Slow Deregulation Of European Energy Market A Danger To Security Of Supply

European governments should overhaul the way that they assess security of gas supplies to reflect rapidly rising imports and the liberalisation of their domestic markets, according to a new report.

The study, published by London's Royal Institute of International Affairs, argues that the European governments have no reason to panic, even though within two decades they will depend for two-thirds of their gas on imports. Even so, big European gas companies are complaining that liberalisation will kill long-term contracts and the security of supply embodied in them.

The report's author, Jonathan Stern, a leading expert on European gas, contends increasing import dependence should cause little further trepidation in a continent where nine out of the thirty three countries are already ninety five percent dependent on imports and only five are self sufficient or exporters of the energy source.

Having embarked on liberalisation, European countries should also carry it through quickly, he says. In fact, slow liberalisation, delayed by remaining problems in France and Germany, could increase security risks by “delaying the arrival of a spot market and short-term trading,” Mr Stern says.

"Arguably, a long transition could expose continental Europe to the worst of all security worlds: disappearance of the old certainties of the traditional market, combined with uncertainty as to how the emerging market players will be obliged and equipped to cope with security problems."

To end this uncertainty, the report calls for government and regulators to set out clearly supply obligations in a competitive market. The need, Mr Stern says, is particularly urgent in the UK, which has been liberalised for some time, holds little storage and has few import terminals.

The European Union should also pay more heed to the effect of liberalisation in eroding the margins of its key gas suppliers, chiefly Russia and Algeria, and in making harder the development of major new gas projects under longer term contracts. If it were to go on ignoring foreign gas producers' interests in its pursuit of deregulation, Brussels could even invite retaliation.

Long term gas contracts will remain, albeit in modified form, the report argues. But it suggests that the EU may have to consider limited antitrust exemptions for expensive gas pipeline projects,which cannot be built in stages.

Such exemptions could involve developers keeping exclusive access to their infrastructure while they got their money back.