Downstream natural gas in Europe the role of upstream oil and gas companies Presentation at PETROPOL research conference on natural gas Opportunities for Norway in the future European natural gas market A research perspective Oslo 7 February 6 Per Ove Eikeland Research Fellow, per-ove.eikeland@fni.no
Background and questions: Second half of the 99s: upstream gas companies with strategic intentions of downstream integration Companies studied: BP, Exxon, Hydro, Shell, Statoil and Total Results by late /early : quite modest overall implementation in Europe and substantial variation between the companies Why weak overall implementation? Why variation between the companies?
The implementation data: Table Self-reported retail gas marketing and sales activities in Europe: geographical and market segment spread by early BP Exxon Hydro Shell Statoil Total Core markets (7) None-core SUM I&C segment Households None of the companies present downstream in all core markets Low presence in none-core downstream markets Gas marketing limited to the I&C segment BP, Total and Shell more extensive forward integration than Exxon, Hydro and Statoil
Explanation of vertical integration response to pre-existing market power problems reduce transaction costs (inefficiencies associated with ex ante investment decisions and the ex post performance of a trading relationship) risk management (hedging against margin migration and to ensure future demand for upstream product)
Downstream integration as diversification : Explanation of diversification : economies of scope - efficiencies associated with marketing and distribution of more than one energy product
Explaining weak downstream integration Liberalisation removing motivation Lack of liberalisation: barriers to entry for independent companies Barriers to entry: lack of third party access tariff size and structure dominating position of incumbents grid capacity bottlenecks
Barriers to entry in European gas markets Table EU member-state implementation of internal gas market measures, and 3 (Number of deviations from ideal internal gas market conditions) a UK SPA ITA NET FRA GER 7 7 3 3 a In, the EU Commission reported on 9 conditions that should be fulfilled for national gas markets to adhere to free-market principles. In 3, it only reported on 8 conditions. Source: The Commission of the European Communities, Second and Third benchmarking reports on the implementation of the internal electricity and gas markets
Table 3 Matching member-state implementation of internal gas market measures and company downstream behaviour UK SPA ITA NET FRA GER 7 7 3 3 Number of companies present () 3
Connection between barriers to entry and downstream integration Few barriers and many companies investing in the UK High barriers and few companies investing in France Otherwise hard to detect any clear connection from these simple data
Table Matching of member-state implementation of internal gas market measures and downstream behaviour by independent upstream oil companies UK SPA ITA NET FRA GER 7 7 3 3 Number of independent companies present () 3 3 Clearer connection between barriers to entry and weak overall implementation of downstream natural gas strategies.
Explaining inter-company variation Variation in business opportunities Internal company management factors Other factors
Table 6 Oil-product service stations in selected OECD European countries, Per Ove Eikeland: Downstream natural BPgas in Europe Exxon the Hydro role of upstream Shell oil and Statoil gas companies Total Table 6 Oil-product service stations in selected OECD European countries, Countries hosting the core gas markets France 7 78,, c Germany,7,3,, Italy a 3,,, Netherlands 3 68 6 Spain 6 8 3,7 d UK n.a., b,, Countries hosting non-core gas markets Austria 6 6 3 Belgium 3 33 Denmark 3 3 6 Finland n.a. Greece,6 n.a n.a. Ireland 3 n.a. 8 Luxembourg 3 3 Norway 3 6 Portugal 3 6 e Sweden 6 77 6 Switzerland 7
Conclusions Overall weak implementation due to: lack of liberalisation (barriers to entry) Inter-company variation due to: Variation in business opportunities Variation in internal management factors