GDF-Suez merger deals a blow to EU ambition to open energy sector

The deal, which creates Europe’s largest buyer and seller of natural gas, as well as its biggest natural gas distributor, reinforces France’s position as a major player in European and global energy markets. But it also runs directly counter to the centerpiece of proposals by the European Commission to break up control of the production, transportation and distribution of energy, analysts cautioned. “The Gaz de France and Suez deal shows that the commission’s plans to really open the internal market to competition in the energy sector is going nowhere.” said Christian Egenhofer, energy analyst at the Center for European Policy Studies, a research group in Brussels. “Nor does it have a proper energy policy.” “This deal leads to more market power concentration,” he added.

Since 2003, the commission, the EU’s executive arm, has moved to break up this concentration of power in the hands of large companies, as part of a larger initiative to increase competition and spur economic growth. The deadline for full liberalization by July, when the last national barriers to open trade in energy were to be dropped, triggered rapid consolidation in the sector and prompted individual governments to support their own national champions. Indeed, the Suez-GDF merger, in which the French state retains a blocking minority, means that Europe’s natural gas sector will now be firmly dominated by handful of players, including Gazprom of Russia, E.ON of Germany, Eni of Italy, Gasunie of the Netherlands and Norsk-Hydro of Norway. Along with Gaz de France, these companies have jealously guarded their positions, sometimes making informal agreements not to enter each other’s markets. Their tight grip has made it difficult for smaller companies to enter the sector unless they make significant investments, like building pipelines, and has led Brussels to insist that the energy companies allow other companies to have access to their networks.

The European Commission tried Monday to put the best face on the French deal. “We examined the details of the merger over a long period of time,” said Jonathan Todd, spokesman for the competition commissioner, Neelie Kroes. “If we find that the companies are abusing their monopoly power by restricting access to the gas or electricity then we could fine them,” he added. The prominent role the French government played in brokering the merger, initially to thwart a foreign hostile bid, had reinforced suspicions in Brussels that national - not European - interests remained the key variable in the sensitive energy sector. It also raised the broader question of whether a policy of grooming national industrial champions was compatible with European ambitions of opening up the energy market.

Prime Minister François Fillon, hailing the GDF-Suez merger as “a strategic operation,” said Monday it would allow France to transform the energy landscape on the Continent. The merger, he told French radio, “will allow us to structure the energy market in Europe.” Todd, the spokesman, said the commission in July opened formal antitrust proceedings against E.ON and Gaz de France after inspections that showed “a possible agreement or concerted practice” between both companies to keep out of each other’s home market, even after the liberalization of European natural gas markets.

To be sure, the merger is likely to bring Europe greater clout when it comes to negotiating energy contracts with other big companies, especially Gazprom, Russia’s state-owned energy giant, which already supplies a quarter of Europe’s natural gas. “It could mean a stronger negotiating position with other countries, for example Russia,” said Susanne Dröge, energy analyst at the German Institute for International and Security Affairs in Berlin. “It might even lead to more diversification for Europe’s energy imports and possibly less dependence on Russian gas if Gaz de France becomes more active in Algeria, a large gas exporter.”

Jan Horst Keppler, energy analyst at the French Institute of International Relations in Paris, also played down fears about weakening competition, at least in France. “The great asset of Gaz de France is its gas transport infrastructure,” he said. “Suez will be able to use it.” But time and again, the major European energy companies have also fiercely lobbied for government support to fend off plans by Brussels to break their stranglehold on everything from production and transportation to distribution and marketing. “The large energy companies are so close to the spine of the political DNA,” said Egenhofer, the energy analyst in Brussels. “They are always close to the government. Governments have a stake in their future because they are about national or strategic assets.”

Indeed, Nicolas Sarkozy, the French president, who played a crucial role in the merger, has publicly urged the creation of a strategic energy entity, partly to defend France against any outside takeovers but also to defend the sector against the commission. Ultimately, he wanted to create a national champion. “It’s industrial policy logic,” Egenhofer said. What is striking, some analysts said, is that despite the different interpretations of this particular deal, there is near-unanimity in France’s political class about the need for state-involvement in strategic industries - with potentially cascading implications for energy policy in neighboring European countries and the leverage Brussels has to impose further liberalization of the sector.

At a joint press conference by Suez and Gaz de France Monday, Jean-François Cirelli, Gaz de France’s chief executive and the new company’s future No. 2, said: “Energy is a strategic sector for all states. Nowhere are governments completely absent from the energy sector.” Analysts viewed the merger as an effective nationalization of Suez’s energy business and a confirmation that France is determined to create national champions in strategic industries. The state’s direct and indirect stakes in the merged group will amount to about 40%, Fillon, announced Monday, making it by far the biggest shareholder and giving it significant scope to influence the group’s strategy, officials say. (iht.com)