Opinion of the Economic and Social Committee on the 'Communication "European Community gas supply and prospects"`

(96/C 204/21)

On 24 November 1995, the Commission decided to consult the Economic and Social Committee, under Article 198(2) of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Energy, Nuclear Questions and Research, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 9 April 1996. The Rapporteur was Mr Lyons.

At its 335th Plenary Session (meeting of 24 April 1996), the Economic and Social Committee adopted the following Opinion by 36 votes to seven abstentions.

1. The views of the Commission: brief summary of the Commission's communication

1.1. Natural gas is increasing its market share in virtually all EU Member States, and dependence on imports from third countries (which is almost 40 % today) is likely to increase to 60 % by 2010, and perhaps to 75 % by 2020. Increasingly it will be used as a power generating fuel.

1.2. While contracted gas supplies are more than adequate to meet projected demand in 2000, there is at present a shortfall in contracted supplies of up to 20 % to meet expected demand in 2010.

1.3. Nevertheless, 'gas supplies potentially available to the EC, both internal and external, are abundant and sufficient to meet demand well into the next century`, the main suppliers being Russia, Norway and Algeria. Additional reserves exist in the Middle East and Central Asia but developing them is likely to be costly. The EU's growing dependence on imported gas is liable increasingly to influence its relations with the countries which supply it.

1.4. Gas has a number of technical and economic advantages as a fuel for electricity generation, and this sector may account for 50 % of the anticipated increase in the use of gas by 2010. If that should transpire, then electricity generation in 2010 would consume nearly one third of the Union's gas consumption.

1.5. On security of supply, in a worst case scenario - which assumes a simultaneous cessation of supply from both Russia and Algeria - the EU as such should be able to cope for up to five months, though individual Member States would fare vary differently. The use of 'the EU dimension` - i.e. the integration of the EU gas system - is essential to attaining and assuring an adequate security level.

1.6. Integration of the EU gas system is, however, a good way from being achieved. In the event of a major short-fall in supplies a number of Member States are at present vulnerable to some degree or another. These include in the first instance Austria, Finland and Spain and - until the attainment of full integration - France and Belgium.

1.7. Against that background the Commission draws attention to the importance of the gas projects included in the TENs programme, to the desirability of developing new underground gas storage facilities, of examining further the potential for interruptibility for handling shortages. Among other issues, it states the need for developing much greater co-operation, and for drawing up emergency guidelines at EU level. It calls on the Council to endorse its communication, to promote examination of the range of issues it has identified, and for the Commission to be required to report further to the Council in due course.

2. General comments

2.1. The above summary does not, any more than the Commission's own summary, bring out the real significance of the issues involved for the EU's future development.

2.2. The EU is not facing a situation in which, in normal circumstances, there will be an absolute shortage of the gas it will need. The heart of the concern is that the EU will become unduly dependent on too few external sources, which could lead to an undesirable vulnerability, economically and politically, during the early decades of the next century. In addition, bearing in mind that by that time gas will be a major fuel for the generation of electricity, it is not inconceivable that that vulnerability could be damaging.

2.3. Contingency arrangements

2.3.1. The Commission first comments on the ability of gas suppliers to cope with unexpected short term interruptions to supply. This is done in the first two paragraphs of 5.2 of its communication. The Commission seems reasonably satisfied overall.

2.3.2. In the rest of 5.2, the Commission considers how crisis situations might be handled. These are defined as situations in which there is an interruption to supply from Russia or Algeria, or both. Not surprisingly, the Commission concludes from its analysis that it will be easier to deal with such supply interruptions on an EU integrated basis than not, and that the EU is more vulnerable to an interruption of supplies from Russia than it is from Algeria. Even so, the Commission argues that the EU could sustain a cut in Russian supplies of 36 % for up to 283 import days.

2.3.3. The effects of such crisis situations, should they occur, would be felt quite differently in different parts of the Union. Sweden has no gas and no plan to introduce it. The Netherlands and the UK are for practical purposes self sufficient in natural gas. Germany is not, but it takes its imports from the Netherlands, Norway and Russia, has many supply points and the capability to withstand even serious interruptions to its supply for a long time.

2.3.4. Other Member States are less fortunate. In particular Austria, Finland, Italy, Luxembourg and Spain find themselves in potentially exposed situations. Greece and Portugal will join this list when they are connected to natural gas during the next few years. Hence, the Commission's conclusion reported in 2.3.2 above that the EU could sustain a cut in Russian supplies of 36 % for up to 283 successive import days means in reality that some Member States will be able to cope with serious interruptions for up to 283 days if the Union develops an integrated system to support them, but for a lesser time if it should not!

