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Gas goes east

Facing stagnant gas demand in its domestic market, RWE Gas has been forced to look outside Germany to find opportunities to expand. The company has made one major purchase in eastern Europe and similar deals in the future have not been ruled out. David Townsend reports

GERMANY'S RWE Gas, part of one of Europe's major utility groups, has recently reinforced its position in eastern Europe with a major acquisition in the Czech Republic. We are strengthening our position in European regional gas sales and marketing, the company's chairman, Manfred Scholle, tells Petroleum Economist.

The central and east European (CEE) energy market is one of the most attractive [for RWE Gas]. Our recent takeover of the Czech regional utilities represents an investment in a market that is already well developed, but that also offers great potential for future growth, as do neighbouring markets. 

European strategy

In May, RWE Gas paid Euro4.1bn ($4.3bn) for a 87% stake in Transgas, the Czech gas transportation company, as well as holdings of between 46% and 58% in the eight Czech regional gas distribution companies. In 2001, Transgas delivered around 9bn cubic metres (cm) of gas to 2.6 million customers in its domestic market and handled 29bn cm in international transit volumes.

RWE Gas is 79.7% owned by Germany's RWE Group, with the remaining shares held by various community bodies in the North-Rhein Westphalia, northern Hesse and southern lower Saxony regions. Last year, it distributed around 21bn cm of natural gas to the domestic market, where it is the second-largest gas supplier.

As well as the Czech acquisition, the firm has a presence in Hungary, the Netherlands, Poland and Slovakia. Its total European transmission network is around 94,000 km.

Scholle says the thinking behind the Czech purchases was to acquire strategic assets that improve our position in gas and non-gas procurement, transmission and storage facilities. He adds that while the company's focus is to integrate these acquisitions with its other operations, other [acquisition] activities may arise in the future in eastern and central Europe.

Part of the reason that RWE gas is turning to eastern Europe is that the German gas market has limited growth potential forecasts are for stagnant demand and is complicated by anti-competition issues. Studies show there is higher growth in other markets, Scholle says. That's why we have turned to markets where we expect to be successful.

In addition, Scholle admits the company has felt the impact of the economic slowdown in Germany, but points out that the weather plays a much stronger role [than the economy] in the development of total gas sales so we see no cause for concern.

While future German gas consumption appears strong (despite expectations for limited growth), based on high usage for domestic heating, Scholle has concerns about the impact of a new natural gas tax. An increase to the existing low mineral-oil tax on natural gas usage was proposed by the Social Democrat/Green coalition government shortly after it was re-elected, in September. It would be levied on industry and consumers. The German gas industry lobby group, BGW, estimates the tax could cost the sector around Euro2bn a year.

To regulate or not

Along with other German utilities, RWE Gas is digesting the implications of the updated European Union (EU) directives. A major issue for Germany is the requirement for all member states to establish a regulatory body for the energy sector, a move that both the country's government and industry had resisted. The EU also wants to harmonise gas tariffs across the union.

Scholle says that, on occasion, the European Commission has a tendency to ignore the fact that structures are different in individual member states. The UK gas grid, for instance, has always had more or less a single owner. The German system is under the ownership of over 700 parties. Working out uniform grid-access tariffs against this background is a highly complex task, which may not even be feasible. 

Scholle points out that the German industry has established an association agreement covering third-party access (TPA), which has been improved on [...] and can definitely be enhanced further. He argues that this approach is in some ways better than a regulator, because the rules can be adapted more quickly. He stresses that the system coped with a 166% increase in grid-access contracts last year over 2001: Why should we change a system that works well? 

Scholle also refers to a recent statement from the head of the German cartel office in favour of negotiated solutions to TPA instead of a regulator, not least because of the increased bureaucratic expenditure associated with the establishment of the latter. However, he says RWE Gas will fully subscribe to the intentions of the EU single market, even though the individual regulations do not meet with our full approval.

Healthy competition

Competition among gas suppliers in Germany has been rising since the late 1980s and Scholle says there is healthy competition in important gas consuming areas, where you will find, side-by-side, pipelines belonging to different companies. He claims competition will spread quickly through the EU and expects six to seven strong regional players to emerge as the single market becomes a reality. EU member states are developing all the time and you have to accept that change requires time. 

As the EU itself admits, much of the success of the future single market for gas will depend on securing sufficient supplies to meet expected demand. Most of this will have to come from outside the EU. Scholle says that although sufficient reserves are in place for export to the EU, the infrastructure has yet to be put in place to facilitate their delivery. If the gas firms themselves are expected to finance a large part of this infrastructure, they will need some form of guarantee to enable such investment, Scholle claims.

We need to have a secure basis from which to encourage the necessary, long-term capital expenditure. EU rules and regulations have to provide this security, for example, by permitting take-or-pay contracts. A balance must be struck between the enormous financial commitments and the interests of consumers. He states that some existing EU regulations, and their implications for entrepreneurial freedom, do not provide the right incentives for the gas industry to invest in new infrastructure.

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