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EC fines E-On and GdF-Suez: the end of long-term gas contracts?

By Benedict De Meulemeester

By Benedict De Meulemeester on 12/07/2009

The European Commission has fined German utility E-On and French recently merged GdF-Suez 553 million euro to sanction uncompetitive behavior. Both gas market giants are surprised by this, which is logic. When the companies had co-invested in the Megal pipeline which brings (Russian) gas from the Czech border to Germany and France, they agreed to share the capacity. Moreover, they agreed not to use it for selling gas in each other’s markets. In today’s liberalized market, it is obvious that such behavior is sanctioned as uncompetitive. But we have to realize that this happened in the old monopoly market. Back then, long term capacity entitlements and national monopolies were a logic element of the long term supply contracts (30, even 40 years) that national champions such as GdF – Suez (then GdF) and E-On (then Ruhrgas) signed with the producers of gas.

The trouble with such contracts is that they have continued to exist when the markets were liberalized. And when competitors have difficulties to obtain import capacity, it becomes difficult for them to find access to markets. Therefore, if you are a supporter of competitive gas markets, you can only cheer the decision by the European Commission to battle the import capacity blockades of incumbent suppliers. Moreover, it seems to work. Although GdF – Suez denies that it is an acknowledgement of its wrongdoing, it has taken a significant measure in response to the condemnation. It has offered to cut its share of import capacity to 50%, down from two thirds. This will surely create some new possibilities for competition in the French natural gas market in the next years.

I have long believed that it is difficult to develop competitive natural gas markets when long term gas contracts prevail. Many will respond that such contracts are necessary to guarantee security of supply. This opens a very interesting discussion. What is the best guarantee for security of supply? Long term, politically brokered, supply contract or easy accessible, open markets? That long term contracts cannot always guarantee that the gas is in the pipe has recently been proved by Russian supply disruptions.

In the next years, we will have to see whether the European Commission continues to attack the long term contracts. And if they do, if they can push energy companies into adopting a different behavior.

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