2.3.5. But, while the Commission's analysis is interesting, it is not, unfortunately, reliable. It may or may not be accurate. This unsatisfactory state of affairs arises because the Commission lacks the quality of information its analysis really needs.

2.3.6. The Commission itself draws attention to this problem. Relating to its comment reported in 2.3.2 above, the Commission states in 5.2 that in evaluating the EU dimension 'it has been assumed that full cross border co-operation between gas industries which are interconnected has been fully utilized`. Later in 5.2, where it is commenting on EU gas companies cross border back-up agreements, the Commission states that 'there is little available data on them and it is not possible to establish if they would exploit the EU dimension to the full in the case of a crisis affecting several Member States`.

2.3.7. Those are very important qualifications. Moreover, the Commission has expressed them notwithstanding the prior consultations it had been having with the gas industry beforehand. The reality is that the Commission has had no access to detailed information about the actual contingency arrangements of the gas companies which comprise the industry. These arrangements are nearly all encased in confidential contracts between one gas company and another, and even Member States' Governments may not know what each of them entails.

2.3.8. Some of the concrete questions to which the Commission would need to have answers for any well informed survey of the EU's gas industry contingency planning would, for example, include the following: what are the arrangements, contractual and otherwise, for the back-up enjoyed by each company from other companies; in what kind of circumstances are back-up facilities actually available, how would they be triggered, how might they be constrained, what would be the limit of their duration? What would be the commercial terms on which it would all be done - and what therefore are the kind of costs which would be involved?

2.3.9. It may be thought that Table 4 of the Commission's communication shows that there is nothing to worry about. Every Member State is reported there to have 'back-up co-operation with other companies` in place. All that that means, however, is that each Member State's Government is aware that its gas companies have back up arrangements with some other gas companies. Many of the Governments will know no more than the Commission about what that statement means in practice.

2.3.10. Table 4 is unsatisfactory in another respect. It contains the question 'Formulated security of supply policy?` to which in every case the answer is 'Yes`. What, however, does that answer mean? In fact, it varies with each Member State.

2.3.11. The relevant information is helpfully set out in the report entitled 'Security of supply of natural gas in Western Europe`, published in November 1994 by EUROGAS (the representative body of the natural gas industry of the European Union). For each Member State there is an explanation of the security of supply arrangements. Unfortunately, whatever may be the intrinsic capability of such arrangements (and the industry has a good record in practice), it is not possible to establish from the information provided what the scale is of the emergency demands which (in each Member State) the gas industry is required to cope with. (The Commission seems not to have taken note of this major difficulty in its judgment towards the end of its first paragraph in 5.2 of its communication). In consequence, the public is unable to make a judgement as to the adequacy of the arrangements.

2.3.12. The exception is France, in whose case EUROGAS states that the gas system has to be able to cope with a disruption of one of the main supply sources of the French market (= 30 % of total supplies) during one year taking into account a winter colder than the average. That is clear, it is understandable to the general public, and performance can be measured against it.

2.3.13. The Commission's difficulties, therefore, are considerable. It is not surprising that in its communication it itemizes a range of studies it would like to see undertaken to give a better picture of the security of supply considerations of which it thinks, given its responsibilities, it should be aware. These include:

- an analysis of the costs and benefits of creating more storage capacity (5.3.3);

- an investigation of the actual amount of interruptibility among Member States 'in order to determine the true level of interruptibility and the implications for security of supply in case of a major crisis` (5.3.3);

- further investigation of the role of energy sharing combined with the anticipated gas fired generation growth (5.3.4);

- an investigation of how to optimize Mutual Assistance Agreements among some of the transmission companies from an EU perspective [5.5.(2)].

2.3.14. In its White Paper 'An energy policy for the European Union` (COM(95) 682 final), published at the end of 1995, the Commission writes at paragraph 77 - which comments on the gas situation - 'the availability of accurate information on the gas sector should be part of the review of the existing instruments for transparency and exchange of information`.

2.3.15. The Commission could surely go further than that. It could discuss contingency planning with Member States with a view to working out a satisfactory, publicly declared, standard - for example, not necessarily exactly the same but of the character adopted in France. Such a standard might vary in detail from one Member State to another: the important thing is that it is published. Member States would then be asked to satisfy themselves that their gas companies are able to operate to the established standard. It is pleasing that the Commission's suggestion (in 5.5) that security targets might be established is in line with this proposal and should be supported.

