"We need a decarbonisation policy that favours gas"

April 26, 2012 | 00:00

Interview: Jean-François Cirelli on change the European gas industry can believe in

"We need a decarbonisation policy that favours gas"

The European gas industry is bracing itself for tremendous changes. "The market is changing to a degree which has never been seen before", says Jean-François Cirelli, President of natural gas trade association Eurogas and Vice Chairman and President of French energy company GDF Suez, in an interview with EER. According to Cirelli, the market will see a gradual shift from fewer oil-indexed long-term contracts to more liquid wholesale markets. "All our membership is very market-oriented", he says. He does warn for "over-regulation". And he is also only half-satisfied with the EU's decarbonisation policy. "We believe gas should be more favoured than it is today." He calls for a single CO2 emission reduction target for 2030, but no other new targets, such as for renewable energy and energy efficiency. "The CO2 price must be raised in a predictable manner. The value of gas is clearly linked to the carbon-price."

Jean-François Cirelli (c) Gaz de France / Laurent Troude

Q: You've said in the past that EU policymakers underestimate the role of gas after 2030. What is your view on its future in a decarbonised energy mix?

A: We believe that, first, gas has the potential to be a partner for the development of renewables (thanks to its flexibility) and second, a good candidate for the reduction of CO2 by replacing coal.

This is exactly the reason why we are advocating to the EU that if they are, as we think rightly, pointing out that the Southern Corridor will be a plus for Europe, we also need a counterpart [decarbonisation] policy that favours gas. If a new pipeline is built, it’s for more than 30, 40 years. If after 40 years there is no demand for gas anymore because the policies implemented are against gas, why invest in a gas pipeline for billions of Euros?

We believe gas should be favoured more than it is today. We have to make sure it is really understood that trying to foster gas is a plus, not a drawback when you want to reduce CO2. I think maybe half are convinced; we still have to convince the second half.

Q: So EU decarbonisation policy today does not match the strong support the EU is giving for the Southern Corridor?

A: Today, the [decarbonisation] policy framework is not sufficiently clear to make final investment decisions [in projects like the Southern Corridor]. We do recognise big progress in the 2050 roadmap, which acknowledges for the first time the big role of gas. Commissioner Oettinger is going in the right direction. I think we have to combine two things: 1) we're going to reduce CO2 and 2) we’re going to do it in the least expensive way. One of the least expensive ways is to foster gas.

Q: What about Carbon capture and storage (CCS)? The energy 2050 roadmap says that after 2030 all fossil fuel-fired power stations must come equipped with CCS, yet this technology is running into big problems today.

A: We are not exactly where we need to be. It will take more time, that’s for sure. You will not have everything ready for 2020. But it would be a mistake if there is not sufficient money to continue CCS projects. If we want to continue down the CCS road we will have to have a transitional period where the industry is supported with R&D, in particular with finding the appropriate technology to scale up. The three technologies we have today to capture CO2 are not economically viable. The question is: do we want to continue to see whether it’s possible or do we stop everything? And I think the latter means big trouble in 20 years’ time.

I don't believe that in 2030 we can just say goodbye to fossil fuels and rely only on renewables or nuclear. CCS is one of the avenues we have to use if we consider that we cannot phase out fossil fuels in the short term and we want to reach CO2 emission reduction targets. There are problems with public opposition to storage in many countries, and these are not easy problems to solve. But if we want to keep our 80-95% CO2 emission reduction target [by 2050, relative to 1990 levels, agreed by European leaders in 2009], it’s quite indispensable to have CCS ready, available and completely feasible for 2030 and beyond. We will need CCS or we will not reach the CO2 target.

Q: If you're not fully satisfied with EU decarbonisation policy as it stands today, what concrete changes would you advocate?

A: There is one major issue: you cannot ask the industry to go for an energy transition, to make CO2 reductions, with a CO2-price in the ETS [EU Emission Trading Scheme] of €8 or €9. There is a big contradiction there. If you keep the present scheme and present price level, it [the transition] will certainly not materialise. The value of gas is clearly linked to the carbon price.

