Proposal for a Directive of the European Parliament and the Council concerning measures to safeguard security of natural gas supply
Date: 2002-09-11
Institutions: European Commission
Subjects: approximation of laws, energy consumption, energy supply, minimum stock, natural gas, petroleum, petroleum product, security of supply, single market, storage of hydrocarbons

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Proposal for a Directive of the European Parliament and the Council concerning measures to
safeguard security of natural gas supply

(2002/C 331 E/41)

(Text with EEA relevance)

COM(2002) 488 final — 2002/0220(COD)

(Submitted by the Commission on 11 September 2002)

EXPLANATORY MEMORANDUM

1. Background

1.1. Completion of the internal market for energy

The European Union is making steady progress towards the completion of the internal market for gas and
electricity. In fact, the EU is in the process of creating the largest, integrated and most open regional
electricity and gas market in the world. As demonstrated by the Green Paper ‘Towards a European strategy
for security of energy supply’ (COM(2000) 769), this market integration will contribute to security of
supply, provided, however, that markets are truly integrated. The European Council at Barcelona on
15-16 March 2002 therefore stressed the importance of powerful and integrated energy networks as
the backbone of
the internal market and an important precondition for connecting the European
economies.

However, market opening and sufficient physical interconnection of markets are not in itself a guarantee of
a liquid market based on secure gas supplies from both indigenous and external sources. It is therefore
important that the current profound changes in the market and the transition towards a fully open internal
energy market are supplemented by transparent and unambiguous new policies defining the overall
framework as well as clear roles and responsibilities of the different market players with regard to
security of supply within the new market context.

In order to ensure the continued well-functioning of the internal market for gas, it is equally important to
ensure that appropriate measures are implemented to deal with extraordinary supply situation.

1.2. Increasing importance of gas and expected rising import dependence

Natural gas is becoming an increasingly important source of energy in the EU's fuel mix. In 2000, natural
gas accounted for approximately 24 % of total EU primary energy supply compared to 16 % in 1985 and
less than 2 % in 1960. The steady growth trend continues, even in times of low economic growth. In
2001, Western European gas consumption increased by 2.5 % notably as a result of significant increase in
the number of household customers and in gas consumption in power generation.

Natural gas has sustained its position as the fuel of choice in EU power generation. Since 1995, gas-fired
power generation has every year represented 50-60 % of new investments in EU power generation. The
most remarkable development over the last decade has been the increasing share of combined-cycle gas
turbines (CCGTs) due to a combination of a change in the EC stance on gas-fired power generation at the
start of the 1990s, technological progress, relatively competitive gas and environmental considerations.

EU demand for gas and electricity is expected to increase considerably over the coming twenty years. Both
EU gas and electricity demand is expected to increase by more than 40 % before 2020 and a market share
of gas in EU energy supply of up to around 30 % is realistic. The key driver in gas demand growth is
power generation. Two-thirds of the increase in gas demand is forecast to come from gas-fired power
generation and co-generation. The increasing dependence on gas in power generation raises a number of
issues with regard to the increasing interdependence between the two sectors notably with regard to
security of supply.

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Europe, however, is in a relatively favourable gas supply situation with significant own gas reserves and
70-80 % of global gas reserves within economic reach of the European market. When implementing the
EU Gas Directive later this year, Norway will become a fully integrated part of the internal gas market.
Combined EU/EEA gas production is expected to increase over the coming decade based on proven and
additional discovered gas reserve potential. By 2010, the internal EU/EEA gas market is expected to depend
on imports for up to 25-30 %. An enlarged internal market including the 10 Central and Eastern European
candidate countries is expected to depend on imports for 35-40 % by 2010.

Further EU/EEA gas reserves may well be mobilised before 2010, which could help further sustain EU/EEA
gas production levels and hence delay a significant increase in EU/EEA gas import dependency. However,
as a function of the expected rapid increase in gas demand combined with an expected gradual levelling off
and decline in domestic EU/EEA gas production at some point in time, the EU/EEA is expected in the
longer-term to become increasingly dependent on imported gas. Based on the current demand forecast by
Eurogas and the Commission and production forecast by the International Association of Oil and Gas
Producers (OGP) for EU and Norway, the level of import dependency of EU15/EEA could reach nearly
60 % by 2020. For EU25/EEA, the level could reach 65 % by 2020. According to recent analysis made by
the OGP, these levels could, however, be lower if allowance is made for developing possible upside
resource potential including ‘undiscovered potential’ and given the right economic conditions.

On the other hand, however, the import dependency of the EU as such (i.e. without Norway) would be
significantly higher and possibly as high as three-quarters by 2020 for EU15.

Import dependency varies significantly between Member States. A number of EU Member States are
already completely dependent on imports while others will see their dependence rise close to 100 %.

On this background, security of supply and Europe's continued ability to attract sufficient gas supply
in the power-
naturally becomes a priority. Security and continuity of supply is particularly crucial
generating sector. Cost of failing security of supply can be very substantial to modern society as the
California electricity supply crisis has borne evidence to. The cost to society of the rolling black-outs in
California in January 2001 has been estimated at 42 billion USD or some 3.4 % of California's GDP.

Continuity of gas supply is also essential to other consumer categories notably small customers without
switching capabilities to alternative fuel such as many large industrial customer have notably with the
possibility to interrupt gas supply and switch to back-up oil supply.

The Green Paper ‘Towards a European strategy for the security of energy supply’
(COM(2000) 769)
therefore suggested that in order to widen and renew policy of fuel stocks, the European Union ‘could
consider extending the [oil] stocks mechanism to natural gas . . . The Union needs to guard itself against
excessive vulnerability, resulting from too great a degree of dependence’.

In its Communication on ‘Security of EU Gas Supply’ (COM(1999) 571 final), the Commission announced
that it would report on a regular basis to the Council and the European Parliament on EU gas security
issues and if and when appropriate, the Commission would ‘make proposals to strengthen security of EU
gas supply and further develop the common framework for security of gas supply’.

1.3. The internal market for natural gas of the EU and security of supply

The completion of the internal market for natural gas in the European Union and ensuring security of
supply are compatible objectives. It is obvious that a well functioning single market for gas relies on a
sufficient level of secure gas supplies from a diversified range of supply sources. For this reason, an integral
part of the creation of the EU internal gas market are measures ensuring security of gas supplies in the
new market environment.