2.4. The inexorable increase in the demand of gas

2.4.1. The adequacy of contingency arrangements is one matter. There are other matters the significance of which has to be considered. The chief of these, given the scope of its ramifications, is the apparently inexorable increase in the demand for gas. The main facts set out in the Commission's communication are as follows:

2.4.2. By the year 2000, less than four years away, EU gas production is projected to increase by 11 %, but demand to grow by 22-26 %. Imports from third countries (chiefly Russia, Norway and Algeria), are projected to increase by 36 %. EU dependence is estimated to grow to about 44 % overall, but with marked differences as between Member States.

2.4.3. By the year 2010, less than fourteen years away, demand is estimated to increase by a further 27 % (on average) over the estimate for 2000. Imports could rise by 70 % over the requirements in 2000. Of contracted supplies, estimated to reach about 168 mtoe, Russia, Norway and Algeria could be supplying approximately 39 %, 34 %, and 24 % respectively. These trends will be reinforced significantly when the countries of Central and Eastern Europe (CCEE) join the EU. Beyond 2010, it is anticipated that demand will continue to grow, with EU imports rising perhaps to 75 % (though it must be accepted that all figures become highly speculative that far ahead).

2.4.4. Some criticism has been levelled at the Commission on the grounds that its forecasts for future demand are overstated. EUROGAS, for example, in its '1995 Publication of Gas Statistics and Prospects` projects demand in the EU as being between 315 and 330 mtoe in 2000 and between 350 and 385 in 2010. These compare with the Commission's estimates of 310-320 mtoe for 2000 and 392-411 in 2010. The estimates of the 'Natural Gas Security Study`, published in October 1995 by the International Energy Agency (hereinafter referred to as the IEA Report) also show lower figures than the Commission for 2010.

2.4.5. There is nothing unusual in such forecasting differences. It is to be expected that different agencies will make moderately different judgements about the imponderables underlying their figures. What these are is not always clearly stated. For example, one of the judgements that has to be made is the extent to which gas fired generation will replace nuclear energy over the next fifteen years, but none of the agencies is forthcoming about the assumptions they have made about this.

2.4.6. While almost all forecasts turn out to be wrong, certainly in detail, they nevertheless remain essential tools in trying to prepare for the future. Of course, they must never be regarded uncritically. Subject to these reservations, the significance of the forecasts discussed in 2.4.5 is that they all point in the same direction. It is only a question of timing (a few years one way or the other) as to when gas is estimated to attain any given enlargement of its market share. As there seems to be no good reason to believe that the Commissions's estimates are inferior to any others, the Committee is satisfied to use them in this Opinion.

2.5. Strategic issues

2.5.1. In considering these forecasts it is not merely an expansion in the volume and market share of gas which is under discussion. The Commission's communication demonstrates that by about 2010 a significant proportion of the EU electricity supply will be fuelled by gas. Eurogas reports that in 1994 about 8 % of electricity was fuelled by gas, but it estimates that in 2000 it will be in the range of 15-20 % and still growing. This is a critical development in the uses to which gas is put.

2.5.2. At present gas is used overwhelmingly for domestic heating and industrial purposes. In these spheres shortages would be greatly inconvenient and almost certainly costly for those directly involved, but it is to be expected that normally they will be coped with without undue difficulty economically or politically. Shortages, even serious shortages, would not pose a threat to society, or the economy, though doubtless they could in some circumstances (a prolonged cold spell for example) give rise to public disturbances and domestic political controversy.

2.5.3. It is different, however, once gas supplied from external sources accounts for a significant proportion of the fuel used to generate electricity. It is at that point that concern about security of supply could become a serious economic and/or political issue, depending among other things on the number and the nature of the sources. Electricity is one of the two motor forces on which modern societies depend for their present state of existence, oil being the other. If external forces are in a position to exercise undue influence over the security of a country's electricity supply, that has to be a matter of some concern. It seems to be the Commission's concern about this vis-à-vis its responsibilities to the EU that in part lies behind its communication.

2.5.4. It is in 5.2 of its communication that the Commission sets out its thinking on this subject. Here it makes the judgement that at least in the more mature European gas market a major shortfall in supplies from one external supply source can be coped with, provided that there is the full interconnection of the EU system of transmission lines linking the different EU sources of supply and that there has been full cross-border cooperation between interconnected gas industries.