There is some contradiction today because we say we want less CO2 and yet we are not really pricing CO2. We must raise the CO2 price but in a sound and predictable manner.

Q: What do you think of the announcement from Climate Commissioner Connie Hedegaard on 19 April that she will come with an assessment of the ETS market this year?

A: We welcome it. We call for a robust market driving low carbon investments, and we ask the Commission not to increase uncertainties for investors, as we need first and foremost long term visibility.

Q: Are you in favour of the so-called set-aside? This would remove a number of allowances from the market to restore scarcity and boost the price.

A: Our membership is divided. Some support a set-aside, some say it's not appropriate, but clearly there is a feeling of urgency about the need to do something. If we re-open the debate on the EU ETS directive, that could take two years. The set-aside has the advantage of being rapidly applicable. I don't know if it's the right solution, we don't like market interventions by the regulators. We also believe that if you want businesses to be more climate friendly, you need some clarity too on what will happen after 2020.

Q: When you say you need more clarity after 2020, are you calling for a 2030 climate and energy package?

A: For us, 2020 is tomorrow. The lack of visibility after 2020 is clearly a problem. Our members don't support a full climate and energy package after 2020 because they don't want new renewables and

Our members don't support a full climate and energy package after 2020 because they don't want new renewables and efficiency targets
efficiency targets. We would prefer a single CO2 emission reduction target. We certainly need to have fewer targets, to move to one key target encompassing all policies, and for us that is CO2 reduction, not trying to build 20% renewables, 30% gas, improving efficiency by 1.5% per year, and so on. A single CO2 emission reduction target makes the most sense, it’s clear, and it’s technologically neutral.

Q: Do you see any competition from coal? Some voices in that industry suggest coal-fired power could also be a flexible partner for renewables.

A: I would argue that combined-cycle gas turbines (CCGT’s) will be by far more flexible than coal plants in future. Coal will not pose serious competition, not in Europe, no. We're not saying that coal is dispensable because it's almost sure we will need a diverse energy mix, but we're saying that we do not believe with our sights set on an 80-95% CO2 emission reduction, coal is a solution.

Q: Gas has often been talked about as a transition fuel to a low-carbon future. Would you describe it differently today?

A: I will not enter into a discussion over whether it's a destination or transition fuel, but I am quite sure we will need gas for a long time to come to accommodate our [decarbonisation] policy.

Q: There has been a lot of discussion of late about how the European gas market should be structured. The Madrid Forum recently adopted the so-called Gas Target Model (GTM) to further fill in the picture. This envisages a series of wholesale energy markets across the EU, each of which is large enough to allow competitive spot trading. National regulators should see to it that their market is sufficiently liquid. We also hear gas companies complaining about too much regulation. How do you see the EU gas market developing? What should be the role of regulators?

A: Yes, it's true we warn about too much regulation. What we are really saying is not we don't need regulation, but we need the right regulation. Some people say the industry is conservative and always negative. But I think we have really changed our views. All our membership is very market-oriented today. Nowadays you will find the industry against anything that distorts the [internal] market because we believe we can fully benefit from it.

We are in favour of the Gas Target Model. It's something we have supported and it's good for us, it sets the right framework. But there is one specific problem: we are not happy with the proposals on how cross-border capacity allocation should be organised, so-called mandatory bundled products. When capacity is available, we are no longer allowed to bring gas to the entry point of the EU, but have to bring it instead to a hub in an EU country. The idea is that if you force every company to bring the gas to a certain point, it will increase the liquidity of the market and boost competition. We are saying we see the idea, we are in favour of increasing the liquidity of the market, but it's not the right instrument.

