'For GDF-Suez, the key word is diversification'

October 27, 2010 | 00:00

‘For GDF-Suez, the key word is diversification’

After the takeover of International Power in August, GDF-Suez has probably overtaken Eon as the largest utility company in the world. Two years after the new French giant was founded and partially freed from the grip of the French state, it is facing an uncertain world, in which it sees its nuclear ambitions thwarted by that very same state, and its LNG operations in the US buffeted by adverse market circumstances. Nevertheless, GDF-Suez, with is broad portfolio of global activities in electricity, gas and energy services, seems in a good position to weather most storms that could come its way. According to Professor Jean-Marie Chevalier, one of the foremost energy experts in France, the key word for GDF-Suez is diversification. ‘The answer to uncertainty is to diversify judiciously.’

In July 2008, the French state-owned French gas company Gaz de France (GDF) merged with the private Franco-Belgian group Suez. The company, which has over 200,000 employees and is still one-third owned by the French state, has recently made a big move in the power market with the acquisition of British electricity company International Power in August. The €6 billion in additional turnover this brings should lift GDF’s sales to some €115 billion this year, slightly higher than German giant Eon, although still some way behind the major oil companies, such as Total, Shell, BP and ExxonMobil.

GDF-Suez’s charismatic CEO Gérard Mestrallet has identified three core business areas for the company: electricity, gas and energy services. GDF-Suez not only owns power plants across the world, including large hydropower and nuclear plants in countries like Brazil, but is also the primary buyer of natural gas in Europe and the primary importer of Liquefied Natural Gas (LNG) into the US (a position which is uncomfortable in the current LNG market). In addition, it is the no.1 energy service supplier of local authorities and companies in Europe and, more generally, the no.2 supplier of environmental services in the world.

At this moment, the main obstacle to GDF-Suez’s expansion lies, strangely enough for a French company, in the field of nuclear energy. This has everything to do with French energy policy. A year ago, at the site of the new European Pressurised Reactor (EPR) power station in Flamanville, France’s

Europe said: ‘We’re going to do 20% better in terms of energy efficiency’. That’s bad news for gas. Europe then added : ‘We’re going to make 20% from renewables’. That’s more bad news for gas
President Nicolas Sarkozy had welcomed the arrival of a ‘second big French group in nuclear energy’. But, faced with various pressures, France has returned to its traditional centralising instincts. On the basis of a report commissioned from Francois Roussely, a former CEO of Electricité de France (EDF) and one of the leading lights of the French nuclear establishment, Sarkozy has decided to designate EDF as the “lead company” in France in nuclear energy.

GDF-Suez had hoped to be involved in the management of the second EPR, to be built in Penly, in northern France. That would have given it useful experience for its global activities. But EDF was confirmed as in sole command at Penly and the Chairman of EDF, Henri Proglio, even allegedly described GDF-Suez as a ‘Belgian operator’. He has the support of his middle management, who are very attached to EDF, and the powerful CGT trade union, a traditional advocate of centralised and state-owned nuclear power. As a result, GDF withdrew its financial investment in the Penly project, refusing to be EDF’s ‘banker’.

There is no longer talk now of a third EPR, which was planned to be entrusted to GDF-Suez. It was most likely environmental concerns, put forward by the influential Environment Minister Jean-Louis Borloo, which blocked this project. GDF-Suez had also envisaged close cooperation with the builder of the EPR, Areva, the group led by high-profile manager Anne Lauvergeon, but this has not materialised yet.

There is just one nuclear hope left for GDF. It is trying to obtain the right to test the small ATMEA nuclear reactor that Areva plans to develop with Mitsubishi Heavy Industries. ATMEA is smaller (1,100 megawatt as against 1,650 Megawatt for the EPR), less expensive and less complex than EPR. It would give the company the full range of nuclear options abroad and might even help it avoid the kind of crushing failure that French nuclear power went through in the Middle East, where it was beaten by its South Korean rivals.

When the new company was formed in 2008, Professor Jean-Marie Chevalier, one of the best known energy experts in France and author of numerous books, described the merger as a ‘brilliant’ move. Two years later he has not changed his mind about that. But he is highly critical of French national energy policy, which is in his view is thwarting the expansion of GDF in nuclear power. He also sees plenty of threats in the gas market. EER asked him to elaborate.

EER: Gérard Mestrallet, the Chairman of GDF-Suez, bases his group’s strategy on three core areas that he gives equal weight to: gas, nuclear energy and services for energy. Let’s take a look at them. How do you assess the current state of the gas market and GDF-Suez’s positions in this market?