2.5.5. But that does not help the more exposed Member States. The Commission's concern about a major shortfall in supplies from an external supply source relates to the possibility of this happening to supplies from the FSU and Algeria. It says explicitly that 'the risk of shortfalls from Norway ... has not been considered`.

2.5.6. Table 2B of the Commission's communication shows that in 2010 Russia and Algeria will be supplying 106 mtoe, or approximately 25 % of the EU's estimated consumption. But that is to the EU regarded as an entity. In reality, they will be supplying a proportion much higher than that to Austria, Finland, Italy and Spain and, by then, Greece and Portugal as well - see 2.3.4 above.

2.5.7. But how likely is it in practice that 'major shortfalls` in supply might be expected from the two sources to which the Commission refers? This question is not discussed in the communication, and it may be that this is a diplomatic omission. It is, however, discussed in an Annex (Annex II) to the IEA report, already referred to, which is specifically about European security of gas supply. Here, the IEA recognizes that 'a growing dependence on natural gas imports will increase interest in European security of supply`. The IEA is particularly interested in the transit problems of long distance gas transportation, and in security of supply from gas originating in the Maghreb.

2.5.8. The IEA says that it is 'uncertain whether there is a real risk of gas supply cuts due to transit issues`. Due to the novelty of long distance gas transit, there is little historic data available, it says. (Where the IEA has found historical evidence it relates to oil pipelines in the Middle East where, since the first one laid in 1931, there has been a history of interruptions due to political hostilities and conflicts between neighbouring countries).

2.5.9. The IEA made a particular study of relations between Russia and the Ukraine, since Russia's existing pipeline to Europe goes through the Ukraine. It found there have been strained relations between the two countries with threats of supply cuts, and some actual cuts, by Gazprom due to the Ukraine having been in very substantial debt to them. The Ukraine offset the cuts in its own supply by reducing the throughput to Europe. The IEA thinks the situation is being brought under control. Both Russia and Gazprom are well aware of the crucial and symbolic importance of security of supply to Europe. The IEA concludes that, despite the evident tensions between them, Russia and the Ukraine are progressively building the basis for sustained cooperation.

2.5.10. Regarding the Maghreb, and Algeria in particular, the IEA emphasizes how important the hydrocarbon sector is to them economically and concludes that European supplies would only be endangered, possibly, in the event of an Islamic Government coming to power in Algeria. This would be more likely to arise, if it occurs at all, from associated social and political breakdown than to any deliberate political decisions.

2.5.11. If that is the background against which the Commission decided to review the question of the EU's security of gas supply from external sources, then the Commission has done no more than to exercise its responsibilities in a prudent manner. Of course the EU is wholly committed to fostering stable economic and political relations with its neighbours, Russia, the Ukraine and Algeria very much included. The signing of the Energy Charter Treaty by Russia and the Ukraine and, subsequently, of associated agreements by Algeria and other North African countries, will provide a major boost to progress and confidence between all the parties involved.

2.5.12. Towards the end of 5.2 of its communication, the Commission lists the measures available to be taken to withstand a possible future interruption to gas supply from an external source - although, as commented above, the Commission does not know to what extent they can or would be utilized. These measures include interruptibility of supplies, production flexibility, greater import diversity, and the use of available storage at EU level.

2.5.13. Commenting on these measures, the Commission adds that, to be fully exploited, it is crucial to achieve 'the full interconnection of the EU system of transmission lines linking the different EU sources of supply`, a requirement the importance of which the Commission emphasizes more than once.

2.5.14. It has to be noted, nevertheless, that most of the proposals for improved gas transmission links (see Annex 1 to the Commission's communication) will not be accomplished for some years to come, and that on the important question of storage, the current capacity available would only last for two months of peak winter demand (see 5.3.3 of the Commission's communication). Further, on storage, while the plans of the gas industry are to increase storage capacity by more than the expected increase in gas demand, the enlarged capacity planned for 2010 will cover a lower proportion of imported supplies than the storage capacity does today.

2.5.15. Rightly, the Commission emphasizes the need for flexibility in the system of gas supply. It is surprising therefore that there is a lack of information about the development of LNG facilities, for these offer the only alternative to importing gas through pipelines. Five additional LNG terminals are among the TEN's Common Interest Projects, and the proposed location of these (in Ireland, France, Portugal, Italy and Greece) is shown on the chart at the end of the Commission's communication. However, the only mention of them comes towards the end of Annex 1. It does not appear that any of them are high on the list of TEN's construction projects. None is included in the list of such projects in Annex 1.

2.5.16. Approximately 15 % of natural gas imports is delivered by tanker at present, and if this proportion could be pushed up to 25 % or thereabouts it would not only give the EU as a whole greater flexibility, but would be a particularly valuable addition to the security of supply available to the countries on the Southern flank of the Union. The Committee recommends the Commission to give greater weight to the potential of LNG facilities in a security of supply context.

2.6. Electricity generation and security of supply

2.6.1. In 5.3.4 of its communication, the Commission discusses the role that the electricity system could play in improving the security of supply of natural gas. In principle the electricity system could provide valuable back-up, but the Commission's assessment of the possibilities may be optimistic.

2.6.2. Considerable store is placed 'on a significant percentage of the power market` being equipped with long term dual fired capability 'such that a large number of power generation users were capable of performance without gas for a portion of the winter season`. (The reference to dual fired plant should be understood to apply mainly but not exclusively to power stations which can switch from burning oil - either heavy or light oil - to gas, or vice-versa).

2.6.3. The Commission's concept is quite valid in itself, and such dual-fired capacity can play a valuable role in the next few years. But it is likely to be a wasting asset. The scene has been changed markedly by the introduction at the beginning of the 1990s of Combined Cycle Generating Turbines (CCGTs). These can produce electricity from natural gas far more efficiently than any other technology. It is true that CCGT plants can be designed to burn gas-oil in addition to gas but as well as being more expensive it is a more cumbersome process, and there seems little likelihood of such dual-fired CCGT capacity being generally installed.

2.6.4. In the report referred to in 2.4.4, the IEA estimates that the share of CCGTs in total gas capacity in OECD Europe for public supply could rise from 2 % in 1992 to 25 % by 2000, and 60 % plus by 2010. If those estimates are accepted then they mean that most of the dual fired plants in Europe will be being phased out by about 2010 or shortly after, just as gas supplies 15-20 % of power station fuel. Dual-fired plant will not provide much back-up security by the time it will most be needed.

2.6.5. The Commission considers that the electricity transmission system could be used to some extent to transmit electricity to a region where an interruption to the gas supply has lead to a loss of generation. Again, the Commission is right in principle. But again the practical possibilities are severely limited. Only a detailed case by case examination of the possibilities will establish just what they amount to.

2.6.6. It is a question of what is the surplus capacity on each side of the transmission point. Italy, for example, imports nearly 20 % of its electricity from neighbouring countries, chiefly France. There is little spare transmission capacity left to import anything more, should there be an emergency, even if it were available.

2.6.7. From the point of view of a potential exporter of electricity, it is necessary for there to be a surplus available at the time it is wanted. Many factors affect this, but the most critical is the availability of spare generating plant at times of maximum demand. Two factors are tending to reduce the amount of spare capacity available. The first is the spread of competitive generation without any organization retaining an obligation to ensure the availability of an adequate capacity for situations requiring maximum generation. The second is the development of the EU transmission system itself, which will encourage generating companies to look to this for some of their reserve capacity rather than to power stations of their own.

2.6.8. In short, the developing EU electricity transmission system cannot at present be looked upon to provide reliable security of supply options to offset interruptions to the supply of gas.

2.6.9. To the extent that strong independent electricity distribution companies (i.e. retailers) emerge at some future date from a more competitive electricity sector in the EU, as the Commission wishes to see, it is possible that they could counteract the two tendencies described in the paragraphs above. It would depend on the structures and legislative arrangements which accompanied them.

2.6.10. In its report, the IEA makes a not dissimilar analysis of the implications for the security of supply when, during the next few years, natural gas becomes a major fuel for its generation. It is perhaps a little more hopeful that dual firing may yet be found to be compatible to some extent with the expanding use of CCGTs. (The IEA also considers the possibility that reserve power station capacity could help, but that this is unlikely as it is in general being run down.)

2.6.11. The IEA continues its analysis by observing that 'the security issues of increased gas use (for the generation of electricity) and greater competition` are not insurmountable, nor do 'concerns over security of supply justify restricting the increased use of gas in power generation`. The Committee can agree with both those conclusions, though it believes - regarding the second of them - that the scene should be reviewed in, say, five years' time.

2.6.12. The IEA concludes its analysis by observing that 'should the system become vulnerable to supply shortages, Governments have ample scope to develop policy instruments addressing the security issue`. This particular conclusion has been used by some critics of the Commission's communication, who are arguing that the IEA's study shows that the Commission is too pessimistic.

2.6.13. But if that is what the IEA intended to convey, it is at odds with its own analysis. The phrase 'Governments have ample scope...` is true but hardly enlightening. Governments do have 'scope`. But the objective of security of supply is first and foremost a political objective, and not all EU Governments accept that it is an objective that they should, or need to, adopt. Hence the significance of the Commission's communication.

2.6.14. Where the objective is accepted, the means of accomplishing it have still to be fashioned. The IEA thinks there is no need to do this at present. The Commission on the other hand does and, in 5.5 at the end of its communication, makes a few modest suggestions. For this, the Commission has been criticized on the grounds that its suggestions are both intrusive and unnecessary.

2.6.15. The IEA's ideas of what could be done, if action is thought necessary, are actually more intrusive than anything the Commission is proposing, and include, for example, introducing a requirement on generators 'to provide funds for centralized back-up fuel storage or construction and/or maintenance of extra reserve capacity`. The Commission has realized that it would be counter-productive if it were to be proposing such active measures as these.

2.6.16. Insofar as there is, over these particular matters, a difference between the Commission and the IEA, the Committee believes that, at present so far as the European Union is concerned, the Commission's approach is overall the more realistic.

2.6.17. In 2.6.1. and below, the Committee considered the Commission's views on whether the electricity supply industry could help with the security of supply problems of the gas industry. At present, it does. One of the security of supply measures used by most gas companies in most countries is, if there is a shortage of gas, to cut off their supply to electricity generation. Where there are dual fired stations that is only sensible. And when gas supplies only a few percent of the fuel burned for electricity generation, it is not difficult for this to be accommodated. But when gas supplies 15 or 20 percent of generating fuel, and there are few dual-fired stations left, this philosophy will be quite unacceptable. It will be the gas industry which will have to adapt to the security of supply requirements of electricity generation.

2.6.18. The increasing use of gas as a power station fuel will require a serious rethink by the gas industry of their security of supply operations. The Commission, too, may like to consider the implications of this requirement.

2.6.19. The Committee also asks the Commission to examine thoroughly the medium and long-term implications of increased natural gas use for electricity production from the point of view of EU energy-supply diversification as well as from the technological, economic, social and environmental standpoints, by comparing the advantages of natural gas with other energy sources: nuclear energy, coal, oil and renewable energies.

2.7. The question of prices

2.7.1. The Commission gives less attention to the economic significance of gas's swift rise to prominence than it does to the security of supply issues. Yet some consideration should be focussed at least on the question of price, for their are some security of supply aspects to that as well when the subject is looked at in the round. As above, however, it has to be remembered that the situation of individual Member States can be very different as between one and another, and also very different from the situation of the EU as a whole. Particular attention should be paid to the question of prices, which also has implications for security of supply. For example, major changes in price levels can lead, as in the 1970s, to a fall in the standard of living and an increase in unemployment.

2.7.2. Perhaps the most important question to be considered is: will the EU's growing dependence on gas imported from Russia and Algeria give those countries the ability, in a few years' time, to affect the economic development of the EU in ways that would not be welcome? The question will assume greater importance as gas increases its role as an electricity generating fuel.

2.7.3. The Commission's estimate that those two countries are likely to be supplying the EU with 25 % of its gas consumption in 2010 has already been noted in 2.5.6 above. In fact, they may be able to supply a higher proportion than that. It is clear that if those two countries (each of which has a single monopoly gas supply company) were to act in concert in relation to the price of their gas as new contracts come to be negotiated, they would, in principle, be in a strong negotiating position.

2.7.4. On the assumption, however, that they will want to continue selling their gas then, unless they were to settle for a series of high priced short term contracts at the expense of lower priced long term contracts, the two countries are most unlikely to be in a position simply to dictate their terms. And, of course, the international price of gas would always be a critical influence. In general, the idea that these two countries would, or could, form a commercial alliance to try to exercise joint commercial pressure on their customers in the EU must be at the extreme of any probability assessment.

2.7.5. An altogether different prospectus being canvassed in academic circles is that, when Russia's second pipeline becomes operational (it is to come through Belarus and Poland and is due to be completed by about the turn of the century), Gazprom will have the possibility of expanding its market share in the EU by exporting much cheaper gas. It would be able to do this by virtue of a large 'gas bubble` which will be at its disposal because of the collapse in internal demand since 1990. This, if it came about, (it is argued) could have both commercial and strategic implications.

2.7.6. Whatever the intrinsic merit of such theories, it is clear that Russia's growing importance to the EU as one of its major suppliers of gas is generating a wider debate as to its significance. The Commission's Communication has focussed on security of supply. The Committee believes the Commission should also keep under review the wider questions of the commercial and economic consequences of Russia's growing involvement.

2.7.7. There is a still wider question that merits some reflection. That is the relationship between gas prices and oil prices, and whether this relationship, such as it may be, will attain greater or lesser significance when gas is one of the major power generation fuels.

2.7.8. The relationship between gas and oil prices is general rather than specific. It is usually held that gas prices are related most clearly to oil prices, and that the former tend to follow the latter both up and down with or without, depending on circumstances, a significant time lag. To the extent, however, that gas becomes an electricity generating fuel, its price (in relation, for example, to a decision to build a new gas fired power station) must be determined in the first place by the cost of producing power from other fuels, chiefly coal and nuclear power, taking into account the different technologies involved. On that assumption, the price of gas may tend to become less clearly linked to oil as its importance to electricity generation grows.

2.7.9. There is another side to that coin, however. While it is true that the price of oil has more effect on the price of energy in general than does the price of any other fuel, when the economics of power generation is largely determined by the cost of coal and nuclear energy it takes years rather than months for major changes in oil prices to work through to the price of electricity. Once gas joins coal and nuclear power as a major generating fuel it will mean that changes in the price of oil will be relayed through to electricity prices rather more quickly than in the past.

2.7.10. The price of oil is historically the most volatile price of all the fuels. Once gas is fuelling 20 % of the EU's power generation then the price of electricity will reflect some of that volatility, and tend to become more variable than it has been. It will take time before these tendencies become clear, since the proportion of gas as a generating fuel will have to exceed more than marginally the proportion of generation to which gas and oil contribute at present.

3. The wider picture

3.1. Less than two decades ago, the energy world was dominated by three fuels - oil, coal and nuclear power. Now that has changed. Developments in the technologies of wind and solar power, biomass and geothermal have entered upon the stage. But there is no doubt that it is natural gas that has emerged as the fourth big player on the world scene. It is environmentally attractive, it has economic and commercial advantages, there are very large quantities of its scattered about the world and, harnessed to the new CCGT technology for power generation, it is set to reduce further the price of electricity which, with oil, is one of the two motor forces of modern civilization. All these are attractive as well as powerful features, and warmly to be welcomed.

3.2. The conclusion of this Opinion is that there are nevertheless legitimate questions about the security of supply to Europe (and in particular the EU) which arise out of the rapid increase in the market share of natural gas, the restricted choice of overseas suppliers from whom it seems likely to be economic to import, and its potential growth as one of the major fuels for the generation of electricity.

3.3. It is interesting to note the terms in which the natural gas industry defines security of supply for its own purposes. 'Generally speaking security of supply has to do with the maintenance of a continuous supply of natural gas to customers in accordance with contractual requirements` (taken from 'Security of Supply of Natural Gas in Western Europe`, page 7, published by Eurogas in November 1994). Although modest in its scope, this is a responsible and appropriate definition for the gas industry to adopt. It cannot define any wider duty to the community because it is not in its remit to do so.

3.4. But, as the discussion in the pages above has demonstrated, the security of the EU's future gas supplies will matter as much to the electricity supply industry as it will to the gas industry. It involves the future of relations with Russia, the Ukraine and Algeria (and other nations as well), and making judgments about possible future commitments and dispositions in the energy field with long term consequences for the prosperity of the Union. A substantial complication, noted throughout the Opinion, is that there are widely divergent interests among individual Member States.

3.5. In electricity supply it is common prudence, other things being equal, to seek an overall balance between the major generating fuels - coal, nuclear, oil, gas, hydro and other renewables. Coupled with the necessary strengthening of both gas and electricity transmission links across Member States boundaries by pressing ahead with the appropriate TENs projects, such a balanced approach is the best guarantee of maintaining the EU's independence of energy supply, which happens also to be essential to its continuing political independence.

3.6. None of this is a question of public versus private enterprise, or of regulated as against liberalized gas or electricity market. If security of supply considerations are agreed to be relevant to the protection of a community's interests, these can be secured by a variety of different measures, depending on the circumstances. None of them need be inimical to normal market operations.