Compared to one or two years ago, the share of the spot market within the overall gas contracts market has increased by three or four times. We are progressing. We say yes to the market going up progressively without putting in place provisions such as this requirement of which we do not know how they will work. We do not know who will be in charge of or who could manipulate the market - we should never forget that in Europe we are gas importers and the producers are not European.

We don't say we have to cancel the possibility to bring capacity to the hubs, we are just saying it's going too far to say we cannot import gas in any other way. Just add this as an option and we will see in one or two more years how things develop, if our fears were justified or not.

Q: Will the future EU gas market be dominated by spot markets and prices, or will long-term oil-indexed contracts continue to dominate?

A: I don't know if they will dominate but clearly the market price or spot market will be more prominent and play a bigger role in the future than today. The market is changing to a degree which has never been seen before. There is more and more market indexation, although suppliers want to keep oil indexation. This is a big contradiction which is summed up by the fact that there is a spread of around €10 between the two price types. There is a big problem of adaptation of prices between long-term contracts and market prices. We are in a sort of transition period with no precedent. We need an adaptation of long-term contract prices.

The vast majority of the Eurogas membership still favours long-term contracts because security of supply is the first priority for a gas company to offer society and long-term contracts are well-suited to that. But clearly the market is going to have to change.

Q: How will the spread in prices between the spot market and long-term contracts be resolved?

A: Either the price of the market will go up or the price of the long-term contracts will go down. It can go either way. To be honest, we are a little bit surprised that the spread between the two prices has
It seems we have a problem that may be worse than we anticipated. It's not only due to the gas glut, it's a structural problem that is also a consequence of the increase in oil prices
increased instead of decreasing - we were expecting a decrease due to the reduction of the gas glut in Europe. But it seems we have a problem that may be worse than we anticipated. It's not only due to the gas glut, it's a structural problem that is also a consequence of the increase in oil prices. In Euro terms, the oil price was €30 per barrel at the beginning of 2009 and today it's almost €100. The only solution for the time being may be to temporarily reduce the level of the oil-indexed prices to factor in market conditions.

Q: Statoil has signed the first long-term contracts that are not oil-indexed. Do you expect Gazprom to follow this example?

A: Many suppliers have accepted that part of the gas sold to European companies is not 100% linked to oil. It could also be linked to market prices. But I don’t know of any supplier who has accepted at this moment to totally de-link from the oil price. Many suppliers want to keep indexation and Gazprom is one of them.

Q: Will gas companies still build pipelines in the new market set-up? Will there be sufficient investments in cross-border infrastructure?

A: First, we want to see real implementation of the third energy market liberalisation package. Today, 19 out of 27 member states have implemented it. What about the rest? It must be implemented. Regulators have to do their job.

Second, new infrastructure must be based on markets and economics - we should not build without a cost-benefit approach. Otherwise we will certainly waste money. In principle the right incentives are there. There is money in Europe to invest in infrastructure. There are lots of investors who believe infrastructure is a good investment but they fear the regulatory environment and changes to it.

Q: What difference will the European Commission's energy infrastructure proposals make?

A: Clearly we are very interested in the PCIs [Projects of Common Interest - projects that will be able to profit from accelerated permitting and EU funding because they are of European interest]. But we see lots of problems among member states. We still have to see whether there is an interest in moving in this direction - that's not totally proven today.

Permitting is the big issue overall. Although it's true too that in the gas industry there is less of a problem of public acceptance for the transmission system operator because we're underground.

Q: How is the gas storage market developing?

A: I think that we have made a lot of progress. For the time being there is no problem developing storage in Europe. There are companies and there is financing to do it. Storage is important and will only become more and more so. The cold in February really signalled its importance - in many countries, half of consumption came from storage during the cold. It's certainly a very important element for reinforcing Europe's security of supply.

Q: Speaking of security of supply, two-thirds of gas is being imported and this will rise. What should be done to improve diversification? How important is the Southern Corridor in this context?

