French Gas Market to Suffer North-South Spread Till 2018, Says Desbois
A progressive convergence towards a fully integrated European energy market is emerging clear. Poland and the United Kingdom are trying to foster a shale gas revolution, while France is voicing its intention to research 'clear alternatives' to fracking, in order to exploit its significant shale gas reserves. According to the estimates released by the Energy Information Administration in 2013, France holds 137 tcf of unproved wet shale gas technically recoverable resources (TRR). Amid speculations and a recent cabinet reshuffle, the situation remains quite complicated. That is why we tried to shed some light on the French gas markets speaking with Baptiste Desbois, International Energy Procurement Consultant at E&C bvba. He is the author of the book "Panorama: Le Marché Du Gaz en France."
In your book ‘Panorama: le marché du gaz en France’, you wrote about the changes occurred in the French gas market in the past few years. Can we briefly recall the two-three most important ones?
The purpose of this book is to answer a single question: how does the French gas market work. Without a real willingness to implement reforms, France has gone through a complex process of liberalization. We witnessed a development of three regional hubs: the PEG Nord in the North, the PEG Sud in the South and the PEG TIGF in the South West. Therefore a gas market has emerged in France, which is unfortunately not as mature as the ones in Belgium or the Netherlands. But still there are possibilities to negotiate competitive contracts with hedging mechanisms and to get rid of uncompetitive regulated tariffs. The problem is that regulated tariffs are mainly based on oil-indexed products. Only 46% of the tariffs are based on the TTF price, the rest is a combination of oil products and exchange rates.
In your book you speak about the tendency towards a perfectly integrated market. What are the main hurdles?
The problem is that the country is still divided into three balancing areas. In the north there are several interconnectors with other countries, besides one LNG terminal. However, the south is quite poor in terms of interconnections. Around half of the gas is imported via two LNG terminals in Fos. There is also a connection with Spain but this country is reliant on LNG as well. The other half has to come from the North of France through limited capacities. However, the LNG supply is significantly decreasing due to price arbitrage in favour of Asia and capacities from North to South are congested, leading to high prices in the South. In December the spot price in the South was 40% higher than the one in the North.
Do you see any room for investments from government or private investors to fund new interconnections?
Wheels are set in motion. 2018 is set as the deadline to create a single market place through extra investments on the transport grid in order to erase congestions. In the meantime, the spread could remain alive and impacts consumers with hub-indexed contracts in the South of France. However, some short-term solutions are being implemented such as reserved capacities from the North for gas-intensive consumers located in the South.
Do you think that this delta would converge to 0 by 2018?
The delta or spread was close to 0 two years ago. Achieving 0 is not impossible. However, the situation has now changed in relation to the Asian and South American LNG demand. Europe - and France – is seen as the balancing market. The effect is amplified in the south of France as the PEG South and PEG TIGF are small market places. Once long-term measures will be implemented, we can expect to see a convergence.
To what extent the reliance on nuclear power is an obstacle for the creation of an international gas hub in France?
France is the world champion of nuclear energy. The country is focused on its power system, which is perfectly understandable, but tends to forget its gas system - although the crisis in Ukraine has been a wake-up call. France has not embraced the liberalization of the electricity market and the implementation of a free market. This unique situation could be responsible for a certain apathy to open the gas market. That’s a shame.
Why do you say it is a shame?
Well, 75% of the French sites are still stuck to regulated tariffs. However, opportunities have emerged, especially in the North. Only large consumers seem to be perfectly aware of that, as 92% of the sites connected to the transport grid got rid of these tariffs to go for a market-based offer. What is striking is the lack of communication. For example, in 2013, 45% of gas consumers didn’t know that they could switch to another gas supplier. The French gas market deserves more attention.
In this context, what is the role of politics? Is the current government and presidency doing anything to further integrate the market? Do you have any reprimand, any rebuke for the current Presidency?
This increase in the PEG Sud market is a clear signal that France needs to strengthen its gas policy. It’s time to react and pay attention to gas in order not to be overwhelmed. France is already late compared to other European countries. The first thing the country has to do is to fix internal flaws such as congestions between the north and the south and improve communication.
What are the actors that should invest to avoid those congestions?
The problem is related to the transport grid, as it was not designed to handle such a flow from the North to the South. As a consequence, the transport grid has to be reinforced. In this context, I am referring to GRTgaz, which is the regulated transport grid operator between the North and the South. The Government and the Regulatory Commission have to be involved as well.
What is your personal understanding of the measures taken by Hollande to improve energy markets? Do you expect any U-turn, any significant change in the aftermath of the cabinet reshuffle?
With Hollande, until today, France was as usual focused on power. However, gas is back in the spotlight due to the situation in Ukraine. It will be interesting to see how the new ministry will react and get along with European discussions about the reinforcement of the EU internal market. An important point will be shale gas. There seems to a lot of theoretical shale gas resources in France, close to eighty years of national consumption, but it would be an euphemism to say that it’s a complicated story. The new ministry will have the same point of view. Ségolène Royal, the new energy minister said that they could restart the debate if clean alternatives to fracking were found. The door is thus not completely closed.
According to Total CEO Christophe Marjorie and Minister Arnaud Montebourg, new techniques are available to fracture with minimized environmental consequences. Do you think that fluorinated propane could change the cards on the governments’ table?
Well, it could be interesting to see whether it is possible and viable. But this of course has to be tested, proved and explained to politicians and to the public. My point of view is that first we need to make sure that there are no issues with these alternative techniques and not run into it too fast. It’s by far more than an economic matter.
How long would the whole process take? Will it be a matter of a few years?
Well, it is sure it won’t happen any time soon. But two-three years seems quite optimistic as well.
Are we saying that it will take more than two-three years to test these alternative techniques?
Yes, this sounds correct. If France wants to focus on alternative techniques, it has to start from scratch. So this could take some time.
France is the country of the most charismatic green leader – José Bové. Do you think that he might be in favour? What is your assessment about how the population might perceive these alternatives to fracking?
Well, that is a though question. Green leaders are not only against fracking but against shale gas. But of course, if scientists manage to prove that environmentally friendly alternative solutions to fracking exist, well maybe in a few years some tests could start and then it will be time for useful debates. I don’t expect any change from one day to another. However, industrial consumers are pushing the government to consider these alternatives.
Are there any alternatives to shale gas to maintain or increase the role of gas in France’s energy mix?
Speaking about alternatives to shale gas, coalbed methane is an other option. France is also developing bio-methane to replace fossil fuels. In this context, it could also be interesting to develop technologies to use gas for transportation purposes. In general, I hope that we are not moving too far away from a Golden Age of Gas. I’m convinced that there still could be an interesting future for gas, in a context of energy transitions.
Great. Wrapping it up, what is the main problem in the French gas market?
The main problem is the persistent spread between the North and the South. That stays the burning topic.
Sergio Matalucci