SEVENTH REPORT
18 November 1997
By the Select Committee appointed
to consider Community proposals, whether in draft or otherwise,
to obtain all necessary information about them, and to make reports
on those which, in the opinion of the Committee, raise important
questions of policy or principle, and on other questions to which
the Committee considers that the special attention of the House
should be drawn.
ORDERED TO REPORT
EU GAS DIRECTIVE
| Un-numbered
| Amended Proposal for a European Parliament and Council Directive concerning common rules for the internal market in natural gas
|
PART 1 INTRODUCTION
THE
EUROPEAN NATURAL GAS INDUSTRY
1. Natural gas already
has an important share in the total primary energy consumption
of the European Community and this is forecast to increase from
20.2 per cent in 1995 to 23 per cent in 2000 and 26 per cent in
2010[1].
A substantial part of this potential growth is attributable to
the increasing use of natural gas in electricity generation, but
gas is also important for certain industries, including steel,
glass and paper manufacture, where it is used as a fuel, and fertiliser
production where it is used as a feed stock. In these industries,
all of which compete on the global market, the cost of gas constitutes
a substantial part of the overall costs of production. The establishment
of a competitive gas market and the reduction in prices that can
be expected to result is therefore an important element in improving
the industrial competitiveness of the Community.
Europe's natural
gas supplies
2. The Community's natural
gas market is substantially and increasingly dependent on imports
of natural gas. In 1995 the Community was dependent on imports
for 40 per cent of its gas, and this is expected to rise to 45
per cent in 2000, 55 per cent in 2010 and 70 per cent in 2020.
Almost all of the Community's gas imports come from Russia (64
per cent), Algeria (33 per cent) and Norway[2].
3. Of the EU Member
States, only the UK and the Netherlands have substantial proven
indigenous reserves. Germany and France have small reserves; others
little or none. Most of Europe's indigenous natural gas is located
under the North Sea, from where raw or partly processed gas is
transported by pipelines, in many cases over distances of 200
miles or more, to onshore terminals where it is converted into
a product suitable for use by final consumers. In most cases,
only minimal processing takes place before transportation, because
the cost of installing and operating processing equipment offshore
would be prohibitive.
The gas industries
of the Member States
4. The natural gas industries
of most Member States were established in the 1970s and are now
mature industries with well developed pipeline networks. Greece,
Spain, Portugal, Finland and Ireland have relatively new gas industries
with underdeveloped pipeline networks[3].
5. The principal Community
gas suppliers are state-owned or state-controlled, with the exception
of the major gas transmission/distribution companies in Germany,
which have always been in the private sector, and those in the
United Kingdom. Here, the British Gas Corporation (BGC) was a
state-owned national monopoly until 1986, when the Gas Act transferred
its business to British Gas plc, the shares of which were sold
to the public. The Gas Act 1986 also introduced competition in
the supply of gas to major industrial and commercial users, provided
negotiated access rights to pipelines and created an independent
regulatory body, the Office of Gas Supply (Ofgas). In February
1997, British Gas de-merged, with Centrica plc taking over the
gas supply business and BG plc retaining responsibility for the
transmission and distribution networks.
Take-or-pay contracts
6. The vast majority
of gas handled by the gas suppliers of the Member States is purchased
under long-term "take-or-pay" contracts. This included,
until recently, most gas supplied in the United Kingdom, but since
the introduction of a substantial degree of competition this practice
is no longer generally followed. Under a take-or-pay contract,
which is often of 20 years' duration or more, the buyer agrees
to take delivery of a specified minimum quantity of gas in each
3, 6 or 12 month period, and must pay for that minimum quantity
even if less gas is, in the event, taken. These contracts are
frequently defended on the basis that the sellers require a minimum
revenue from a gas contract to enable them to finance infrastructure
development costs and that they enable the buyers to ensure security
of supply.
7. All such contracts
include mechanisms for automatically adjusting the price paid
under the contract to reflect changes in the market prices of
competing, alternative fuels (particularly fuel oil and gas oil).
In addition most contracts for the supply of gas to Continental
Member States, but not those for supply to the United Kingdom,
include "price re-opener" clauses, which make provision
for price re-negotiation where significant changes in the gas
purchaser's market affect the profitability of gas supply in that
market. Such clauses are not, however, intended to accommodate
gas price changes as a result of gas-on-gas competition.