A: I think the major diversification which has already become a reality is LNG. One-quarter of European gas supplies now comes from LNG. This comes from different countries. We now have LNG almost everywhere in Europe. I think it's clearly a new feature that besides the traditional suppliers we now have LNG which could match and increase their supplies - this is a real diversification.

I believe Nordstream, which was recently built, is also an element to increase security of supply, for sure. And clearly all our members favour a Southern Corridor in one way or another. There are many projects and still a lot of bottlenecks for some. Will something happen? Certainly. I don't doubt there will be a new corridor. Which project will win? I don't know. It's true that the activity between Azerbaijan and Turkey is changing the situation a little bit.

I think today we are still in a transition period, we don't know exactly who will be winner. In addition, we are not under pressure from the market - we have plenty of gas so we can take our time a little to make the right decision. But we need a Southern Corridor or rather a Southern Corridor for Europe will certainly be a plus. It's up to the market to decide which projects are the best projects. In our view, we have politicised this question too much - it's not a question of losing face or not, it's a question of doing business. The project which will win will be the one which is most economical. No projects are already dead today.

Q: What about the Russian-sponsored South Stream project?

A: For Russia, there is clearly a political decision but their plans also have to be demonstrated as economically interesting for the backers. It's more a question for Russia, how they will export to Europe, if not through Ukraine. Clearly South Stream would have less diversification value for Europe than other projects.

Q: What kind of a role do you see for biogas?

A: In our view it’s very important, but not always taken into consideration. Biogas is developing across Europe and is a very good way to increase the use of gas and enlarge the possibilities for how it is used. We see a lot of experiments with it across Europe, and this is something we want to encourage.

There is a role for gas also in transport. Even with electric vehicles, we think there is a space for gas to fuel ships, trucks, etcetera. We believe we are certainly on the eve of some progress there, especially in the US, but also in Europe.

Q: Is there a need for extra support from policymakers for biogas?

A: No, biogas is a national issue and more or less every country is keen. No, I think it has to undertake its own development and there is nothing needed today at European level. It's just at the start.

Q: A year ago, you said you did not expect shale gas to be as important in Europe as in the US. Is your view unchanged?

A: It is. Shale gas will not change the European gas market for a long time yet. There are lots of uncertainties to overcome before we will see a big production of shale gas in Europe. We see a lot of public acceptance problems today. I think that Europe will benefit from US shale gas, when the US starts exporting it. This is currently a big debate over there and we should expect the answer to be yes, they will allow exports. In 2020, there will definitely be shale gas in Europe but it will come from the US.

Q: Should we be actively promoting shale gas exploration in Europe?

We do not believe that Europe is ready to really look to [its own] shale yet, with some exceptions. It's an option that has to be kept open, but we must first of all prove that it is economically possible and
We do not believe that Europe is ready to really look to its own shale gas yet
feasible in Europe, which has not been done yet. Second we have to prove to stakeholders that it is feasible without putting the environment into danger. Certainly some day we will have to really do some experiments to be quite sure. It's clear that there's a lot of work to do to reassure critics. We need the support of the population and we don't have it. Today there is a lot of emotion on shale gas so I think we have to be cautious. But it is true it is changing the world energy landscape.

I think it was a good decision by Europe to say it's a national subject; that there will be no EU regulation.

Q: How do you see the European gas market evolving in relation to other gas markets?

A: Europe is one of three main gas markets, which are all roughly the same size - the US, EU and Asia. It will remain a big market for gas. Though this is linked to economic growth to some extent, and it's true that for the time being we're lacking economic growth.

One big issue we will be faced with is competition for LNG among the different zones. There are three prices - very low in the US, higher in the EU and much higher in Asia - and the extent to which that could alter the market is difficult to say today. The US could be a new supplier to Europe in future, but to what extent is still to be demonstrated. One thing is sure: we will need more and more imports because our own production is diminishing.

There is certainly a Golden Age of gas to come, for the world and for Europe. But it is true too that in Europe we need to consider diversification, infrastructure developments and we need to build our internal market.

 

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