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By Bloomberg

Natural gas transmission operators in Europe are at risk of squandering investment as the European Union aims to add pipelines and storage sites at a time when customers are favoring short-dated contracts and demand is declining.

Network operators may end up with so-called stranded assets as users are less likely to buy long-term capacity, Jean-Claude Depail, president of Gas Infrastructure Europe, said Thursday at the lobby group’s annual conference in Dublin. The company that runs a pipeline linking the U.K., Europe’s most traded market, and Belgium expects to sell more short-term capacity than long- term when a sale closes May 20, its commercial director said.

The EU is building pipelines between its member nations in an effort to make gas supplies more secure and become less reliant on flows from Russia, which were interrupted in 2006 and 2009 amid winter weather. Demand for the heating fuel in the bloc’s 28 states declined for a fourth year in 2014, according to Brussels-based Eurogas, which represents members including units of German utilities EON SE and RWE AG.

“Given the unsecured prospects for gas demand and the future structure of tariffs, favoring the short term at the expense of the long term, network users are less likely to commit to long-term bookings,” Depail said. “Are we moving towards a sound investment climate?”

Cross-Border Links

The EU may need to spend as much as 1 trillion euros ($1.1 trillion) on energy infrastructure to improve cross-border ties and curb reliance on Russia, Energy Commissioner Miguel Arias Canete said Thursday in Dublin. Slovak grid operator Eustream has proposed building the Eastring pipeline to improve security of supply in southeastern Europe, company Chairman Tomas Marecek said Friday in the Irish capital. France plans to join the gas markets in its north and south with pipelines in 2018.

Gas markets in Europe are turning to contracts of one to five years and away from 20-year accords, Gerard van Pijkeren, managing director at BBL Co., which operates a pipeline linking the U.K. and the Netherlands, said April 15 in an interview in Amsterdam. A lack of long-term signals is making investment more difficult, he said.

A new EU regulation taking effect this year will support a shift to short-dated agreements, according to Emmanouela Angelidaki, regulatory affairs manager at Interconnector (UK) Ltd., or IUK, which runs the U.K.-Belgium pipeline. The so- called Capacity Allocation Mechanism requires space to be auctioned and a minimum quota for short- to medium-term flows.

‘Big Impact’

“There’s a very big shift across Europe from long-term contracts to short-term, and CAM encourages this,” Angelidaki said April 15. “This has a big impact for an asset like IUK, so being able to secure some long-term contracts is essential to determine the future business model of the company.”

CAM, coming into force in November, is already having an effect. Results of the non-binding stage of IUK’s capacity sale from 2018 show much greater interest in the first year, according to Commercial Director Darren Reeve.

“On a 10-year basis, we don’t currently expect to sell all of the capacity,” he said.

Pipeline operators’ revenues will “certainly” fall under CAM, said BBL’s van Pijkeren. Governments shouldn’t create rules for markets where competition exists, he said.

Operators will be reluctant to invest if the EU fails to take the correct steps to ensure natural gas’s role in the energy mix, according to Depail at GIE.

“Most investments should be market-based,” he said. “We should avoid a shift from market-based to central planning and public funding.”