Gas buyers and
sellers
8. In the case of Russia
and Algeria, the exporting companies (Gazprom and Sonatrach respectively)
are at present state-owned companies. In the case of Norway, all
export sales are currently handled through an organisation comprising
three Norwegian production companies, Gassforhandlingsutvalget
(GFU), although non-GFU companies may join the market in time.
The Continental gas buyers are major gas companies which, except
in Germany, are owned or controlled by the State. As a result,
the purchase of gas for the Continental European market is conducted
between oligopolies of comparable economic strength.
The Hydrocarbons
Licensing Directive
9. The exploration,
development and production of natural gas in the North Sea and
within the territories of the Member States are subject to the
controls laid down in the 1994 Hydrocarbons Licensing Directive[4].
The terms of this Directive also apply to the Norwegian sector
of the North Sea and to Norway itself through the operation of
the European Economic Area Agreement, to which Norway is a party.
10. The 1994 Directive
requires the Member States (and Norway) to establish and operate
a non-discriminatory and transparent procedure for the granting
of licences for the exploration, development and production of
oil and gas fields. It reserves to the States concerned sovereign
rights over oil and gas resources, including the right to determine
the timing of the development of reserves and the rate at which
they are allowed to be depleted. It does not apply to gas storage
or transmission pipelines.
THE
ORIGINS AND CURRENT STATUS OF THE EU GAS DIRECTIVE
11. The proposed Gas
Directive, which is the subject of the present report, has its
origins in the Single European Act of 1985 and is intended to
create common rules for the internal market in natural gas and
thereby promote competition in the gas markets of the Member States.
In order to implement the Single European Act an internal market
provision (Article 7a) was added to the EC Treaty, defining the
internal market as "an area without internal frontiers in
which the free movement of goods, persons, services and capital
is ensured in accordance with the provisions of this Treaty".
Article 7a required the Community to adopt measures with the aim
of progressively establishing an internal market over a period
expiring on 31 December 1992. Although the measures to be adopted
included those for the establishment of an internal market in
energy, this was one of the sectors in which the 1992 deadline
was not met.
12. The need to extend
the internal market to the energy sector was emphasised in the
energy objectives for the Community identified by the Council
of Ministers in September 1986. The objectives expressly mentioned
the need for "greater integration, free from barriers to
trade, of the internal energy market with a view to improving
security of supply, reducing costs and improving economic competitiveness."[5]
13. It fell to the Commission
to prepare the draft measures-mainly Directives-for the creation
of an internal market for the various energy sectors including
natural gas and electricity. The Commission began its task in
1988 by publishing a Working Document[6]
which analysed the issues involved in creating an internal energy
market and identified potential obstacles to the creation of such
a market in each of the energy sectors. The potential obstacles
identified in relation to the natural gas sector included differing
technical standards, constraints on the free movement of natural
gas at Community and national levels, and issues of transportation,
storage, distribution, marketing and imports and exports.
14. Progress in reaching
agreement on the internal market Directives for the gas and electricity
sectors was hindered by disagreement among the Member States and
by opposition from the industries concerned and from the European
Parliament to some aspects of the proposals. The Commission adopted
a common approach to the gas and electricity sectors when preparing
its proposed Directives on the grounds that many of the obstacles
to the introduction of competition were shared between the two
sectors. The Commission issued consultative draft Directives for
both gas and electricity in 1991, followed by formal proposals
in 1992[7]
and amended proposals in 1994[8].
Later that year, the Energy Council decided to give priority to
the Electricity Directive, with further progress on the Gas Directive
to be suspended in the meantime. A common position was reached
on the Electricity Directive in July 1996 and was approved by
the European Parliament later that year. The Directive came into
force on 19 February 1997[9].
15. In a memorandum
accompanying the consultative draft Directives issued in 1991,
the Commission reviewed the obstacles to the creation of a single
market in the gas and electricity sectors, listing them as follows:
- established
gas undertakings had exclusive rights which limited new entrants
to the market;
- there
was little or no gas-on-gas competition since the few importers
there were had divided the market between them "through a
series of long term contracts characterised by costly take or
pay clauses and supply prices based on the price of competing
fuels";
- consumers
were unable to choose their suppliers, while companies experienced
no competition in their markets and as a result continued to behave
in a monopolistic fashion;
- integrated
gas and electricity companies published their accounts on a consolidated
basis which limited the information given to the public on the
efficiency and quality of the management of the various operational
activities;
- interventions
by Member States in the gas and electricity markets, in order
to influence investments and prices, were often excessive and
hindered companies' adjustment to their commercial environment;
- the conditions
in which companies operated were not harmonised;
- gas and
electricity transmission infrastructures and interconnections
between networks were often inadequate and consequently restricted
justified economic exchanges.
16. In September 1996,
following agreement on the Electricity Directive, work was resumed
on the Gas Directive. A compromise proposal, based in many important
respects on the solutions adopted in the electricity sector, was
prepared and circulated to Member States by the Irish Presidency.
Its most controversial aspects related to market access and the
treatment of long-term take-or-pay contracts. On market access
it proposed an initial minimum market opening percentage, which
was unspecified, with the Commission required to publish a minimum
market percentage figure for each subsequent year. On take-or-pay
it provided for the granting of "transitional regimes"
in respect of access obligations only for contracts entered into
before 25 July 1996, such transitional regimes to be granted by
the Commission on application from the Member States concerned[10].
Despite extensive negotiation, no agreement had been reached by
the time the Presidency passed to the Netherlands in January 1997.
17. The Dutch Presidency
issued a new text on 25 April 1997 which proposed that, in the
first stage of market opening, all power generators and other
consumers using more than 25 million m3 per year should
qualify as "eligible customers" able to benefit from
competition in the supply of gas; that this threshold should fall
to 10 million m3 after five years and to 1 million
m3 after ten years; and that the resulting market opening
should amount to at least 30 per cent initially, rising to 40
per cent after five years and 50 per cent after ten. The 25 April
text also provided that "derogations" (the term now
used instead of "transitional regime") could be granted
in respect of access obligations for long-term take-or-pay contracts
entered into at any time (that is, before or after 25 July 1996).
18. A further Dutch
text of 6 June 1997 replaced these indicative figures with letters
of the alphabet, indicating the extent of the disagreement that
remained. It also proposed different procedures for applying for
derogations from access obligations in respect of take-or-pay
contracts, depending upon whether the contract was entered into
before or after 25 July 1996. In respect of the former, Member
States could grant derogations without reference to the Commission,
but in respect of the latter they were required to notify their
intention to grant a derogation to the Commission, which could
require amendments to the derogation or refuse permission to grant
it. No agreement was reached during the Dutch Presidency.
19. The incoming Luxembourg
Presidency produced a compromise proposal on 18 July 1997 which
proposed qualifying thresholds for eligible customers (other than
power generators) of 25 million m3 initially, 15 million
m3 after 5 years and 5 million m3 after
10 years, and minimum figures for market opening of 28 per cent,
40 per cent and 45 per cent respectively. This July text included
recitals for the first time and incorporated a number of other
changes[11].
20. Foremost amongst
these was a revised two-stage procedure for the granting of derogations
from the access requirements of the Directive to gas undertakings
which, as a result of the introduction of competition, encounter
economic difficulties or hardship under long-term take-or-pay
contracts entered into either before or after 25 July 1996. The
procedure would allow a gas undertaking to which an application
for access has been made to apply to the Member State concerned
for a derogation, either before or after access is refused. When
considering such a request, the Member State would be required
to take into account the terms of the contract in question, including
the extent to which it allows for changes in market conditions.
If it proposed to grant a derogation, the Member State would have
to notify the Commission, which would be required to apply the
same criteria as the Member State and could, within four weeks,
request the Member State to amend or withdraw the proposed derogation.
This procedure replaced that proposed in the 6 June draft, increasing
the powers of the Commission to refuse or amend derogations proposed
by Member States.
21. When the Committee
began to take evidence in June, many of the basic elements of
the draft Directive had been agreed, but a number of key issues
were still to be resolved. These included the application of the
Directive to offshore pipelines, the level of market liberalisation
and the criteria for granting derogations from the application
of the Directive. The Committee finished taking evidence in late
July, since when negotiations on these outstanding points have
continued, with the Working Party on Energy issuing new compromise
texts on 22 September and 6 October. The most significant change
in these texts was an addition to the criteria for granting derogations
under Article 23, which requires the Member State and the Commission
to take into account "the extent to which, when accepting
the take-or-pay commitments in question, the undertaking could
reasonably have foreseen, having regard to the provisions of this
Directive, that serious difficulties were likely to arise"[12].
