Visit of the pipes and groups of the universe of gas, between monopolies and geopolitics; A market under pressure on which relations between Gasprom and Europe are tense. By François Lévêque, Professor of Economics, Mines ParisTech - PSL
The blue flame of your water heater or stove may burn gas from the Urals. Tomorrow it will probably come from the United States. Same for electricity: a part is produced thanks to Russian gas and in the future the European power plants could turn with American shale gas. Gazprom, the leading provider of Europe, and the Kremlin, its owner, are not interested in this prospect. Welcome to the world's biggest gas game!
The world before
For a long time, natural gas has traveled only in pipes. Not massively transported in LNG tankers, special boats so baptized, because natural gas is essentially composed of methane (one carbon atom and four hydrogen, CH4, you probably remember the formula of the lightest hydrocarbons). Until recently, the gas consumed did not come from the basement, but from the distillation of the coal. This historic primacy of manufactured gas to illuminate cities explains why natural gas is spoken of when natural gas or natural bauxite is never said.
For a long time, natural gas has not competed (other than with other sources of energy, especially coal and fuel oil). By barely simplifying, in every European country a single national gas company was involved in everything from transport to big, then small pipes, to commercialization to the final consumer. Sometimes even, it included production, when there were as in Holland, but not always (in France, Elf Aquitaine produced in Lacq and GdF took care of the rest). In absence of or in addition to indigenous resources, the national gas company obtained from one or more suppliers, also from state-owned companies, such as the Algerian Sonatrach or the Russian Gazprom.
In the case of a single buyer and seller, two monopolies are thus face to face. This situation, known as bilateral monopoly, has long been disliked by the economy because it does not lead to a market equilibrium. There is not a quantity and a price that would be imposed on the parties as in the case of perfect competition, the simple monopoly, or the oligopoly. There are several solutions, even an infinity, and the one that is chosen depends on who is the stronger. If the bargaining power is on the side of the buyer, the price will be low, if it is on the seller side, the price will be high.
The bilateral monopoly
For a long time, the bilateral monopoly has deceived the most experienced economists and incorrect solutions have been taught in the best microeconomics textbooks. In reality, there is indeed a quantity of equilibrium in the exchange between the two parties. This optimal quantity is that which maximizes the sum of the joint profit, that is to say the profit that would be collected if the two firms were one.
On the other hand, there is no equilibrium price for the intermediate good. This price simply corresponds to the agreement found between the parties to share the joint profit. It is a sort of transfer pricing between two separate companies that discuss and co-ordinate.
Besides, the final consumer does not have to make the price of the intermediate good. Imagine, in the world before, subscribers of a Gaz de France then in monopoly (or the state representing their interests) that would only buy from its Russian counterpart. They only have to worry about whether the volume of gas transiting at the boundary and set by both parties is equal to or close to the optimum. Economic theory establishes that if the two enterprises maximize their joint profit, then the price of the final good, that which the consumer pays, will be the most advantageous to him.
Was that the case at the time? Even today, in retrospect, it is hard to say, because there are few pure cases of bilateral monopoly and historical data on quantities and prices remain secret. For a long time, bilateral trade has been exclusively regulated by long-term contracts known only to the parties. This was before the creation of the free gas market, which was run by stock exchanges. For a period of 20 years or more, these contracts fix a floor quantity that the buyer must withdraw under all circumstances and a price that includes a constant term and a series of indexing parameters, in particular the rate of And the price of oil.
By simplifying, in these so-called Take or Pay contracts the buyer assumes the volume risk and the seller the price risk by ensuring the competitiveness of the gas with the competing fuels. In the absence of knowledge of the terms of the contracts, it is not possible to establish retrospectively whether the quantity negotiated corresponded to the theoretical model, nor indeed to know who appropriated most of the joint profit.
Gazprom against Europe ...
Do you remember the winter of 2008-2009? Arrived early, the cold was very lively. Temperature in January had never been so low in two decades. It was this winter that Russia chose for both financial and political reasons to shut off the gas tap at its border with Ukraine that did not pay its debts. Two weeks of complete interruption of delivery at the beginning of the year. Ukraine is a major transit area for Russian gas to the European Union. The populations of south-eastern Europe suffered severely from this cut because of their almost exclusive dependence on Russian gas for heating and electricity production. Tens of thousands of refrigerated people found themselves plunged into energy poverty. This crisis has strengthened Europe's will to diversify its gas supplies and thus strengthen its energy security policy.
Until then, it had focused on opening up markets to competition and facilitating intra-Community trade. An ambitious program which has resulted in the erosion of the monopoly position of the national historic gas operators and the supervision of the interconnection infrastructures between the Member States. In detail, this gives many technical measures: vertical separation between the management of the pipes and that of the gas that passes in, regulation of the first, creation of spot markets for the second.
In addition, there is a constant criticism of long-term contracts, in particular by the European Commission's Directorate-General for Competition. Their long duration is considered a handicap for the entry of new operators; Their indexation to the price of oil is analyzed as unfounded; And they are perceived as incompatible with European law inasmuch as they prohibit the buyer of a Member State from reselling its imported gas to an operator located in another Member State.
... Or Europe against Gazprom?
In other words, the European energy security and liberalization policy has not - and is not doing - the Gazprom business. Let us give two illustrations.
A short distance from the Lithuanian coast floats a regasification platform for imported gas by boat, especially from Norway. This investment, supported by Europe, enabled Vilnius to relax its dependence on Russian gas coming inland. This is true both physically and economically. The platform provides Lithuania with an alternative entry point to import gas into its territory. Moreover, even if its capacity is still underutilized, this facility exerts a competitive pressure on Gazprom, forcing it to lower its price.
The second illustration concerns the destination clause which prevents resale. It allowed Gazprom to charge a different price for its gas from one Member State to another. It was justified by the idea of adapting to the conditions, varying according to the country, from the competition of gas with fuel oil. This clause led to gas prices decorrelated from their distance to the Russian border, ie the cost of transporting methane. For example, the price of Russian gas in Germany, which is closer to the Urals than France, has been more expensive than the one arriving in France. Gazprom thus discriminated among consumers by geographical origin.
Let us recall that a strategy of discrimination is always favorable to the monopoly, because the profit pocketed with prices that take into account the different demands of the consumers is higher than with a single price for all. However, the willingness to pay for gas depends on many national characteristics, such as the price of fuel oil to the final consumer and the types of heating and power generation equipment. More destination clause, more geographical discrimination possible.
The latest avatar of the evolution of tensions between Gazprom and the European Commission dates from April 2016. The game this time opposes two very big players trained in the economy. On one side of the table is Margrethe Vestager, Commissioner for Competition, who is said to have inspired the famous Danish series Borgen; Opposite, Alexander Medvedev, Deputy General Manager of Gazprom, and incidentally former President of the Continental Hockey League. That month, one week after attacking Google, Margrethe Vestager accused the Russian gas of abusing a dominant position in the eastern part of the Union. It criticizes Gazprom for opposing the sale of gas in unfair prices in eight Member States. Since then, both parties have been trying to compromise. The Commission wants to end the territorial restrictions and indexation of long-term contracts at the price of oil while Gazprom seeks to escape a fine of several billion euros. The agreement was expected before Christmas. It is still waiting today ...
By François Lévêque, Professor of Economics, Mines ParisTech - PSL
http://www.latribune.fr
Reuters
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