtoe by 2010, though previously anticipated, can surely no longer be taken for granted, he said.
Penetration of the residential market cannot not be expected to continue at the same level, he said, since it cannot be based solely on increasing the numbers of customers in areas already receiving gas. Instead this will require development of new areas where customer density is lower. As progress is being made with energy conservation in Germany, gas consumption per household is falling, with a consequent rise in connection charges. This picture is gradually being repeated – with a slight time-lag – elsewhere in Europe, and is likely to continue, said Bergmann, “not least due to the relocation of energy-intensive industries”.
Only in the power sector are prospects for gas “undiminished”, he said, although there too it would be necessary to come to terms with lower load factors, improved technology and reduced costs of coal-fired power plants. Co-generation, though attractive, was a “limited development”. There are, Bergmann said, “no ground-breaking developments” in terms of new markets while, at the same time, gas has to be supplied from ever more remote regions under increasingly difficult conditions. This calls for “more modesty by producing countries in their government take, more stringent cost-management at all stages of the gas chain, full exploitation of the market value and longer pay-back periods”. He also noted an “emerging medium-term oversupply in north-western Europe”.
Bergmann identified the other main factors he considers responsible for the uncertainty clouding the future for gas as energy taxation and the regulatory framework for grid energies. He attacked “lop-sided” gas taxation in Germany (see chart), where excise tax is levied at a rate of 20% of the import price, while dirtier fuels such as coal, lignite and nuclear remain untaxed. The different excise taxes in western Europe also lead to distortions in gas demand, he said, though some importing countries do not grant producers a right to “taxfall” profits.
Bergmann feels that no emergency action is required on regulation, either at the Brussels or national level. Speaking of Germany, he said that more competition would be “triggered by the market itself”, though clearly not without some raised temperatures (see separate story). The EU debate, he said, is over the opposing concepts of negotiated third party access (TPA), which Ruhrgas appears prepared to go along with, or the “single-buyer concept” favoured by the French.
Bergmann predictably slammed “general third party access” and claimed that EU proposals have been superseded in Germany by actual market developments. He called for the continuation – and honouring – of long-term import contracts to ensure the viability of future large-scale projects. The answer to how gas could hold its own in an increasingly uncertain future, he said, lies in raising efficiency and lowering costs.
He said that an efficient merchant company (like Ruhrgas) would continue to be a better option for a producer than trying to market gas directly, but marketers must be prepared to act faster and more flexibly as gas was increasingly becoming a commodity, like oil.
“We at Ruhrgas no longer market natural gas,” he said. “We market the brand product ‘Natural gas from Ruhrgas’.”