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Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common
rules for the internal market in natural gas (1) has made very important contributions towards the creation
of the internal market for gas. The directive already acknowledged the importance of security of supply for
the internal market. Consequently,
it allows Member States the possibility of imposing public service
obligations on natural gas undertakings in relation to security of supply.

The creation and development of an internal market for natural gas inevitably renders Member States
increasingly interdependent regarding security of supply issues. As a result, failure to adopt adequate
measures in one Member State can have serious consequences regarding the operation of the internal
market throughout the European Union. It is therefore essential, in order to ensure the proper functioning
of the internal market, to provide for a minimum level of harmonisation regarding security of gas supply
policies in each Member State, in order to avoid market distortions and ensure the well functioning of the
internal market for gas on a level playing field.

Liquidity forms an indispensable ingredient of a proper functioning EU internal gas market. Measures
aimed at enhancing liquidity, such as spot markets, incentives for new gas supplies from internal and
external sources and non-discriminatory authorisation procedures for building storage and LNG facilities,
should, among other things, be fully taken into account by security of supply policies in a competitive
market environment.

2. The European gas market in transition — clear security of supply rules are important as an

integral part of the internal market.

The European gas industry has managed security of supply in a steadily growing European gas market over
the last four decades very successfully. However, the European gas market is undergoing rapid change
these years and the role of traditional market actors is also changing.

Hitherto, the task of planning and developing the gas network to fulfil gas security targets (as often defined
by the gas industry itself) was relatively straightforward as the dominant suppliers controlled all the
infrastructure requirements, gas supply and demand side portfolio,
information and other necessary
instruments to conduct this planning. In addition, direct state involvement was less necessary as the
national gas companies responsible for security of supply in many cases were partly or fully publicly
owned. Until now, few Member States have therefore been directly involved in setting security of supply
policies for natural gas.

In the new liberalised gas market, however, no single player will necessarily maintain the overall respon-
sibility for short- and longer-term security of gas supply at national level as industry restructures, national
markets integrate, new entrants emerge and competition develops. While security of gas supply forms an
integral part of the internal market for gas, security of supply policies and procedures need to be reviewed
and formalised in this new context, which represents different circumstances. In a competitive market, it is
not evident that strategic priority will be given by gas suppliers to security of supply. The primary
objective and role of gas companies is changing towards being competitive. Organising security of
supply can therefore not be left to industry alone and Member States have an obligation to ensure that
all market players take minimum measures with regard to security of supply. Moreover, security measures
can be costly and it is perfectly feasible that certain operators could neglect these measures to reduce costs
if no agreed minimum standards apply.

The adoption by Member States of measures requiring industry to meet minimum standards is therefore an
important integral part of market opening. The creation of an internal market is not simply freeing
customers to choice, but also ensuring that the market provides high levels of public service, foremost
amongst which is security of supply. The existing Gas Directive (98/30/EC) therefore acknowledges the
right of Member States to consider security of supply as a public service obligation. Security provisions are
not a consequence of the creation of the internal market, but a central part of it. Without a common
framework establishing harmonised minimum standards with respect to security of supply obligations, a
real risk of market distortion exists.

(1) OJ L 204, 21.7.1998, p. 1.

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Security of supply and competition are compatible objectives and gas security can be enhanced in the
single EU gas market when properly planned for by companies in liaison with the responsible authorities.
A sufficient and appropriate level of security of supply will contribute to a proper functioning of the
internal market. The transition to the new market regime is obviously particularly important with regard to
clearly defining the new rules and ensuring in operational terms a continued high level of security of gas
supply.

Article 24 of Directive 98/30/EC concerning common rules for the internal market in natural gas allows
Member States to take necessary safeguard measures in the event of a sudden crisis in the energy market. Such
measures shall, however, cause the least possible disturbance to the functioning of the internal market and
shall be least restrictive to competition. Measures taken shall be notified to other Member States and the
Commission, which may decide that the Member State concerned must amend or abolish such measures if
they distort competition or trade in a manner which is not in the common interest. It is necessary to
complement these measures by establishing minimum levels of action by each Member State, which need
to be compatible with the requirements of the internal market.

A clear need exists therefore to have such emergency measures defined and agreed in advance rather than
Member States developing these if and when a sudden crisis arises.

The European gas industry including both GTE (the European association of
transmission system
operators) and Eurogas have stressed the need for the definition of clear roles and responsibilities of
the individual market players with regard to security of supply (1). In a rapidly changing market, it is
extremely important that any uncertainty with regard to security of supply responsibilities is avoided. Lack
of clarity with regard to security of supply will in itself increase the risk of a supply crisis.

The primary responsibility for an overall definition of such clear roles and responsibilities within the new
legislative, regulatory and market framework of the internal market lies with Member States.

While the operational responsibility must remain with the gas industry, Member State governments as well as
the Community have therefore an important coordinating and supporting role to play in this respect. The role
of government will be to ensure that the market is working efficiently and giving true signals to guide the
participants in interpreting and managing change while maintaining the appropriate level of security of
supply. The role of the Community will be to monitor implementation of the new security of supply
policies and ensure their compatibility with the requirements of a well functioning internal market.

The fifth meeting held in February 2002 of the European Gas Regulatory Forum, which brings together the
Commission, national regulatory authorities, Member States and all relevant gas market stakeholders agreed
on a set of recommendations on ‘Guidelines for Good Practice’ in relation to third party access services.
The guidelines include some initial elements aimed at clarifying the roles and responsibilities of the main
parties in gas transportation notably the transmission system operators (TSOs) and network users. In
addition, the Forum agreed that (2):

‘Within the new regulatory and market environment of the internal market for gas characterised by a
multitude of market players and unbundling of integrated gas companies, security of supply can no longer
be assumed to be the responsibility of one single party.

A new chain of responsibilities with regard to security of supply and infrastructure planning between
public authorities and the different market players including shippers and TSOs therefore needs to be
enshrined in order to ensure certainty in this respect. Obligations must be allocated clearly to different
players and appropriate to their role.