Gas groups have to face up to a series of surprises more and more often. The gas market has been turned upside down partly due to the economic crisis and in particular due to the development of unconventional gas in the US. Thanks to shale gas, the US is not going to import as much liquefied natural gas (LNG) as was forecast and could perhaps even export their gas surplus. The same phenomenon could arise in European countries and even in Asia. Nobody saw this coming.

There’s another example of this kind of ‘surprise’. We know that there are huge oil deposits at great depths off Brazil. But we’ve discovered that huge quantities of gas are linked to this oil. Sooner or later, this gas will appear on the market and will have an impact on prices.

In fact, for a period of 40 or 50 years, up until 2008, the demand for gas grew regularly in Europe, with big companies pulling the strings. As they were in monopoly situations, they would sign contracts and

For EDF to get involved in the design of power stations built for competitors is shocking and unhealthy
would thereby build demand. But Europe introduced competition. Europe said: ‘We’re going to do 20% better in terms of energy efficiency’. That’s bad news for gas. Europe then added : ‘We’re going to make 20% from renewables’. That’s more bad news for gas. And then the Germans are going to extend the lives of their nuclear power stations. That’s even more bad news for gas.

In short, the demand for gas depends a lot on parameters external to the gas industry itself. Moreover, if the price of gas falls, we’ll be sure to see gas power stations springing up but at the same time such a scenario will cut into the hydro economy and will hamper the renaissance of nuclear energy. GDF-Suez is involved in major nuclear and hydro projects in Brazil.

That said, gas companies should not complain as they earn money. Like lots of other gas companies, GDF-Suez is both a producer and a buyer and is an active trader. That creates lots of lucrative arbitrage operations. The group is also present in lots of emerging markets, such as in Brazil. It is consolidating its Asian positions and it is right to do so because history this century will be made in Asia.

For GDF-Suez, the key word is ‘diversity’. Their electricity-generating capacity includes gas, coal, nuclear, hydro, biomass and cogeneration. In a world full of uncertainties, diversity is a major asset. I have seen in your magazine a statement by the Chief Economist of the International Energy Agency, Fatih Birol, according to whom ‘the future of energy has never been so uncertain’. That is a very good comment. The answer is to diversify judiciously.

EER: In the context of this diversification, nuclear energy is a key part of the development of GDF Suez. But, in France, the group is going from disappointment to disappointment. The traditional electricity producer EDF is breathing down GDF-Suez’s neck. How is GDF-Suez going to deal with this return to centralised nuclear planning in France?

French president Sarkozy decided to designate EDF as the 'lead company' in France in nuclear energy
Yes, it’s a very irritating business. In Abu Dhabi there was a big failure for the French when the South Koreans set up their less expensive and lighter power stations. France’s President Nicolas Sarkozy said to himself, ‘We need to put some order into the network’ and commissioned a report from the former EDF chairman François Roussely. A 23-page summary of this came out in June.

In this summary, there are good ideas but it uses a misplaced metaphor. The metaphor is that of ‘the French team’, as if you could compare nuclear energy competition to a football match. Basically, the idea was that you need one team captain and that there is only one and that’s EDF. So EDF should take the lead on nuclear energy in France and abroad.

That’s not a good stance to take, for several reasons. First of all, every company has its specialisations. Areva’s specialisation is to design and build nuclear power stations and to control the cycle from fuel from the uranium mine to reprocessing. EDF’s specialisation is to run power stations. It is fine that EDF takes part in the design and engineering of a power station that it will own, as has happened at Flamanville, where France’s first EPR reactor is being built. But for EDF to get involved in the design of power stations built for competitors is shocking and unhealthy. What would we say if British Airways had to buy Airbus planes from Air France?

Secondly, the nuclear power market is a very complex one. There need to be tailor-made answers depending on whether a request is from Hungary or Brazil or China and the country concerned will be well advised to have a big choice of potential business partners. Dealing with a single interlocutor speaking for France is a very bad idea. There need to be specially designed consortia, partnerships with foreigners, as Areva has done with Mitsubishi.

And in the third place, let’s be a bit more modest too. EDF may be the company with the largest number of nuclear power stations in the world but their availability is poor for technological reasons, due to the structure of its facilities and due to the management of human resources. This is not a benchmark.

In short, we’re heading towards a monopoly situation for EDF and we don’t want to make room for GDF-Suez. This is not a good way to proceed.

EER: GDF-Suez has not secured the right to take part in the management of the second French EPR planned in Penly nor has it been given the green light for a third EPR where it would have had a dominant position. But suddenly, GDF-Suez is campaigning to build a smaller power station, such as the one planned by Areva with its Japanese partner Mitsubishi. Is that a good idea?

