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Global Gas History

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    10 months ago: Russian President Vladimir Putin, center, and the Netherland's Prime Minister Jan Peter Balkenende, left, enter a hall for a signing of documents ceremony in the Moscow Kremlin, Tuesday, Nov. 6, 2007, with Dutch gas company Nederlandse Gasunie NV President Marcel Kramer, right, in the background. Russian and Dutch officials signed an agreement Tuesday to include Dutch gas giant Nederlandse Gasunie NV in the Baltic Sea pipeline designed to bypass several European countries and ship Russian gas directly to Germany.  

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      Dutch Ordeal '63 


    The Global Gas History

    Three years after the discovery of the huge Groningen gas field in 1959, the Minister of Economic Affairs, De Pous, in his famous “Nota De Pous” established the main principles of the Dutch gas policy. Firstly, in order to generate maximum revenues for the State and the holder of the concession, the Nederlandse Aardolie Maatschappij (NAM, a 50/50 joint venture of Shell and Exxon, exclusively to undertake the production activities at Groningen), the minister introduced the "market-value" principle as the basis on which the gas should produced. Thus, the price for gas to be sold to the various types of consumers was linked to the price of alternative fuels most likely to be substituted, viz. to gas oil for small-scale users and to fuel oil for industrial and other large-scale users.

    Accordingly, consumers would never have to pay more for gas than for alternative fuels, but the market value principle also ensured that they would not pay less. The application of this principle based on market segmentation enabled the concession holders, Shell and Exxon, and the Dutch State to maximise revenues and to market natural gas at a competitive price. A price that would have been related to the production costs of gas from the Groningen field would not have had these benefits.

    The State’s revenues
    were secured in a number of ways; first, through corporate taxes (48%) on the profits of the Maatschap (The State, via the Staatsmijnen (later Dutch State Mines or DSM), was to participate in the costs of exploiting gas from the Groningen field and in the flow of revenues through a financing partnership, known as the Maatschap (40% DSM, 60% NAM)), Gasunie (Gasunie was established as a joint venture owned by the Dutch State Mines (DSM) (40%), the Dutch State directly (10%) and Exxon (25%) and Shell (25%).

    Gasunie was given the exclusive responsibility to co-ordinate the commercialization of the Dutch natural gas resources on behalf of the State, the concession-holder NAM and DSM; secondly, through an additional 10% government surcharge on the profits of the Maatschap, and thirdly, through the dividends and the “State profit share” paid to the State by, respectively, Gasunie and DSM. From the early 1970s onwards, a State profit share was also applied on the profits of the Maatschap since the oil price had risen and the State judged that the profit share of the private parties would otherwise extend far beyond the original principles of the cooperation agreement.

    Regulated market
    An essential precondition for maintaining the market value principle was that no alternative supplies of low priced gas could reach the segmented market - a condition which was fulfilled until recently in the Netherlands and abroad. To this end, the second main principle in the “Nota De Pous” Stated that the exploitation of the Dutch gas resources should proceed “in harmony” with the sales of gas achieved, in order to avoid disruptions of the energy market. Control over the supply of gas was thus seen as a government responsibility. The Nota also stated that the exploitation and marketing of the gas reserves should be undertaken by the private concession owners, Shell and Exxon, in order to enable the country speedily to benefit from their knowledge, experience and financial resources.

    In 1963, the Dutch government and the two companies agreed upon a structure that effectively united these principles.The Ministry of Economic Affairs formally confined its responsibilities to approving decisions taken by DSM and Gasunie in respect of prices, production, national and international trade volume and the construction of transport and storage facilities. In practice, it was always consulted on strategic issues and could initiate discussions for any changes it thought to be necessary in the national interest.

    European network
    Initially, Dutch gas policy was driven by the belief that these reserves should be produced and sold before the expected widespread use of nuclear energy would make the gas redundant.

    From the mid-1960s onwards, Dutch gas exports stimulated the construction of a European gas transport network. This laid the foundation for an integrated gas market and established the principles and patterns of European gas trade. Despite some adjustments, the institutional set-up and principles that governed gas production, marketing and pricing and the distribution of the profits have prevailed until present times.

    Inland sales and exports increased rapidly and most gas originated from the Groningen field.

    The 1973/1974 oil crisis gave rise to the first revision of Dutch gas policy. Seeking security of supply, the inland consumption and exports of gas were discouraged, whereas the exploration and exploitation of new on- and off-shore deposits was stimulated. Post-1974, oil companies were stimulated to find more new gas deposits, by assuring them that Gasunie - having the right of first refusal - would purchase their gas immediately, against acceptable prices and at an adequate rate of depletion. As a result, from the mid-1970s onwards, in addition to the Groningen supplies, increasing volumes of gas were supplied from Dutch on- and off-shore fields - large and small. Later in the Gas Act Gasunie was given the obligations to accept gas from small fields when offered.

    Groningen as swing producer
    Due to the successful exploration, small fields deliveries builded-up and over the years the low cost Groningen field became a marginal source. As a swing producer it supplied the volumes of gas that had to fill the gap between the increasing production of the new fields and Gasunie's falling total requirements, associated with a decline in exports. Hence, from around 85 Bcm in 1976, production at Groningen fell to 45 Bcm in the early 1980s, 30 Bcm in the early 1990s to around 20 Bcm by 1999 up to some 25 Bcm in 2004.

    Many of the smaller fields contained gas of much higher or lower calorific value than the gas from Groningen, to which all (domestic) appliances were adjusted. So, measures had to be taken to include these flows. Installations of large industrial users were converted to H-gas and a second transmission system was built to transmit the H-gas. H-gas and L-gas were mixed to produce a gas of Groningen quality and H-gas was mixed with nitrogen to produce Groningen quality.

    Large revenues
    After 1983, the emerging perception of abundance in energy supply and the falling sales at home and abroad inspired the renewal of export contracts, as long as Gasunie was able to guarantee that it would be able to supply its inland customers for at least 25 years, on the basis of the Dutch reserve position and the estimated evolution of demand. From the early 1960s onwards, the Netherlands benefited from the co-ordinated exploitation of its large natural gas reserves. The Dutch economy was provided with a relatively cheap, reliable and clean source of energy, while the export of natural gas to other Western European countries and the reduction of oil imports into the Netherlands contributed to a positive international trade balance. The increases in oil prices, to which gas prices were linked, induced enormous expansions of the revenues to Exxon and Shell and the Dutch State. The large revenues the State was able to collect permitted the growth and maintenance of the generous Dutch welfare State. Over the early 1980s, the aggregate State revenues from the exploitation of the gas reserves amounted to around 15 á 16% of the over-all State income (exclusive of social security contributions). Currently, this share is below 5%.

    Opponent of deregulation
    Until mid-1995, the Netherlands had been among the opponents of the initiatives of the EU Commission for a liberalization of the gas market. It was not until the second half of the 1990s, that the approval of the European Electricity (96/92/EC) and two years later the Gas (98/30/EC) Directives empowered the EU-Commission to undertake a process of liberalization in the European energy markets.

    Before that already by the end of 1995, however, the Third White Paper on Energy contemplated a fundamental change to the traditional organisation and the operation of the Dutch gas industry. Initially, the aim was to maintain the basic structure of the industry, with a key role for Gasunie and De Maatschap/NAM, to secure scale and organisational advantages and to facilitate the continued co-ordination of gas sales and purchases from the Groningen field, on the one hand, and from the smaller fields, on the other.

    The Gas Act
    By March 1999, a proposal for a Gas Act was sent to Parliament and in June 2000, the new Act was passed. Key elements were:

    • Free choice of supplier for large consumers first and in a later stage the small consumers
    • Non-discriminatory provision of transport and storage service and regulatory oversight in those operations.

    To this end, Gasunie separated its high pressure transport and storage facilities from its trading activities, through the establishment of a ‘Chinese wall’. The local distribution companies were split up into gas suppliers and network operators, providing regulated access.

    • Negotiated Third Party Access on the basis of indicative published tariffs, enabling traders, producers and consumers to contract transport and storage services from Gasunie and the local network operators.
    • Gasunie could  no longer be held responsible for the long-term security of supply for importing consumers: “Dutch gas cannot be reserved primarily for Dutch consumption” (MEZ 1998, p. 20). The traditionally required ministerial approval for volumes, prices and destinations of gas to be exported have been withdrawn in the Gas Act
    • The only remaining - politically determined - limit emerges from the overall Dutch gas production objective of 80 Bcm annually, in combination with the continuation of the small fields policy, recently replaced by a cap on Groningen field production.

    Hybrid TPA-system
    Subsequently, a kind of a hybrid TPA-system began to develop. Pursuant to the Act, by August 2000, the competition authority for the energy sector, DTe, published its provisional guidelines for Gas TPA for 2001 (DTe 2000). These involved the obligation for Gasunie to provide indicative tariffs/structure for standard basic services (defined as transmission, balancing, quality conversion and storage), and information provided by network operators. In addition, negotiations should take place within reasonable period, while the most- favoured-tariff clause should apply.

    In reaction Gasunie carried through a 6.5% lowering of its tariffs for services and promised to dismantle its system. Moreover, it voluntarily announced a legal separation of its transport and trade branches by means of “Chinese walls”.

    Guidelines Transport and Storage
    By June 2001, DTe published an information document on its Guidelines 2002. It proposed to split up Gasunie’s Basic transport services further into separately contractible elements tradable on the secondary market, covering guaranteed gas transport service, backhaul transport service, interruptible transport service and gas storage. It also required the abolition of the point-to-point tariff structure, the application of tariffs (including tariffs and penalties for balancing services), tradability of imbalance and the matching of the period of transport contracts and the balancing regime. Also important were the requirements for the provision of transparency regarding available capacities, costs for basic services, results of negotiations on deviating tariffs and conditions and other information necessary for successful negotiations on efficient cost levels.

    After a number of consult meetings, in October 2001, the Guidelines Transport and Storage for 2002 appeared (DTe 2001b, c). Essentially, these further developed a hybrid system of TPA , in which transmission and storage companies had to offer basic services, subject to standard conditions and tariffs, while they may enter into negotiations on special services. It also required the development of an entry-exit-point system, to promote trade, while giving signals of scarcity of transportation capacity.

    Regarding balancing, basic services are to be offered within a regime of daily balancing with indications on the boundaries of tolerance Gasunie may impose. Regarding the highly debated access to storage facilities, it was compromised that part of the capacity of the storage facilities would be available to third parties in the year 2002. Gasunie announced the establishment of a new transport tariff system. In the meantime,

    Complaints and criticism
    Gasunie’s customers, individually and through their representative organizations, were filing complaints and criticisms at DTe’s hearings and Gasunie’s presentations. Eventually, by January 2002, DTe gave Gasunie a binding order to follow its Guidelines. This order involved a number of compromises, but carried the DTe view further forward. Gasunie’s system and DTe’s several versions of its guidelines, as well as some other elements of the Gas Act, did induce animated discussions in the gas sector, about the way in which they are encroaching upon the ‘vested’ interests of the parties involved. This, of course, involved issues like the determination and acknowledgment of cost levels, tariff rates, access conditions, etc.

    Essential to this debate, however, was that Gasunie argued that the regulator, DTe, went far beyond its tasks as provided in the Gas Act, in developing the Guidelines. This was the main complaint, in a court case started by Gasunie against DTe. Instead of being a reactive watch-dog, checking the behaviour of the firms, the development of services and their access conditions on a post-hoc basis, DTe took a pro-active role in designing crucial institutional elements of the Dutch natural gas market; including the definition of the scope of transport, storage, balancing and ancillary services, technical and contract conditions and tariff structures. In this respect, it conceived as its main tasks to facilitate gas trade and to impede abuse of dominant market positions. Therewith, of course, DTe took the initiative to develop the new institutional set-up of the Dutch market away from Gasunie.

    Loss of marketshare
    Since the liberalization of gas supply to large consumers in 1998, Gasunie lost a considerable share of the industrial market, mostly to competitors supplying UK gas through the Interconnector and some Dutch gas, not delivered to Gasunie. This caused a fall in Groningen’s output to 23 Bcm in 1998 and to below 20 Bcm after 1999, back to some 24 Bcm in 2004, despite the increase of gas export.

    The consequences of the new Gas Act, influence some core elements of Dutch gas policy, viz., firstly, the small fields policy, the balancing function of the Groningen field, the accommodation of H- and L-gas and the national depletion policy; secondly, the pricing of gas according to the principle of opportunity costs (or the ‘market value’ principle); and, thirdly, the maintenance of State and private revenues (the “aardgasbaten”).

    We inferred that all parties involved have a fundamental interest in maintaining the output of the Groningen field a level related to the level of committed gas purchases from the small fields. Thus, the declared overall Gasunie volumetric objective for its sales was been set at around 80 Bcm annually and that for Groningen production at 42.5 Bcm. Yet, the Dutch home market for gas is, by and large, saturated. So, only an expansion of gas demand elsewhere in Europe provides Gasunie with an opportunity to increase its overall sales volume. Gasunie also states that it seeks to provide new clients with “what it knows best, balancing the flat supply curves temporarily storing gas in abandoned gas fields and using the output flexibility of the Groningen field”.

    The large underground gas storage facilities with a total capacity of 35.1 Bcm, created by Gasunie/NAM in depleted gas reservoirs in the Netherlands - at Alkmaar (jointly with BP/Amoco), Langelo and Grijpskerk, together with the flexible production regime which is technically possible from the up-graded facilities installed on the Groningen field, are important instruments for achieving the objective of increased Dutch exports of gas supply flexibility.

    Strategic player
    The abandonment of the self-imposed long-term security of supply objectives was another prerequisite for a role of Gasunie as an unconstrained active and long-term strategic player in the European market. Flexible supplies of additional supplies, in combination with the temporarily withdrawal, of Dutch gas could indeed stimulate the further creation of markets in Europe for long distance, high load-factor gas from Norway, Russia and elsewhere. Gasunie has the ability to develop the facilities. Yet, it remains to be seen how successful - and eager - Gasunie will be in approaching these markets with such services.

    Subsidiarity is modifying the way in which the EU Gas Directives are being implemented in the several member-states. This is giving rise to large variations in the degree of openness and in the business strategies in the several EU-member states. Dutch policy in this respect has been ambitious, with a progressive schedule for market opening and a vigorous TPA regime. Reciprocity in access to markets, however, has not yet fully materialized and the traditional Dutch export markets (Germany, Belgium, France, Italy and Switzerland) are largely supplied by other major production and marketing companies.

    Since the mid-1990s, by and large, a move towards liberalisation has guided developments in the down-stream segments of the national EU gas sectors. Spill-over from competition in other industrial sectors and pressure by large, commercial energy consumers and potential new entrants to the gas and electricity industry, stimulated the EU Commission to develop its Gas Directive, against much resistance. As a pre requirement for ‘selling’ this package to the small consumers, as citizens and voters, the promise of low prices was included.

    Market stabilization
    The current difficulties in implementing the Directive in the Netherlands are illustrative for the Dutch position as a consumer and as a supplier/exporter of gas in the EU. On the one hand, there is the liberal face of the new Dutch Gas Act, in the spirit of the Integrated Energy Market. On the other, there is the traditional face of the Dutch role as an important gas producer, playing a key-stabilizing role within the wider European gas industry. These faces represent two entirely different sets of possibilities, interests and objectives, different institutional frameworks and different geo-political spheres, as is illustrated before. DTe, thus, intervenes in a sub-market that is tightly interconnected with the wider European and Russian gas market. Whereas the EU - down-stream - gas market has embraced the consumers’ logic of custom choice as the leading paradigm; in the upstream gas industry, involving mainly three non-EU countries, long-term contracts, market stabilization and oil-parity remain the key principles for securing stable supplies over the longer term. From these contrasting approaches, completely different techno-economic paradigms emerge regarding the need for and methods of regulation and co-ordination of these markets and the preferred institutional frameworks.

    The regulatory system
    The implications of both ‘worlds’ require a balanced approach in the single framework of the Dutch regulatory agency, DTe. Indeed, many of the essential parameters for the operation of this vertically structured international industry lie outside its jurisdiction. And even outside the EU jurisdiction as the recent dispute between Russia and Ukraine has shown. It remains to be seen, of course, whether it is sensible to try to regulate only a – rather important - part of that industry on the basis of paradigms that are geared towards the short term interest of consumers markets specifically.

    It is also obvious that several parties, with diametrically opposed interests, try to influence the set-up of the regulatory system, referring to these different spheres of co-ordination. Lack of awareness of these different institutional layers, and their interactions with the operations of the overall gas system, has induced shifts in political priorities, objectives and instruments, over time, leaving behind a apparently inconsistent legacy of instruments, commitments stalled investments, etc. This phenomenon is clearly reflected in the post-1959 history of gas policy and instruments of the Dutch Ministry of Economic Affairs and other governmental bodies, with regards to prices, tax revenues, environmental aspects, Mining legislation, etc. It now very much complicates the task of DTe to ‘carve out’ its role, as a stabile consistent regulating authority in the newly emerging institutional context of the Dutch sector. Yet, it could be wished that the Dutch regulator would at least take note of the fact that it is trying to regulate only an interconnected segment of a much larger system, with a rather different logic of coordination.

    The x factor
    On the 2nd of July 2004 the Dutch transmission operator (Gas Transport Services) was founded. Shareholders were still the same but the board and the advisory board where different to that of the commercial part. In August 2004 the Netherlands Competition Authority decided on adapting the method of price capping to promote efficient operations of gas network managers (the x factor decision). The x factor should be established for a period of at least three and at most five years. The method decision was also determined during this period, the main parameters are; DTe will introduce yardstick competition for the regulation of the tariffs of network operators; the determination of the tariffs are based on total revenues (The sum product of the tariffs ant the cost drivers to which they apply may not exceed the total annual revenues determined by DTe. GTS entered appeal against the above mentioned x-factor and method, and the Courts decisions in these cases are not expected before July 2006.

    Split up of Gasunie
    In July 2005 the split up from Gasunie into a transport company (NV Nederlandse Gasunie, fully owned by the State, Gas Transport Services being its 100% daughter company) and a trading company (Gasunie Trade & Supply, with the same shareholders as the former Gasunie) became reality. The further dismantling from the latter is still under discussion. It was decided late December 2005 by the Minister of Economic Affairs to adjust the production from an overall Dutch gas production cap into a cap at the Groningen field production . In the next ten years (2006-2015) the maximum volume produced out of the Groningen field is 425 billion m3.

    The Energy Council in 2005 (the official advisory board to the Minister, consisting of experts from industry and institutions) advised that the further split of the trading party should be reconsidered, as the council feels that with the split up of Gasunie Trade and Supply the Netherlands will loose its present strong position in the gas buyers market in Europe for the State and the public interest in maintaining the small fields policy in conjunction with the management of the Groningen Field could be compromised. Another argument is that the DTe should not over-regulate the Dutch Market, compared to other countries, as this could reduce its strong position in the European gas industry.

    The Gas Tariff Code
    was adopted in August 2005 and came effective January 2006. For 2006 GTS also altered their balancing structure, the method for doing so was not yet decided early 2006 and is not expected to be in the near future. In the middle of 2005 DTe announced that GTS has the obligation to act as an alternative supplier of gas flexibility services for the period from 2006 up to and including 2008, this due to the outcome of a investigation on the position of gas flexibility in the Dutch market. The “surprising” outcome is that the position of Gasunie T&S in the market of flexibility for specific low calorific gas and in several of the high-calorific gas is dominant.

    The way the liberalisation is implemented, with the strong reductions in the transportation tariffs, makes the Dutch system one of the cheapest in Western Europe. The further lowering could induce a rerouting of gas flows from the German network to the Dutch Network. In periods of high demand, such as the peak winter season, the lower transport tariffs may lead to a high potential domestic demand for gas transport which cannot be fulfilled by the (limited) capacity of the Dutch gas transport network. This may lead to congestion in the network as access in an entry/exit system must be given on non discriminatotory basis and transit can not be identified.This could mean that final consumers in the Netherlands do not get the gas because there crowded-out by transit flows.

    Roundabout for gas
    This position of the Netherlands in the European gas playfield could be that of a roundabout for gas.
    The strong position of the Netherlands as a gas producer and exporter has resulted in having a comprehensive gas infrastructure, with important existing and planned East-West and North-South connections. The recent plans for the Netherlands anticipating this role, are varying from storage, interconnections (UK) and LNG.

    These plans are mainly based on the advantageous geographic and geophysical properties of the Netherlands. Geographic it could be the roundabout for the (Western) European Market and geophysical it gives large opportunities for delivering flexibility form either existing storage or new build. The Netherlands could contribute to a major role in the Security of Supply discussion for Europe. Illustrated by the recent supply crisis as a result of the Gazprom Ukraine dispute. The coming decade will be an interesting one with a lot of changes in supply and legislation in the Netherlands and in the EU. The Dutch gas market will gain importance with its interconnections to the UK and future LNG and pipeline projects including connection to the Russian gas supplies (e.g. North European Gas Pipeline, NEGP) and could be one of major importance to Europe and even in an emerging world gas market.

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