by Jerome a Paris
Tue Apr 18th, 2006 at 09:01:20 AM EST
I've talked to some people directly involved in the gas trading business in Europe, and and a fascinating insight on how these things work, and in particular on why continental European did not deliver gas to the UK a couple of weeks ago when there were shortages and prices jumped fourfold.
I wrote that the UK government's lack of foresight was to blame (EU Energy reform = give Britain access to the continent's cheap spare capacity), but I did not expect that European liberalisation was the actual culprit!
I'll explain below the fold...
Quite simply, the "incumbent" gas companies import most of their gas, under long term contracts with the main suppliers like Russia (pipeline), Algeria (pipeline and LNG) or Norway (pipeline) and a few others (most of them via LNG).
These contracts now usually have clauses that say that if the gas is diverted to another destination (for instance, if a LNG tanker goes to the US instead of going to its European port of destination), then the buyer will share will the seller of the gas some of the profit of that change of destination. Typically, that happens if prices are higher in the US than in Europe.
The problem is that such "destination clauses" (that profit sharing mechanism) have been judged anti-competitive by European competition authorities, and are now forbidden under EU law. So, a contract with Algeria or Russia cannot authorise Algeria or Russia to make a profit if the European buyer of its gas resells that gas in any other EU country - like the UK.
Prevented to impose such profit sharing contractually, Algeria and Russia have made it clear to their clients that they would nevertheless take it very badly if their gas was sold onwards without them having a share of the profit. In one case, a European buyer of Algerian gas that nevertheless diverted LNG cargoes to other European destinations a couple years ago was punished at the expiration of one of its Algerian contracts: it was simply not renewed.
Thus, the European companies, stuck between EU competition rules and prickly suppliers, can divert gas to the USA, but not to the UK...
Oh, and, by the way: the technical parameters for natural gas that are accepted in the UK are not the same as those for gas in continental Europe, so only specific qualities of gas can be accepted in the pipeline between Zeebrugge (Belgium) and Bacton (UK) -and these are not necessarily available when there is an urgent need on the UK side. And few LNG tankers are authorised to dock at UK ports, thus limiting again, for technical reasons, the ability to divert gas to the UK.
But noooo, it's all the fault of evil protectionist Europeans...