Going into an EPR in Flamanville and Penly with such a small slice of the cake is not good business for a big company like GDF Suez. The group did the right thing by withdrawing from Penly.

By contrast, building an ATMEA power station in the Rhone valley is a very good idea. ATMEA, which will be developed by Areva–Mitsubishi, is a simpler, smaller and cheaper power station than the EPR and more tailored to certain needs. That is part of the need to diversify French offerings, even with the Japanese. Westinghouse is with Toshiba, General Electric with Hitachi.So going into partnership with the Japanese is not a bad idea. It would be positive if GDF tests this model in the Rhone valley.

EER: What would this reactor be for? France just doesn’t need any more nuclear electricity. Some French analysts have noted with interest the German government’s decision to extend the life of nuclear power stations. The Germans have said they will tax their electricity to finance the development of renewable energies. So, according to the analysts, German companies will be tempted to buy more cheaper, French electricity. Do you think that there are interesting prospects here for GDF-Suez?

We are at a particularly complex moment in the development of a European electricity market. We have a price indicator that tends to be set by the German market on which French prices align themselves.

But companies want to have access to cheap electricity. You could imagine systems where contracts link industrial consumers with builders and operators of power stations. That is what has been done in Finland. The Finnish EPR is based on long-term, fixed-rate sales contracts to paper manufacturers.

In France, we have had a similar experience – Excelsium – where a consortium of companies had been set up to buy electricity wholesale. Could one have this type of set-up behind ATMEA, with a relatively fixed price signal because it is linked to cost? That would be going in the right direction, with risks being shared between energy suppliers, users and financiers.

Whether this is completely in line with European competition rules is a moot point. It is on the borderline of what Brussels can accept. But, at the end of the day, they did authorise it in Finland.

EER: What about Mr Mestrallet’s third core area: energy services. Is it really significant or just window-dressing in these times of environmental thinking?

At Paris-Dauphine university last year, Mestrallet quipped during a conference: ‘If I sell less gas, I’ll sell more services’. It’s a good answer. This is all about energy efficiency services, optimisation of flows and everything that is covered by the issue of ‘smart grids’.

In the good old days, people sold as much electricity or natural gas as possible. Today, you need to sell better by helping the customer satisfy his needs by consuming less. What you lose in terms of product sales, you win back by selling services. Mestrallet is very aggressive and pushy in this area. I think that that is very important.

EER: Aren’t we heading towards some confusion in the activities of big energy groups? Producers become distributors, operators become constructors, Total wants to make nuclear power, etcetera.

There are examples of good and bad diversification. When Mestrallet says ‘less gas, more services’, he is heading in the right direction. He is going in the direction of the history of his group. When EDF says ‘I’m going to do nuclear engineering’, it is going out of its area of expertise. When Total says, ‘I’m going to make nuclear energy’, it goes out of its area of expertise. Groups must be cautious in their efforts to diversify.

Remember, there was a time when people said telecoms and electricity was the same area of expertise as energy. They said, if I sell electricity then I can sell telecoms and water. Lots of electricity companies (such as Enel, RWE, Eon, and many others) went into telecom. It was a total fiasco despite there being lots of logical arguments.

EER: Buying International Power has made GDF-Suez the world’s biggest or second biggest producer of non-nuclear electricity. Do you think that it was a good move?

These are large-scale operations. It’s too early to say if it’s a good or bad bit of business. That will depend on the evolution of the British energy mix, which is not clear. They’re pushing wind power hard. Will nuclear power make a comeback? I think it will but slowly. This acquisition’s success will depend on the evolution of nuclear energy. Will nuclear energy make a comeback in Italy and in Great Britain? What is the risk of a new nuclear accident?

Whichever way you turn, you see lots of uncertainty. It’s the uncertainty I was talking about just now when I quoted Fatih Birol.

Who is Jean-Marie Chevalier? Professor of economics at the University of Paris-Dauphine, Director of the Centre de Géopolitique de l’Energie et des Matières Premières [Centre of the Geopolitics of Energy and Raw Materials], Senior Associate at Cambridge Energy Research Associates (CERA, Paris office), a member of the Board of Directors of Nexans, member of the Conseil d’Analyse Economique (CAE) [Council of Economic Analysis]. Professor Chevalier is also a member of the editorial board of European Energy Review.

The latest (English-language) book he edited is “The New Energy Crisis: Climate, Economics and Geopolitics” (Palgrave MacMillan 2009), which contains a series of wide-ranging essays by mostly French researchers on the fundamental energy issues of today.

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