US Easing of Restrictions for non-FTA Countries Decreases TTIP’s Impact on EU

European Commissioner Cecilia Malmström and European Council President Donald Tusk recently spoke in favour of stronger economic ties with the United States. Tusk also hoped that Brussels and Washington will “conclude the negotiations on a comprehensive and mutually beneficial Transatlantic Trade and Investment Partnership (TTIP) by the end of 2015.” Malmström said that the deal would build a strong European economy, and “protect Europe’s values.” But what would be the impact on energy markets?

We spoke about it with Koen Rademaekers, Managing director at Triple E Consulting, and co-author of a study about the subject for the ITRE Committee (European Parliament). Rademaekers does not see a significant effect on European energy markets because of i. low barriers between the two countries in the oil and gas industry, ii. a possible increase in American gas prices, iii. and a simultaneous easing of restrictions from the US to non-FTA countries. Rademaekers does not expect a price convergence between Asia and the EU for the time being, and adds that countries are unlikely to change interest rates policies. 

What would be the impact of an energy chapter in the TTIP?

In the oil and gas industry (between the US and the EU), there are nearly no tariff barriers – current tariffs are between 0 and 0.4%. Obviously, if you are going to delete them, these measures would not make much of a difference. More important are the non-tariff barriers such as the restricted US export of oil and natural gas. Above, due to the current organisation of the energy markets, the TTIP will not have a big impact on the European energy markets.

Would the TTIP change the probability of LNG to Europe?

Speaking about American LNG coming to Europe, there are a lot of ‘IFs’. At the moment, there is a high US gas demand. Even if the US gas demand lowers, there should be enough LNG terminals in place and export restrictions should be banned. Moreover, where would the extra gas go to? It won’t come to Europe as wholesale prices in Asia are currently much higher. 

Could we see a convergence of European and Asian gas prices?

In the industry, it is not easy to switch from gas to oil. In Europe, natural gas is a different product than oil - gas prices are not anymore following the Brent price. In some other markets, like Asia, there is a higher correlation between oil and gas prices. If oil prices stay low for the next 6, 12, 24 months, then there is a possibility that the spread between gas prices in Europe and gas prices in Asia is becoming smaller. That could have an impact. But that is for the short and medium term. Nonetheless, most research indicates that oil prices can stay rather low in the short term (say 6-12 months), but in the medium term they will increase again. 

But still many spoke about convergence. Reuters for example reported that prices in the natural gas hubs of Europe and Asia are at their closest to the U.S. benchmark since 2010.

I don’t know if we will see an overall convergence of Asian and European gas prices. Looking at the European gas and electricity markets, when Powernext, EEX, APX and BELPEX started to work more closely together, spreads were decreasing until 3 years ago. The idea of one big market with one big pricing strategy is currently far away. In the last couple of years, the spreads increased again, basically due to different national policies. That is why I don’t think that in the short and medium term, there will be further convergence.” 

On the other hand, could you see a decline in gas prices in Europe?

I don’t see a huge further decline of gas prices in Europe. Norway, Qatar and Algeria are smart enough not to oversupply European markets. 

Going back to the relation between the US and Europe, you said that American LNG to Europe might be difficult, right?

Currently, natural gas exports from the US to Europe are limited and at the same time US’ exports to non FTA countries are becoming easier. In the short and medium term, we don’t see the US as a player able to increase market security in Europe. 

What is your take on the future of the US gas market? Do you think production will remain on the same levels?

Looking at shale gas developments in the US, it will be a question if they can go on, in the way they are dealing with it currently. We believe that gas prices will increase in the US due to the fact that there will be slowly more regulation in place, that they will have to organise it differently and that they are producing at very low marginal costs for the time being. But they cannot continue like they have been doing over the last years. I think that quite some US’ shale gas producers, especially small ones, will go broke if prices will stay as low as today.

Could US’ shale gas producers be endangered also by a change in interest rates?

I don’t see inflation picking up rapidly in Europe or the US. It means that in the short and medium term, there is no reason for national banks to change their interest rates policies.

Do you think that the TTIP might make easier for American companies to capitalise on their technology? I am referring for example to the recent deals clinched by GE with Norway’s Statoil and Algeria’s Sonatrach. 

GE’s strategy to become more active in Europe was set up at least five years ago. I think that this development is totally separate from the TTIP and I don’t see the link.

In conclusion, looking ahead, what are the main hurdles for the TTIP? Would you be able to provide a deadline? 

In the last year, we saw that different political and third parties in Europe have been sending an enormous amount of letters/emails to the Commissioner, telling that they cannot go beyond their current negotiation powers, otherwise they would intervene with national environmental, labour and consumer legislation.

My point of view is that if the negotiators continue with the strategy of dealing with all the different topics at the same time, it can still last for another 12 months. Another possibility is to discuss the topics in a different way: to finalise one topic, to close it, and then go further with another one. And that is maybe an alternative to come to an end in a shorter way.

Sergio Matalucci 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci