Gas Infrastructure in Europe: “We Need a Stability Now”

Natural Gas Europe had the opportunity to speak with Jean-Claude Depail, President of Gas Infrastructure Europe.

Mr Depail, Executive Vice-President of GDF SUEZ in charge of the Infrastructures business line, was re-elected President of GIE for a two-year term by the General Meeting of GIE, which met in Krakow on May 24 and 25, 2012 for its 10th annual conference.

What do you believe is the most immediate challenge facing infrastructure players in the European market?

In the short term I would say the absence of stable and predictable regulatory framework is really an issue. Sometimes even the national frameworks move in different directions from each other and from the European framework. Furthermore the permits and authorization procedures should be significantly improved all across Europe.

In the long term, I think the lack of visibility for the gas infrastructure industry is probably one of the main challenges for the gas infrastructure players. It is something that we cannot accept. Gas infrastructure is a long-term, capital intensive business. Just today we build infrastructure, that will be used in 2050, for this reason we need a sound investment climate; we need a stable and predictable regulatory framework. But overall we need visibility. We need to attract investors; this requires strong signals from the EU policy makers recognizing the fundamental role gas will play by 2050 and beyond. Otherwise investment on gas infrastructure will not take place.

We have to convince producers to invest in the production of gas for the future. We have to work closely with countries that can produce gas.

We have heard today [during the conference] about high estimates of future costs of extending networks in Europe…

Yes, according to ENTSOG and the Commission the estimations for future investments up to 2020 are around 70 -90 bln euros; it is not easy to give a more exact figure…

 …In the current economic climate, how in your opinion, governments and the UE can help to finance this costly development?

I think, that if the governments and the EU give the right signals to the market on the short, medium and long term, if they ensure that the regulatory framework is robust, predictable and stable, if they are able to create a sound investment climate, then the investors will be confident, they will be sure that they will get the remuneration, be able to have bankable projects and attract investors. If you have confidence, if you give confidence, the investors will come.

You can see what happens to the network of Germany. Australian funds buy this network because they have confidence in Germany. There’s a lot of money to be invested in infrastructure. Stability is very important, if you don’t change rules, you give confidence to the market. What funds need for their customers, is stability  of their returns on the long term.

It was recently announced that the first leg of Nord Stream was fully operational. The second leg is going to be launched later this year. In the light of this fact, but also in the light of the expected increase of LNG exports from the US to Europe in a few year time, do you think that those new investment, especially South Corridor pipeline projects, may be profitable, may be needed?

GIE is independent from specific projects, therefore GIE does not take position regarding individual projects.

Significant gas investments are needed to achieve the 3 pillars of the European Market : energy policy, that is to say security of supply, competitiveness and sustainability. Let the market decide where these investments should take place; GIE and most stakeholders are effectively convinced that most investments should be market based.

I think Russians will decide what they will do. If they believe in their business, they will launch South Stream.

 How about Nabucco?

It’s difficult for us to speak about these projects because we don’t have to choose among different projects. Clearly, the Nabucco and South Stream are in competition. For the moment what you see is that investors of Nabucco are disappearing, but I will not judge on that..

 Do you think that oil indexation of gas prices is sustainable practice in Europe in the long term?

Since the second gas directive, gas infrastructure activities are more unbundled from the supply side. Gas infrastructure operators are not involved in buying and selling gas in large amounts, we buy gas only for small uses related to our compressors and as permanent cushion gas for the storage. Nevertheless, we are not involved in those negotiations. Our perception is just that we are seeing today an increasing tendency for decoupling between oil-indexation and gas prices. As long as we are seeing the development of liquid hubs across Europe, gas to gas competition increases.

The main question is: do we need long term contracts or not?. And then, long terms contracts may be indexed on different prices : index of the market, or index of oil. It’s often ideological question, and one difficult to answer, because we know that in the past, from time to time oil-indexed gas was cheaper than the market index…

 …Not at the moment…

Why? Because, we have shale gas in the US, crisis and diminished gas consumption. But  ask Japanese, they have very high prices.

There is a kind of division between Eastern and Western parts of Europe in terms of density of the network. How much time will it take to overcome this difference?

We have some countries in the East, that have a good network. Romania has a good network, but it’s not connected to the West. We have to connect these countries. In 2009, during  the Russian supply crisis, it was difficult to send  gas from the West. This year, when we had - not a crisis - but some problems with Russian gas, the countries were not so dependent as in the past. Today the situation is better than it was several years ago.

How successful was the European Commission in creating a competitive gas market in the EU? Do you think there is a need for a fourth round of gas market liberalization?

GIE and its members are committed to create this single competitive market and secure EU gas markets.

The first gas directive was published in 1998, the second one in 2003 and the third one in 2009. In 10 years, three different directives have been published by the EU. If we take into account that some gas projects can take up to 10 years from the drafting phase to the start-up date, then a project promoter could have run the feasibility studies under  the first package, run the permits and authorization phase under the second package and build and operate the project under the third package; this is a clear example of non-stable regulatory framework and you can take for sure that this is having an impact on the investment climate.

I think that nobody can deny, that we see progress with respect to how the gas market looked like 10 years ago. It is too early to assess whether a fourth package is necessary. I would prefer to wait until the network codes foreseen by the third package start to be implemented and we see how the market is changed due to them.

We are in Poland, so let me ask a question touching the subject, that is very popular here: shale gas. The shale gas revolution happened in the US, where pipelines network is extensive and access is guaranteed by common carriage principle. In Europe, especially in the Eastern Europe, network is less abundant and access is regulated by the TPA principle. Do you think it may be a barrier for the development of shale gas in Europe?

For me there’s no barrier. The shale gas production facilities can be connected to the TSO transmission pipelines as conventional gas production. From gas infrastructure`s point of view, shale gas production is handled the same way as other gas production.

What is important is cost of production. Today for example you have 2 dollars per BTU in the US, in Europe it’s about 12 and in Japan 16 or even 18. I’m not sure if we will have the same cost in Europe, but clearly it`s all about cost of production, as cost of the network is very weak in comparison. The costs of the network and storage on the gas bill are about 10 percent. There is not barrier, and by TPA you can enter, you can connect your production to the network and pay fee for capacity. Even if you don’t own a network , when you have resources in the ground, you have no barriers…

 …in your opinion, if there is a supply and demand, sources of financing for extending the infrastructure sooner or later will be found.

if you convince people, that you have reserves in ground, if you have a market because cost of shale gas is low, if you have an opportunity to sell this gas to the market, because it will be cheaper than gas that you import - there`s no problem with that.