In this respect Member States will have a role in defining security of supply output standards within a
public policy framework. Within this framework it may be left to the market and industry to develop the
most efficient solutions to meet the agreed outputs.’

(1) GTE i.a. in ‘GTE Position Paper’, 15 June 2001. Eurogas i.a. in ‘Response of Eurogas to the DG TREN Strategy Paper’,

19 March 2001.

(2) ‘Conclusions of the 5th meeting of the European Gas Regulatory Forum, Madrid, 7-8 February 2002’.

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However, security of gas supply is not merely a question of balancing demand and supply in a competitive
market every day. It also has a long-term strategic aspect.

In view of the above and in view of the transition towards a fully operational and integrated single gas
market, Member States should therefore, in function of their gas market features and structures, monitor
and ensure that security of gas supply policies are adapted to the new market environment and properly
translated into clear roles, operational responsibilities, security criteria and emergency procedures for all
participants involved in the gas business within the new legislative framework. This is also important in
order to avoid that different approaches to security of supply become a barrier to entry and cross-border
trade and so impede the completion and well functioning of the internal gas market.
It is equally
important, however,
to ensure that the new framework and procedures are implemented in a way
which does not create significant difficulties for companies with small market shares or new market
entrants.

3. The importance of storage

Gas production and long-distance transportation is capital-intensive. Due to much lower energy density for
gas than, for example, for oil, the cost of gas transportation per unit of energy is much higher for gas than
for oil and represents a very significant part of the total end-consumer price for gas. In practice therefore,
most production from far away fields and long-distance gas transportation pipelines are operated at high
utilisation rates with a relatively constant flow. As, however, demand for gas fluctuates considerably during
the year, a significant difference exists between supply and demand profiles.

For optimum results, gas storage facilities (either in underground depleted fields, aquifers or salt cavities or
in above-ground LNG peak shaving installations) are therefore used, preferably close to demand centres, to
help balance the inevitable mismatch between supply and demand thereby reducing unit costs of gas
supply. If there were no gas storage at all, both production and transportation capacity would have had to
be designed to meet the peak day demand and therefore most of the time have significant over-capacity.

Underground gas storage therefore plays a key role in EU gas supply both under normal operational
circumstances as well as in case of supply emergencies and there are economic and strategic reasons why
gas storage should be located close to the market. Gas companies therefore seek, as far as geology and
economy allows, to spread storage facilities as well as possible and to locate them as near to large demand
centres as possible i.e. preferably not too far from large cities.

Underground storage therefore serves several functions including:

— strategic reserve for security of supply in case of disruption (particularly used in Member States with

high dependence on non-EU gas imports);

— seasonal load balancing to match peak demand (gas is pumped into the storage during the spring and

summer and typically withdrawn from October/November to February/March);

— achieving daily balance;

— arbitrage of gas prices i.e. commercial optimisation of variations in gas prices e.g. around periods of
recalculation of gas prices (e.g. beginning of quarters) and more generally as a commercial tool in
liberalised markets (notably in the UK). As gas prices in a competitive gas market is expected to
increasingly reflect demand and supply for gas, new patterns of price variations and volatility may
be expected. Under such circumstances, it should be expected that gas from storage would be released
in case of high prices hence limiting volatility.

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— overall system optimisation including facilitating swaps;

— transmission support such as mitigating localised capacity constraints or critical pressure thresholds.

While there may be short-term adjustments with regard to requirements for storage and the wish of
market players to carry the costs of gas storage, it is generally expected that availability of storage facilities
will become increasingly important over time due to growing EU gas demand and import dependency and
thus the need for additional storage for security of supply reasons. Furthermore, additional need for storage
will exist for load balancing and due to increasing import dependency and relative declining flexibility
from domestic production.

The availability of storage and equivalent alternative flexibility mechanisms as an integrated part of the
overall gas supply system is crucial for an efficient operation of the gas system. Providing for non-discrimi-
natory third party access to storage is therefore essential both for the functioning of the internal market
and for security of supply reasons. In addition, based on experience from other regions of the world, it
may be expected that the development of the internal market will offer new commercial opportunities to
owners of storage facilities. It is therefore important that the European Union is prepared to meet the
challenges, which this represents in terms of ensuring sufficient development and availability of storage.

The Community should therefore also give high priority to support the development of gas storage as
appropriate under the TEN-Energy programme.

The development of a fully operational and liquid internal market for gas with spot markets gradually
developing will contribute to security of supply. Security schemes and gas stock requirements at national
level should be compatible with and not hamper but support the development of a competitive internal
market for gas. In this respect, non-discriminatory access to storage is particularly important.

Mixed picture regarding storage requirements at Member State level

The graph below shows the storage volume in percentage of annual gas consumption.

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The graph clearly illustrates the different relative importance of underground gas storage in the different
Member States and the absence in some Member States of storage. On average, EU gas storage capacity is
equivalent to approximately 50 days of gas consumption (or 14 % of total consumption). Austria holds
storage equivalent to 115 days of average gas demand, France for 95 days, Germany and Italy for around
80 days and Denmark for around 65 days. The UK, Greece, Belgium, Spain and The Netherlands have
storage equivalent to in the order of 10-20 days of average gas consumption while the remaining Member
States have no storage capacity. In some Member States, the geological sites available for construction of
new underground gas storage facilities are limited or non-existent. Some Member States therefore rely on
storage or back-up services from other Member States. Normally it would not be optimal — but it can be
necessary — to cover a storage need in a specific area through remote storage facilities. With a view to
both strengthen the internal EU solidarity and co-operation with external suppliers, there may be certain
projects of common interest with regard to storage development in Europe which merit further analysis.

4. The importance of long-term contracts and liquid gas markets

Long-term Take-or-Pay contracts have played a very important role for the build-up and development of
the European gas market. In particular, in the past, investment in the gas supply industry has usually been
underpinned by the conclusion of long-term contracts by European gas companies. Long-term contracts
provide an important element of stability for external suppliers and enhance their ability to continue the
development of large-scale capital-intensive gas supply projects. Long-term contracts may also facilitate the
diversification in the medium term of EU's gas supply and help bring new sources of gas to the market
hence enhance supply-side competition.

The Commission considers that the conditions established by the internal energy market will ensure that
such contracts will continue to exist, and will continue to underpin security of supply in the internal gas
market in an appropriate manner. Indeed, it is clear that EU gas undertakings, as part of their overall
contract portfolio, will continue to meet gas needs through such contracts for supply in a competitive
market.

Nonetheless, given the importance of long-term contracts for the security of supply of the EU gas market
— such contracts are likely to remain necessary to underpin the financing of major new gas supply
projects such as the Stockman field — it is appropriate to provide for a safety net, in the unlikely and
unforeseeable event that insufficient long-term contracts develop. It is equally important, however, that the
inclusion of
existence of
restrictive conditions, or by significantly foreclosing markets. Furthermore,
that
is
long-term Take-or-Pay contracts evolve and adapt to the new gas market environment.

frustrate competition either via the explicit

long-term contracts does not

important

it

On the other hand, it is important to ensure that sufficient liquid gas supplies develop to enable the
internal gas market to function properly and competitively, and also to provide the necessary conditions
for gas companies to adopt a balanced contract portfolio.

This implies not only the development of gas spot markets throughout the EU — which can provide
certainty that producers, suppliers or customers having sold or bought gas on a long-term basis can sell
the gas, at the prevailing spot price, if they are unable to find direct outlet for the gas in the market — but
equally concerns the adoption, where necessary, of gas release programmes by Member States.

Considerable progress on the development of liquid gas supplies has been made in recent years, notably in
the UK and North-Western Europe where trading hubs are operating or emerging. In certain countries, gas
release programmes have been implemented and have contributed to new market entry. Furthermore,
action taken by the Commission under competition law in the gas sector, such as the GFU case, have
further contributed to increased liquidity. The Commission is convinced that this process will, and indeed
needs to, continue. Nonetheless, again a safety net needs to be provided in the event that such devel-
opment do not take place.

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5. Existing security of supply policies at Member State level

It is important to notice that the gas supply situation varies considerably between Member States as natural
resource, geological and market circumstances differ. The supply situations of Member States vary
significantly both in terms of availability of domestic gas production, the importance of gas in the
overall energy balance, dependence on external gas supplies, availability of underground storage, the
level of interconnection etc.

Member States and their gas industries therefore also deal with security of supply in different ways
depending on their individual circumstances, market characteristics and technical options available and
their relative costs.

Given these different situations, the European gas industry employs different combinations of supply-side
and demand-side tools and procedures to respond to short-term security of supply difficulties. These
include system and supply-side flexibility; storage and interruptible customers. The range of facilities
available to gas companies allow them to ensure that gas demand and supply are matched at any given
time i.e. seasonally and within-day, and that emergency situations can be dealt with.

In order to meet customer demand, the gas supply system necessarily needs to be designed to meet the
combined, aggregated peak demand. Gas supply systems are often designed to meet the peak demand of
the coldest day, which statistically occurs, for example, once every 20 year and the coldest winter, which
statistically occurs once every 50 year.

A number of Member States and large gas companies have in some way specified conditions which need
to be fulfilled in relation to security of supply or availability of storage for existing and new entrants into
the market:

— In Italy, for example, new entrants importing non-EU gas into the Italian market are required to hold

gas stocks equivalent to 10 % of the annual supply.

— In Spain, overall gas supply dependency upon any single external supply source must not exceed 60 %
and there is an obligation on gas suppliers to keep gas reserves for at least 35 days of supply.

— In the UK, security of supply standards are defined to meet ‘1 in 20 years’ peak day demand and ‘1 in
50 years’ winter duration. Similar standards are applied in The Netherlands and France and other
Member States.

— The French gas system has also been designed in order to be able to withstand (notably through

strategic gas stocks) disruption of the largest source of supply for up to one year.

— In Denmark, the integrated gas company, has designed its back-up and storage capacity to be able to
continue gas supplies to the non-interruptible market with no alternative fuel switching capacity in
case of a disruption of one of the two offshore gas pipelines supplying gas to Denmark.

6. Effective mechanisms essential for dealing with extraordinary supply situations

While it appears that a number of Member States base their security of gas supply on a combination of
extreme weather conditions and an ‘n-1’ availability of gas supply sources i.e. that one of the range of
supply sources available is disrupted, there appears to be a lack of transparency in the security of supply
policies applied at national
level which in many cases appear not to be sufficiently well-defined and
formalised and not reflecting the market changes taking place. Improving coordination at both national
and EU level and improving transparency in this respect must therefore be a first priority.

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Despite the diversity in the supply situations in Member States and due to the structure of the gas supply
to the EU, the main supply risks of individual Member States is often a common risk shared with other
countries. The risk of disruption in gas supplies to Europe from any of the principle suppliers, for example,
would have serious implications in a number of Member States. In such a situation, only coordinated
efforts to remedy a disruption will be sufficient. This gives a common EU dimension to measures aimed at
preventing or managing a major gas supply crisis and it requires solidarity at EU level to minimise any
negative impact.

In view of the increased market integration within the internal gas market and the European inter-
in security terms could have an impact on security elsewhere in the
dependence (the ‘weakest link’
internal gas market) and in order to ensure a balanced,
transparent and coherent system of risk
sharing,
it is necessary to ensure that adequate and effective European mechanisms for safeguarding
security of supply and coordination and intervention at EU level in case of extraordinary supply situations
are adopted with a view to ensuring proper functioning of the internal market.

It is important that in pursuing this, proper account is taken of the diversity of supply situations in
Member States and that
responsibility for
implementing the necessary measures.

industry maintains

the European gas

the operational

With regard to gas, the proposed new Community framework pursues the same aims regarding security of
supply as the proposal regarding oil stocks. Thus, it introduces strict and quantitative requirements with
regard to security of supply standards, and defines the manner in which these standards must be met. In
particular,
it requires Member States to define and publish the manner in which they guarantee that
non-interruptible customers, i.e. customers who cannot immediately switch to alternative back up fuels,
are ensured continued supplies during sixty days in the event of a disruption of the largest supply source
to the market in question. Similar provisions exist regarding extreme weather conditions and thus extra-
ordinarily high demand, which require supplies to such customers to be guaranteed throughout the entire
period of exceptional demand in question.

Given the considerable differences between the gas and oil markets, these measures are de facto equivalent
to the obligation to maintain minimum oil stocks. However, the new framework does not envisage at this
stage, as for oil stocks, the definition of minimum gas stock levels that Member States should hold in order
to guarantee security of supply. This is because not all Member States have equal geological conditions for
underground storage and indeed in some countries no suitable storage sites exist. Thus, each country needs
to rely on a different mix of instruments to achieve the 60 day obligations and the high demand coverage
requirements, based on storage (within or outside the country in question), production flexibility
arrangements, linepack and other available measures.

Furthermore, whilst the different geological conditions and the significant advantages of having storage
close to demand (and thus avoiding the additional costs of relying on distant storage) mean that a legally
binding minimum storage requirement on a Member-State by Member-State basis would not at this stage
be appropriate, storage will and must play an important role in Member States' security policies. The
proposal therefore requires all Member States to publish indicative quantitative targets for the future
contribution of storage in meeting their security of supply standards.

Finally, it is important to underline that, in view of the different degree of availability of storage in Member
States and hence the importance of ensuring Community solidarity and co-operation across borders,
non-discriminatory access to available underground storage capacity, as emphasised in the Commissions
proposal of March 2001 for a Directive amending Directives 96/92/EC and 98/30/EC concerning common
rules for the internal markets in electricity and natural gas, is essential.

More generally,
it is absolutely indispensable that the security of supply policies to be defined and
implemented by Member States are compatible with and contribute to the completion of a fully oper-
ational internal market for gas. It is particularly important that the security of supply policies are imple-
mented in a non-discriminatory manner and in no way hamper the entrance of new market participants.

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7. Technical expertise supporting the implementation of the measures

The creation of the internal market for energy is gradual and very complex in particular in relation to the
implementation of technical rules. It is therefore important to ensure that the new legislative framework is
applied in an effective, efficient, non-discriminatory and homogeneous manner by all market participants
under conditions, which will guarantee the competitiveness of the companies.

The various phases of the development of the internal market for gas and electricity should therefore be
accompanied by measures which would allow notably to convene national regulatory authorities, Member
States, market operators and the Commission in the context of technical working groups. These working
group meetings should examine the most appropriate measures to be taken in order to implement the
opening of the gas and electricity markets, and should regularly make technical recommendations to the
Commission.

Similarly, the new Community framework, which will be created in order to enhance security of gas
supply, within the context of the internal energy market, will require complex and technical tasks to be
undertaken and accomplished. These will notably relate to monitoring the development of international
markets and assessing their impact on safety and security of supply. The effectiveness of the measures in
place will have to be continuously evaluated. In this respect, the measures aimed at guaranteeing security
of gas supply including the level of gas stocks held by Member States will have to be monitored. In order
to be able to carry out these tasks, objective, reliable and comparable data will be necessary.

In the event of an energy crisis, the European Commission may issue recommendations on appropriate
measures to be taken by Member States or may, by decision, require Member States to take specified
measures. The effects of these measures will need to be evaluated.

It therefore appears essential to create, within the Services of the Commission, a European Observation
System for supply of hydrocarbons, which will gather the necessary expertise in order to respond to the
highly technical issues involved in these tasks. It will provide, under the aegis of the Commission, the
technical and scientific assistance and a high level of expertise to assist in the correct application of
Community legislation in the field of gas supply.

The European Observation System shall be run by the Commission, which should invite to the meetings
representatives of the Member States as well as representatives of the sectors concerned.

8. Conclusions

On the basis of the foregoing, it may be concluded that security of gas supply will not diminish in strategic
importance to the European Union. On the contrary. In view of the demand and supply outlook for gas
for the EU and in view of the rapid ongoing change with the completion of the internal market for gas,
there is a need to undertake co-ordinated action to ensure that security of gas supply is safeguarded and by
this will complement other actions taken to achieve the completion of the EU internal energy market.
Security of supply policies in a competitive market have to be based on clearly defined and non-discrimi-
natory policies and operational responsibilities. Appropriate monitoring and safeguard mechanism as well
as adequate emergency response measures will have to be implemented and kept under review at national
and Community level.

The Commission therefore presents the following proposal
for a Directive concerning measures to
safeguard security of EU gas supply. These measures will ensure the proper functioning of the EU
internal gas market by safeguarding security of gas supplies in a competitive market framework. In the
event of a crisis, they will ensure the solidarity and the joint Community action necessary in order to
respond effectively to uncertainties in the energy market and to promote in this context the proper
functioning of the internal market. Article 95 of the Treaty therefore represents the appropriate legal
basis for the proposal for a Directive.

C 331 E/272

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THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE
EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community, and in particular Article 95 thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the Economic and Social
Committee,

Having regard to the opinion of the Committee of the Regions,

Acting in accordance with the procedure laid down in Article
251 of the Treaty,

Whereas:

(1) Directive 98/30/EC of the European Parliament and of the
Council of 22 June 1998 concerning common rules for
in natural gas (1) has made very
the internal market
important contributions towards the creation of internal
market for gas. Directive 98/30/EC allows Member States
the possibility of imposing public service obligations on
natural gas undertakings, inter alia, in relation to security
of supply;

(2) The European Council at Barcelona agreed on a rapid
adoption of the pending proposals for a completion of
the internal market for gas and electricity. The completion
of the internal market for gas will significantly change the
framework and must be supplemented with
market
common rules with respect
to the security of supply
context and the appropriate policies required in this
respect;

(3) The guarantee of a high level of security of supply is
therefore a key condition for the successful operation of
the internal gas market. With a view to complete the
internal market
for gas and thereby ensuring a level
playing field, a minimum common approach to supply
security is necessary throughout the Community in order
to avoid market distortions;

(4) Gas is becoming an increasingly important component in
EU energy supply. In function of the increased importance
of gas, ensuring the proper functioning of the single EU
natural gas market by safeguarding security of gas supply
also becomes of higher strategic importance;

(1) OJ L 204, 21.7.1998, p. 1.

and

security

non-discriminatory

(5) A competitive single EU gas market necessitates trans-
parent
supply
policies compatible with the requirements of such a
market. Definition of clear roles and responsibilities of
all market actors is therefore crucial in safeguarding the
well-functioning of the internal market and security of gas
supply while at the same time avoiding creating obstacles
to new entry or significant difficulties for companies with
small market shares;

of

(6) As indicated by the Green Paper ‘Towards a European
strategy for the security of energy supply’, the European
term to become
Union is expected in the longer
increasingly dependent on gas imported from non-EU
sources of supply;

(7) In order to meet growing demand for gas and diversify
gas supplies as a condition for a competitive internal
market for gas, the EU will need to mobilise significant
additional volumes of gas over the coming decades much
of which will have to come from distant sources and
transported over long distances;

(8) The European Union has a strong common interest with
gas supplying and transit countries in ensuring continued
investments in gas supply infrastructure;

(9) Long-term contracts have played a very important role in
securing gas supplies for Europe and will continue to do
so. Whilst the current level of long term contracts is more
than satisfactory on the Community level, it is believed
that such contracts will continue to make a significant
contribution to overall gas
companies
continue to include such contracts
in their overall
is appropriate to provide a
supply portfolio and it
safety net in this respect;

supplies

as

(10) The development of liquid gas supplies in the internal
market plays an important role in enabling the internal
gas market
to function properly and competitively.
Considerable progress has been made in developing
release
liquid
programmes at national level. This trend is expected to
continue. Nonetheless, it is appropriate to provide for a
safety net in this respect;

trading platforms

through gas

and

(11) It is important that Member States lay down an unam-
biguous framework which will facilitate security of supply
and is conducive to investments in gas supply infra-
structure.
to monitor that appropriate
measures are taken to ensure regulatory and fiscal
frameworks for exploration and production, storage and
transport of natural gas which provide appropriate
incentives for investment;

is important

It

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(12) Domestic gas resources and measures designed to extend
their availability, in a non-discriminatory manner that is
compatible with the requirements of a competitive single
market for natural gas and competition rules, contribute
to enhancing the level of security of supply in the internal
gas market;

this Directive in conformity with
implementation of
Council Decision 1999/468/EC of 28 June 1999 laying
down the procedures for the exercise of implementing
powers conferred to the Commission (1);

(13) In the interest of a well functioning internal market for
gas to which secure gas supplies are crucial, the supply/
demand balance in individual Member States should be
monitored and appropriate action taken if security of
supply is compromised on a Community level;

(19) In accordance with the principles of subsidiarity and
proportionality as set out in Article 5 of the Treaty, the
objectives of the proposed action, namely the creation of
a fully operational
internal gas market, based on fair
competition and secure natural gas supplies, cannot be
sufficiently achieved by the Member States and can
therefore, by reason of
the
action, be better achieved by the Community. This
Directive confines itself
to the minimum required in
order
to achieve those objectives and does not go
beyond what is necessary for that purpose.

the scale and effects of

(14) For the well functioning of the internal market for gas
and the security of supply, solidarity between Member
States in emergency supply situations is essential;

HAVE ADOPTED THIS DIRECTIVE:

Article 1

(15) It

is inherent

to the creation and development of an
internal market that Member States become increasingly
interdependent regarding security of supply issues. Failure
to adopt adequate measures in one Member State can
have serious consequences regarding the operation of
the internal market
is
throughout
in order to ensure the proper func-
therefore essential,
tioning of
a
minimum level of harmonisation regarding security of
gas supply policies in each Member State;

internal market,

the Community.

to provide

the

for

It

This Directive establishes measures aimed at ensuring the
proper functioning of the EU internal market for gas by safe-
guarding security of gas supply.
It establishes a common
framework within which Member States shall define general,
transparent and non-discriminatory security of supply policies
compatible with the requirements of a competitive single EU
market for gas; clarify the general roles and responsibilities of
the
specific
non-discriminatory procedures to safeguard security of gas
supply.

different market

implement

actors

and

(16) In the event of extraordinary gas supply situations, the
Commission shall take appropriate action proportionate
to the severity of the supply situation to ensure that the
necessary measures to provide specific assistance to those
Member States particularly affected by the gas supply
disruption are implemented in order to safeguard, as far
the internal
the continued functioning of
as possible,
market for gas;

(17) With a view to assist in preparing and implementing
Community legislation in the field of safety and security
of gas supply, to monitor its application and assist in
evaluating the effectiveness of the measures in force as
well as to better monitor the development of security of
gas supply, a European Observation System of hydro-
carbons should be established within the services of the
Commission;

Article 2

For the purpose of this Directive:

1.

‘source of gas supply’ shall mean gas supply originating
from one single gas supply country;

2.

‘long-term gas supply contract’ shall mean a gas supply
contract with a duration of more than one year;

3.

‘new market entrants’ shall mean undertakings that are not
yet active in the Member State in gas supply, or have only
entered the market within 5 years following the entry into
force of this Directive and which have a small market share;

4.

‘small market share’ shall mean a market share of less than
10 % of the national gas market.

(18) The necessary measures

should be adopted for

the

(1) OJ L 184, 17.7.1999, p. 23.

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Article 3

1. Member States shall take the necessary measures to define
the general policies for security of supply which are necessary
and integral part of competitive internal natural gas market.
This may include clarifying the general roles and responsi-
bilities of the different market actors in fulfilling the security
of supply standards.

2.
The measures and standards to ensure security of supply
in the context of the internal gas market shall be developed in
accordance with paragraph 3 of this article and with article 4.
these measures and standards shall
The implementation of
complement the completion of the internal gas market, shall
be implemented in a non-discriminatory and transparent way
and shall be published.

3.
In developing the measures and standards referred to in
paragraph 1, Member States shall take the utmost account of:

a) the importance of ensuring continuity of gas supplies under
severe conditions notably to household customers without
alternative fuel options;

b) the need to ensure adequate levels of gas storage or alter-

native back-up fuels;

c) the need to diversify supplies and ensure a reasonable

balance between different gas supply sources;

d) the need to create incentives for new gas supplies from
internal and external sources to the single European gas
market;

market for gas. The security of supply policies shall be imple-
mented in a non-discriminatory manner and shall in no way
hamper the entrance of new market participants.

In order to ensure that security of supply criteria estab-
6.
lead to a significant
lished by Member States would not
restriction of
entry,
Member States shall exempt companies with small market
shares and new entrants from obligations imposed pursuant
to articles 3 and 4 of this Directive.

competition or barriers

to market

Where Member States consider that the imposition of obli-
gations adopted pursuant to articles 3 and 4 of this Directive
would not result in a significant restriction of competition or
barriers to market entry, they may apply to the Commission
for authorisation to lift this exemption. The Commission shall
decide on the request in conformity with article 9, paragraph 2
of this Directive.

Article 4

In order to fulfil

1.
the security of supply policies and
achieve the standards referred to in article 3, Member States
shall take the necessary measures to ensure that security of
supply can be maintained to non-interruptible customers
without fuel switching capabilities in case of disruption of
the single largest source of gas supply during sixty days
given average weather conditions.

take the necessary measures to
2. Member States shall
ensure that security of supply can be maintained to non-inter-
ruptible customers without fuel switching capabilities in case of
extremely cold temperatures during a period of three days
statistically occurring every twenty years.

e) the risk of the most serious system failure or of disruption
of the largest single supply source and the cost related to
mitigate such supply disruption;

3. Member States shall
take the necessary measures to
ensure that security of supply can be maintained to non-inter-
ruptible customers without fuel switching capabilities in case of
a cold winter statistically occurring every fifty years.

f)

the internal market and the possibilities for cross-border
cooperation in relation to security of gas supply.

In order to achieve these security of supply standards,
the

4.
Member States may use a combination of at
following instruments:

least

In developing the measures and standards referred to in
4.
paragraph 1, Member States shall also take account of the need
for setting high security of supply standards for gas supplies for
power generation in particular with regard to the level of inter-
ruptible demand and alternative fuel back-up capacities in this
sector.

a)

interruptible customers

b) gas storage

c) supply flexibility

5.
The security of supply policies shall be compatible with
and contribute to the completion of a fully operational internal

d) spot markets

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take the necessary measures to
5. Member States shall
ensure that gas storage, either located within or outside the
the Member State, contributes to a necessary
territory of
minimum degree
supply
the
standards referred to in this article in function of the geological
and economical
feasibility of storage within each Member
State.

to achieving

security of

In this respect, Member States shall, initially not later than one
year after the entry into force of this Directive and every two
years thereafter, adopt and publish a report setting national
indicative targets for future contribution of storage, either
located within or outside the territory of the Member State,
to security of supply in terms of gas storage working volume
and withdrawal capacities and the percentage of gas storage
capacity of gas consumption for the next ten years. The targets
for
future contribution of storage shall be established in
accordance with the form set out in the annex to this Directive.

6.
The security of supply criteria set out in this article shall
be established by Member States in a manner compatible with
the objectives of the internal gas market including the harmon-
the measures implementing these criteria where
isation of
economically and technically possible and appropriate.
In
particular, minimum storage objectives imposed on under-
takings shall take account of the availability of non-discrimi-
natory access to storage and the terms and conditions on
which such access
that
operate storage facilities.

is granted by those companies

7. When implementing security of supply standards and
imposing obligations on a market participant established and
registered in another Member State, Member States shall take
proper account of measures already taken by the market
participant
in fulfilling security of supply criteria in that
Member State.

competition or barrier
resulting from these measures;

to entry to such companies

b) the supply/demand balance on their territory;

c)

the level of expected future demand and available supplies;

d) envisaged

additional

capacity

under

planning

or

construction;

e)

the emergency and contingency instruments in place to
cater for a sudden crisis in the market;

f)

the levels of stocks and the measures taken and to be taken
in order to achieve the indicative storage targets and

g) the extent of long-term contracts concluded by companies

established and registered on their territory.

In addition, Member States shall monitor that appropriate
measures are taken to ensure regulatory and fiscal frameworks
for exploration and production, storage, LNG and transport of
natural gas which provide appropriate incentives for new
investment.

2.
In the Report issued by the Commission pursuant to
article [28] of Directive . . ./. . ./EC [proposed new Directive
amending Directives 96/92/EC and 98/30/EC concerning
rules for the internal markets in electricity and natural gas],
the Commission shall examine

a)

issues relating to security of supply in the Community, and
in particular the existing and projected balance between
demand and supply including the appropriateness of
incentives given to investment in new gas supply infra-
structure;

Article 5

1.
In the Report published by Member States pursuant to
article [4a] of Directive . . ./. . ./EC [proposed new Directive
amending Directives 96/92/EC and 98/30/EC concerning
rules for the internal markets in electricity and natural gas],
Member States shall, in particular, cover the following:

b) the scope for harmonisation of security of supply measures
aiming at better functioning of the single European gas
market;

c)

the situation with regard to stock levels in relation to the
indicative storage targets;

a) the competitive impact of the measures taken pursuant to
articles 3 and 4 of this Directive on companies with small
market shares or new market entrants and in particular the
effectiveness of measures taken by Member States pursuant
to article 3 paragraph 6 to redress any restriction of

d) the level of long-term contracts for gas, and the conse-
for ensuring adequate
this level
quences in practice of
levels of new gas supplies for the European Union in the
future.

Where appropriate, this report shall include recommendations.

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Article 6

1. With a view to ensure continued long-term security of
gas supply for the Community and the gradual development of
a more liquid internal market for gas, the Commission shall
closely monitor the degree of new gas supply import contracts
from non-EU countries concluded on a long-term basis as well
as the existence of adequate liquid gas supplies and transparent
gas price references within the Community to underpin stable
long-term gas supplies. The Commission may issue Recom-
mendations on appropriate measures to be taken by Member
States in this respect. The Recommendations may only address
an insufficient degree of such contracts on a Community level.
Member States shall inform the Commission of the manner in
which the Recommendations are implemented. In making such
Recommendations,
the Commission shall pay particular
attention to the possible effect such measures may have on
companies with small market shares and new entrants.

2. Where the measures taken by Member States in relation
to the Recommendations referred to in paragraph 1 are inad-
equate with regard to the long-term security of gas supply, the
Commission may, by Decision,
in conformity with the
procedure laid down in article 9, paragraph 3 require the
Member States concerned to take specified measures
to
ensure that an appropriate minimum share of new gas
supply from non-EU countries over the five years following
the entry into force of this Directive is based on long-term
contracts and that adequate liquid gas supplies are developing
and transparent gas price references are available within the
Community to underpin stable long-term gas supplies. When
taking such Decisions, the Commission shall pay particular
attention to the possible effect such measures may have on
companies with small market shares and new entrants.

