The Political Economy of European Natural Gas Markets
| Author | Jerome D. Davis |
| DOI | 10.1177/001083678301800102 |
| Published date | 01 March 1983 |
| Date | 01 March 1983 |
| Subject Matter | Articles |
The
Political
Economy
of
European
Natural
Gas
Markets
JEROME
D.
DAVIS
Institute
of
Political
Science,
University
of
Aarhus
Davis,
J.
D.
The
Political
Economy
of
European
Natural
Gas
Markets.
Cooperation
and
Conflict,
XVIII
,
1983,
3-20.
The
natural
gas
market,
like
Caesar’s
Gaul,
is
in
three
distinct
parts:
production,
transmission
and
distribution.
Critical
to
the
relations
between
the
stages
is
stability
—
a
form
of
functional
equilibrium
not
unlike
that
of
solutions
to
a
three
person
cooperative
game.
After
defining
stability
and
instability
in
natural
gas
markets,
this
article
examines
the
manner
in
which
state
and
industry
cooperate
both
nationally
and
internationally
to
provide
a
stable
basis
for trade.
The
nature
of
European
trade
in
natural
gas
is
then
analysed
and
the
forms
of
industry-state
cooperation
are
highlighted.
INTRODUCTION
Curiously,
while
the
activities
of
OPEC
and
the
oil
multinational
corporations
have
increasingly
become
the
focus
of
academic
attention,
little
heed
has
been
paid
to
the
problems
of
natural
gas
on
a
worldwide
scale.
Yet
international
gas
negotiations
have
become
newsworthy.
Between
1976
and
1982
contract
nego-
tiations
and
renegotiations
have been
typ-
ical
of
the
international
gas
trade,
and
there
are
no
signs
of
a
decrease.
Dutch
contracts
with
the
rest
of
Europe
have
been
renegotiated
twice.
In
North
America
natural
gas
disputes
between
the
US
and
Mexico,
and
the
US
and
Canada,
have
become
more
the
rule
than
the
exception.
In
the
rarified
world
of
liqui-
fied
natural
gas
trades,
Algeria
has
taken
on
all
comers
and
attempted
to
build
an
OGEC
(Organization
of
Gas
Exporting
Countries),
so
far
without
success.
Finally,
and
not
the
least,
the
issues
of
the
recent
series
of
Soviet-Western
Euro-
pean
natural
gas
contracts
have
threatened
the
foundations
of
the
Atlantic
Alliance.
_
Elsewhere
in
this
issue,
focus
is
directed
towards
European
energy
imports
and
their
meaning
for
European
vulnerability.
This
paper
focusses
on
European
gas
mar-
kets,
more
specifically
in
terms
of
the
general
political
economic
relationships
germane
to
the
industry
itself.
Working
from
this
background,
the
natural
gas
markets
are
examined
in
terms
of
their
stability
and
centralized
organization
-
which
are
found
to
be
considerable.
NATURAL
GAS
TRADES:
THE
ISSUES
Unlike
the
oil
industry,
the
degree
of
vertical
integration
in
the
natural
gas
industry
is
limited.
Historically
(or
at
least
until
1974)
the
oil
industry
has
been
char-
acterized
by
a
small
number
of
firms
which
have
exercized
effective
control
over
the
oil
produced,
transported,
refined,
and
marketed,
from
the
well-head
to
the
gaso-
line
pump.
This
has
never
been
the
case
with
the
natural
gas
industry.
Ruhrgas
in
Germany
and
Distrigaz
in
Belgium
for
example
are
large
transmission
firms
which
do
not
own
natural
gas
fields
directly.
Even
Gaz
de
France
and
British
Gas,
to
name
two
others,
own
only
a
4
fraction
of
the
gas
which
they
transport
and
market.
The
same
can
be
said
of
the
enormous
US
transmission
companies,
El
Paso,
Texas
Eastern,
and
Trunkline.
A
major
reason
for
this
difference
can
be
seen
in
the
economics
of
natural
gas
transportation.
Oil
transportation
is
rela-
tively
inexpensive
(especially
by
tanker).
Natural
gas
transport
and
marketing
is
enormously
expensive.
