LONDON (Dow Jones)
The Netherlands is investing billions in new infrastructure with the aim of becoming the gas trading and distribution hub of northwest Europe, but its success may be hindered by a lack of reform in neighboring countries.
The Netherlands has advantages: It has been a major gas producer for decades and sits at the intersection of the region's largest energy markets. But unless the European Commission can strong-arm France and Germany into reforming their domestic energy markets to allow genuine competition, industry experts say the Dutch may be planning for a market that will never materialize.
Ever since the 1959 discovery of Groningen, Europe's largest gas field, the Netherlands has been at the center of Europe's gas industry. After 40 years of production, that field is in slow decline, but the infrastructure built up around it gives the Dutch a head start.
"It's an entry point into northwest Europe," said Haroun van Hovell, chief financial officer of 4Gas, a Dutch company that is planning to build a terminal in Rotterdam to import cargoes of liquefied natural gas. "The Netherlands already exports gas to Germany, France, Belgium and all the way to Italy," he said, adding that new projects are "building on existing infrastructure and building on existing policies."
Private-equity group the Carlyle/Riverstone Global Energy and Power Fund II is the main shareholder in 4Gas.
As Europe's own gas reserves decline, two sources will grow in importance – pipeline gas from Russia and LNG shipped from the Middle East, Africa or Trinidad. The Netherlands could be an important transit route for both.
A joint venture between state-controlled Dutch gas network operator NV Nederlandse Gasunie and shipping terminal operator Koninklijke Vopak NV (39300.AE) is building the Gate LNG terminal, which should be operational in the second half of 2011. If 4Gas decides to go ahead with its Liongas terminal, it could be operational by 2012.
"I think a substantial part of Dutch LNG imports will be going to other markets," said 4Gas Chief Executive Paul van Poecke. The terminals would be able to import almost half of Dutch consumption and van Poecke said that "there's a lot of interest from German power companies to get gas in the form of LNG," and France and Belgium are also potential markets. Danish and Austrian companies already have agreements to take gas from Gate LNG.
The Netherlands could become an important transit corridor for Russian gas to Western Europe by 2012 once the Nord Stream pipeline under the Baltic Sea into Germany is completed. Gasunie is a partner in Nord Stream and owns the north German gas grid. Russia's OAO Gazprom (GAP.RS) is a partner in the BBL pipeline that connects the Netherlands to the U.K.
Marcel Kramer, chief executive of Gasunie, said the flow of Russian gas will depend on the needs of consumers, but, "if they want to do that then our involvement along the route might help." Gazprom has made no secret of its desire to rapidly increase its share of the U.K. market.
These plans don't come cheap. Gasunie plans to spend between EUR1.1 billion and EUR1.8 billion increasing the capacity of the gas network. Gate LNG will cost around EUR800 million and the BBL cost EUR500 million. 4Gas doesn't yet have a final budget for Liongas.
French, Germans Resist EU Reforms
But even as the Dutch lay the foundations for its new gas market, neighboring Germany and France - Europe's second- and fourth-largest gas markets -are fiercely opposing European Commission plans to open up energy markets by taking gas and power networks away from the big national utilities.
"Infrastructure is our asset base. Splitting out the major part of our assets will weaken us in the face of Gazprom," said Bernard Brelle, deputy head of the strategy division at Gaz de France SA (1020848.FR). "This is clearly not in favor of security of supply."
But the European Federation of Energy Traders argues that Open access to gas networks is the key to improving Europe's gas markets. "Gas is a 'network' energy, and access to the gas grid has a crucial influence on the development of gas trading," EFET said.
If the Dutch market is open but the German and French gas networks aren't, there will be "barriers to trade for companies wishing to buy gas in one part of Europe and sell it in another," it said.
The result of this can be seen in the lack of liquidity on most European gas trading hubs. The Netherlands has continental Europe's most liquid gas-trading hub, called the TTF, which is busier than similar hubs in Belgium and Germany. However, the level of trade on the TTF is still far short of where it is in the U.K. - a mature and fully liberalized market.
"The TTF needs more liquidity...you just need a bigger marketplace," said 4Gas' van Poecke.
As long as some parts of Europe are more open than others, it will be difficult to achieve a single flexible gas market, said Gasunie CEO Kramer.
Sally Bogle, a senior research analyst at consultancy Global Insight, said European reforms were likely to progress despite French and German intransigence. "A lot of time and energy has been invested in liberalization to date... At some point that step will have to come," she said. "There will be a hell of a lot of resistance for sure, and the model adopted may not be the preferred one."
The commission's plans got a big boost last month when German utility E.ON AG's (EOA.XE) electricity business agreed to settle an antitrust case by selling its transmission networks and some generation assets. Another antitrust charge is pending against E.ON Ruhrgas, but it and GdF strenuously oppose a similar settlement for gas networks.
The Dutch gas industry is confident that European reforms will work eventually. "We are making progress, but it's a bit like watching grass grow," Kramer said.
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