3.7. The Commission has no powers to adopt an EU energy policy. But it is entitled to open up discussion on important energy topics which it thinks bear on the EU's economic and political future. The Committee believes that its communication on 'Gas Supply and Prospects for the European Union` is a valuable contribution to a discussion which is needed.

4. Summary

4.1. Gas is rapidly increasing its market share in most Member States and is set to continue to do so. Dependence on imports from third countries, at present at a level of 40 %, is likely to increase to 60 % by 2010, and an even higher percentage in later years, and this is a matter of some concern. But there are very great differences in the situations of the individual Member States with Austria, Finland, Greece, Italy, Luxembourg and Portugal being, now or later, in the most exposed positions.

4.2. In normal circumstances, there is no potential shortage of gas to meet this growing market in the next 20-25 years, and probably for much longer than that. Russia and Algeria alone are expected to be supplying some 25 % of the EU's requirements in 2010.

4.3. Also by 2010, the proportion of electricity generated from gas is anticipated to grow from approximately 8 % to between 15 to 20 %. At that level of penetration, gas will have become a major electricity generating fuel. This will represent a marked change in the strategic significance of gas to the EU, and the gas industry will have assumed a direct responsibility for ensuring the security of supply of electricity to the EU's citizens.

4.4. In its communication the Commission has examined scenarios for the handling of unexpected shortages in the supply of gas from external sources. But while it can carry out paper exercises, it is not well informed about the contingency arrangements which the Union's gas companies have planned for handling emergencies, and it may be that a number of Member States' Governments are not well informed either (2.3.3 to 2.3.11).

4.5. The Committee supports the Commission's search for better information (2.3.13) and recommends (2.3.15) that the Commission should go further and work out with each Member State a standard of security of supply which would be published, and against which the adequacy of contingency plans by gas companies could be judged.

4.6. The Committee sees no reason not to use the Commission forecasts (2.4.2 to 2.4.6).

4.7. The measures available to the EU for handling possible interruptions to gas supplies are listed in 2.5.12, but it is noted that, to be fully effective, 'the full interconnection of the EU system of transmission lines` is crucial (2.5.13).

4.8. The Committee indicates the deficiencies in the existing plans in 2.5.14 The Committee is critical of a lack of information in developing the EU's LNG capacity, which is particularly important for the Member States on the Southern flank of the Union (2.5.15 and 2.5.16).

4.9. The Committee notes the information supplied by the IEA's review of long distance gas transit systems, and of problems which might arise in the Maghreb, and agrees that against such a background the Commission's review of gas security of supply is prudent (2.5.7 to 2.5.11).

4.10. The likelihood that electricity supply can offer increased security of supply to gas is small (2.6.1 to 2.6.9): on the contrary, when gas is the generating fuel for 15-20 % of electricity output, the gas industry will no longer be able to regard power station outlets as normally suitable for interruptible gas (2.6.17 and 2.6.18).

4.11. The Committee agrees with the analysis of the IEA in its recently published 'Natural Gas Security Study`, but not its conclusions (2.6.10 to 2.6.12). The implications for the security of supply of electricity of gas becoming a major generating fuel should be reviewed again in five years time. Security of supply is a political objective, to which not all Member States' Governments subscribe (2.6.13). The Committee concludes that, in relation to the European Union, on these issues 'the Commission's approach is overall the more realistic`. (2.6.1.6).

4.12. The question of whether undue dependence on a few external suppliers is likely to lead to pressure being placed on prices is considered in 2.7.1 to 2.7.5. In 2.7.8 it is argued that the greater the role played by gas as a fuel for electricity generation, the weaker will become the relationship between its price and the price of oil.

4.13. The Committee concludes that:

- the emergence of gas as a major fuel is a beneficial development;

- security of supply for the EU, as for Member States, is a political issue;

- there are legitimate concerns about the future security of external gas supply to Europe, and of the possible consequences of a shortfall for electricity generation (3.1 to 3.3);

- in electricity supply, it is common prudence to seek an overall balance between the major generating fuels; the EU must press ahead with the appropriate TENs projects to strengthen both gas and electricity transmission links; and that such a balanced approach is the best guarantee of maintaining the EU's independence of energy supply;

- none of this is a question of public versus private enterprise; security of supply can be secured by a variety of measures which do not need to be inimical to the normal operation of the market;

- the Commission's communication is a valuable contribution to a discussion which is needed.

Done at Brussels, 24 April 1996.

The President

of the Economic and Social Committee

Carlos FERRER