Transportation
of
natural
gas
is
largely
(though
not
exclu-
sively)
through
pipelines:
from
the
pro-
ducing
well
to
the
collection
point
to
the
transmission
trunk
line
to
the
distribution
lines
to
local
lines
to
the
final
burners
(or
in
some
cases
chemical
works).
The
result
of
the
capital
costs
and
the
various
forms
of
expertise
needed
is
a
decided
tendency
for
natural
gas
companies
to
become
specialized,
a
specialization
reflected
in
the
three
stages
of
natural
gas
production,
transport,
and
marketing.
The
relation-
ship
between
these
stages
is
marked
by
conflict
as
much
as
it
is
by
cooperation.
Cooperation
is
necessary
for
the
joint
maximization
of
returns,
but
there
are
notable
conflicts
of
interest
over
the
pro-
ducing
and
marketing
of
natural
gas.
A
second
reason
for
the
difference
between
the
oil
and
gas
industries
is
that
natural
gas
production
and
marketing
are
inflexible
by
nature.
Like
it
or
not,
the
partners
in
the
natural
gas
chain
are
locked
in
by
pipeline
technology
and
mar-
keting
infrastructure,
and
locked
in
for
periods
of
up
to
30
years.
A
transmission
company
receives
a
certain
quantity
of
natural
gas
at
a
certain
load
factor
and
must
deliver
that
gas
to
a
utility
company.
The
utility
company
takes
gas
at
a
certain
load
factor
and
through
judicious
storage
and
selling
matches
a
more
or
less
con-
stant
throughput
of
natural
gas
to
the
fluctuations
in
demand
of
the
final
market.
At
any
point
along
the
line,
failure
to
meet
contractual
demands
can
result
in
enormous
losses.
Finally,
unlike
oil
markets,
the
final
sales
of
natural
gas
are
through
public
utilities
which,
due
to
their
local
mon-
opoly
positions,
are
rather
closely
regu-
lated
by
the
state
concerned.
Therefore
it
may
simply
not
pay
for
a
large
trans-
mission
firm
to
be
engaged
in
the
local
sales
of
natural
gas.
To
summarize,
the
sales
of
natural
gas
have
much
in
common
with
those
of
electrical
utilities
on
the
one
hand
and
with
vertical
integration
on
the
other.
This
particular
combination
leads
to
interest
conflicts
between
each
of
the
stages
concerned:
producer,
transmission
line,
and
utility.
Natural
gas
seldom
occurs
in
a
separate
’dry’
form
when
produced.
The
constitu-
ent
proportions
of
natural
gas
can
there-
fore
vary
enormously.
Natural
gas
can
be
almost
’dry’
(occurring
with
little
or
vir-
tually
no
condensate)
at
the
one
end,
while
at
the
other
end
of
the
spectrum
it
may
only
be
a
minor
fraction
of
crude
oil
fractions
produced
from
a
field.’
Irres-
pective
of
whether
gas
comes
up
’freely’
with
oil
or
not,
the
producer
tries
to
find
the
most
economic
use
possible
for
the
gas.
With
very
small
proportions
of
natu-
ral
gas
to
oil,
the
natural
gas
is
utilized
to
power
field
facilities
or
is
sold
on
local
markets.
Where
this
is
impossible,
it
may
be
reinjected
into
the
field
(to
maintain
field
pressure)
or
flared.
Even
when
there
are
considerable
quantities
of
natural
gas
it
may
not
pay
the
producer
to
produce
it.
Such
production
would
depend
on
the
availability
of
a
market
-
most
often
a
transmission
line
but
sometimes
a
local
utility
or
other
market.
Irrespective
of
whether
natural
gas
is
a
joint
product
of
crude
oil,
there
is
no
such
thing
as
’free’
natural
gas.
Prior
to
marketing,
natural
gas
must
be
collected,
the
heavier
oil
frac-
tions
separated
from
it,
purified
of
sulphur
and
other
impurities
and
then
transported
to
the
transmission
line.
In
all
instances,
sales
must
cover
producer
costs
(here
defined
as
the
minimum
acceptable
return
on
capital).
Over
and
above
costs,
how-
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