Other changes included a revised definition of "transmission"
which would have the effect of excluding from the scope of the
Directive production pipelines subject to the 1994 Hydrocarbons
Licensing Directive; the introduction of Chinese wall provisions
to prohibit transmission or distribution undertakings from abusing
"commercially sensitive information obtained from third parties
in the context of providing or negotiating access to the system";
and a reversion to a definition of "emergent regions"
in place of the list of qualifying regions in an Annex proposed
in the June and July texts.
22. The Luxembourg Presidency
called an extraordinary Energy Council on 27 October, in the expectation
that a common position could be reached on the draft Directive.
Since this report was still in preparation, the Chairman of Sub-Committee
B, Lord Geddes, wrote to the Minister for Energy, Mr John Battle
MP, on 16 October to convey to the Government, in advance of the
Council meeting, the provisional conclusions that the Sub-Committee
had reached. The Minister replied on 19 November, informing the
Sub-Committee that a common position had not, in the event, been
achieved at the Energy Council. Although differences over market
opening and take-or-pay remained unresolved, the Council concluded
by noting the "substantial progress made" and confirming
its "political willingness to reach a common position at
the next Energy Council on 8 December 1997."
STRUCTURE
OF THE REPORT
23. The membership of
Sub-Committee B (Energy, Industry and Transport), which undertook
the enquiry on which this report is based, is listed in Appendix
1. The witnesses who gave evidence in the enquiry are listed in
Appendix 2, while Appendix 3 consists of a table of gas prices
in the EU and G7 countries which was supplied by the Department
of Trade and Industry. The letter sent by the Chairman of Sub-Committee
B to the Minister is printed as Appendix 4 and the Minister's
reply as Appendix 5. The remainder of this report consists of
a summary of the main points made in evidence in Part 2, followed
by the Committee's conclusions in Part 3.
ACKNOWLEDGEMENTS
24. The Committee would
like to thank all the witnesses who gave oral and written evidence
in the enquiry, particularly those who travelled from overseas.
We also wish to thank the Specialist Adviser, Mr Michael Brothwood
of Denton Hall's Energy and Infrastructure Group, for the assistance
he provided during the enquiry and in the preparation of this
report.
1
Source: Eurogas. Comprehensive data on the European gas industry
is contained in documents supplied by Eurogas and reprinted as
part of the evidence accompanying this report. The data to which
this footnote refers is at p 57. Back
2
Source: Eurogas, pp 59-60. Other States of the former Soviet
Union are also likely to become increasingly significant exporters
of gas. Back
3
Source: Eurogas, p 57. Back
4
Directive 94/22/EC of the European Parliament and the Council
of 30 May 1994 on the conditions for granting and using authorisations
for the prospection, exploration and production of hydrocarbons,
OJ L164 30.6.94, p 3. Back
5
Council Resolution of 16 September 1986 concerning new Community
energy policy objectives for 1995 and convergence of the policies
of the Member States, OJ C241 25.9.86. Back
6
Commission Working Document: The Internal Energy Market, 2.5.88. Back
7
Proposal for a Council Directive concerning common rules for the
internal market in natural gas COM(91) 548 final- SYN 385, OJ
C65 14.3.92, p 14; Proposal for a Council Directive concerning
common rules for the internal market in electricity COM(91) 548
final-SYN 384, OJ C65 14.3.92, p 4. Back
8
Amended Proposal for a European Parliament and Council Directive
concerning common rules for the internal market in natural gas,
OJ C123 4.5.94, p 26; Amended Proposal for a European Parliament
and Council Directive concerning common rules for the internal
market in electricity OJ C123 4.5.94, p 1. Back
9
Directive 96/92/EC of the European Parliament and the Council
of 19 December 1996, OJ L27 30.12.96, p 20. Back
10
Presidency Compromise Proposal for a European Parliament and Council
Directive concerning common rules for the internal market in gas,
Brussels, 7 February 1997. Back
11
Presidency Compromise Proposal for a European Parliament and Council
Directive concerning common rules for the internal market in
natural gas, Brussels, 18 July 1997. Back
12
The October text also gives Member States the right to choose
whether an applicant for a derogation must submit the application
before or after refusing access. Back
| 