3.
The Commission shall, within five years of the entry into
force of this Directive, submit a review report to the European
Parliament and the Council on the experience gained from the
so as to allow the European
application of
Parliament and the Council to consider,
in due course, the
need to adjust it.

this Article,

Article 7

With a view to enhancing liquidity of natural gas, Member
States shall take appropriate measures to ensure non-discrimi-
natory authorisation procedures for building storage and LNG
facilities and remove any obstacles for building such facilities.
These procedures shall apply equally to EU natural gas under-
takings as to non-EU gas suppliers.

ordinary gas supply situations including a major interruption
of gas supplies from one of the European Union's principal gas
suppliers, issue Recommendations to Member States to take the
necessary measures to provide specific assistance to those
supply
Member States particularly
disruption. Such measures may include, but are not limited
to, the following:

effected by the gas

a) release of gas stocks;

b) provision of pipeline capacity enabling diversion of gas

supplies to affected areas;

c)

interruption of interruptible demand to allow reallocation of
gas and system flexibility.

2. Member States shall
implementation of the Recommendations.

inform the Commission of

their

consequences of

extraordinary gas

3. Where the measures taken by Member States are inad-
equate in the light of market developments, and/or where the
economic
supply
the
situation become extremely severe, the Commission may, by
Decision, in conformity with the procedure laid down in article
9, paragraph 3,
require Member States to take specified
measures to provide necessary assistance to those Member
States particularly affected by the gas supply disruption. Such
measures may include, but are not limited to, those mentioned
in paragraph 1 points a), b) and c).

4.
The recommendations and decisions to be taken in
accordance with this article shall restrict competition as little
as possible. The Commission shall ensure that this principle is
complied with throughout the entire period of application of
the measures.

Article 9

The Commission shall be assisted by a Committee of
the Member States and chaired by the

1.
representatives of
representative of the Commission.

2. Where reference is made to this paragraph, articles 3 and
7 of Council Decision 1999/468/EC shall apply in respect of
the provisions of article 8 of that Council Decision.

3. Where reference is made to this paragraph, articles 5 and
7 of Council Decision 1999/468/EC shall apply in respect of
the provisions of article 8 of that Council Decision.

Article 8

The period foreseen in article 5, paragraph 6 of Council
Decision 1999/468/EC shall be one week.

1.
laid down in article 9, paragraph 2,

The Commission may, in conformity with the procedure
in the event of extra-

4.

The Committee shall establish its internal rules.

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Article 10

e) Create a basis of objective, reliable and comparable data as a

1.
Not later than 1 January 2004, the Commission shall
make the necessary arrangements to set up a European Obser-
vation System for supply of hydrocarbons to assist in preparing
and implement Community legislation in the field of gas
supply, to monitor its application and assist in evaluating the
effectiveness of the measures in force and their effects on the
functioning
gas market. The
Commission shall ensure that adequate resources are made
available to enable the effective monitoring of measures
provided for in the present Directive.

internal

natural

the

of

sectors concerned.

The European Observation System for supply of hydro-
2.
carbons shall be run by the Commission, which should invite
representatives of Member States as well as
to meetings
representatives of
shall provide the
Commission with the technical assistance necessary for the
formulation and evaluation of measures taken in relation to
the application of the present Directive and shall contribute
to a better understanding of
the internal
market and the international gas market and the factors
driving these markets.

the evolution of

It

3.
The European Observation System for supply of hydro-
carbons shall carry out, in the field of natural gas, following
technical tasks:

a) Monitor the functioning of the internal market and the

international market for gas;

b) Contribute to the implementation of a physical monitoring
system of the internal EU and external gas infrastructures to
the European Union which contribute to the security of gas
supply;

basis for fulfilling its tasks.

Article 11

The Commission shall closely monitor the manner in which
Member States implement this Directive, and in particular the
compatibility of the measures taken with regard to article 4
and their effect on the internal gas market and the devel-
opment of competition within the European Union. The
Commission shall closely monitor the availability of
third
party access
to storage on non-discriminatory terms and
conditions. In the light of the results of this monitoring, the
Commission shall, if necessary, no later than 1 January 2004
present proposals
to ensure
effective access to storage.

regarding further measures

Where appropriate,
dations or make appropriate proposals.

the Commission shall

issue recommen-

Article 12

Member States shall bring into force the laws, regulations and
administrative provisions necessary to comply with this
Directive by 1 January 2004. They shall forthwith inform the
Commission thereof.

When Member States adopt those provisions, they shall contain
a reference to this Directive or be accompanied by such a
reference on the occasion of
their official publication.
Member States shall determine how such reference is to be
made.

Article 13

c) Monitor gas supply and the procedures aimed at guaran-

teeing security of gas supply in cases of emergency;

This Directive shall enter into force on the twentieth day
following that of its publication in the Official Journal of the
European Communities.

d) Monitor the level of strategic gas stocks and the procedures
for their use as well as the procedures applied with regard
to access to storage including aspects of market dominance
in relation to access to storage;

Article 14

This Directive is addressed to the Member States.

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EU storage capacity — national indicative targets

ANNEX

The table below illustrates gas storage capacities in absolute as well as relative terms in relation to consumption.

Storage capacities at 1 January 2001

Working
Volume (BCM)

In %
of 2000
Demand

Withdrawal
capacity
(million m3/day)

2010
Target
BCM Storage

2010
Target %

2010 Target
Withdrawal
capacity

Austria

Belgium

Denmark

France

Finland

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

UK

EU-15

2.295

0.675

0.810

11.1

0.0

18.556

0.075

0.0

15.1

0.0

2.5

0.0

1.0

0.0

3.577

55.688

31.6

4.2

17.6

26.2

0.0

22.3

3.8

0.0

22.0

0.0

6.1

0.0

5.5

0.0

3.7

14.2

24

19

25

180

0

425

5

0

265

0

145

0

8

0

137

1 233