Solvay SA, a Belgian chemicals maker, said a natural gas shortage has emerged in southern France as suppliers bypass the region in favor of faster growing markets in Asia.
The premium “represents 25 percent on gas prices versus the rest of Europe,” Philippe Rosier, president of Solvay Energy Services, said in an interview. It’s “adding to the competitiveness problem of industry in the south of France.”
The shortage of natural gas, widely used in industry applications, for furnaces and fertilizer, and in households for cooking, is adding to the woes of French industry, which is already reeling from Europe’s economic woes. European chemical companies Solvay, Arkema SA and Ineos Group Holdings SA have operations in southern France and the Rhone Valley.
Southern France is also losing out as the main pipeline connecting the region to north European gas networks has limited capacity.
A shortage in gas supplies traded on the Point d’Echange de Gaz Sud, or PEG Sud, pushed the difference in day-ahead gas prices versus its northern France counterpart PEG Nord to a record in December, according to the Commission de Regulation de l’Energie.
Intensive gas users in the south of France have to buy part of their gas on the spot market and “the price spread has catastrophic consequences on industrial sites” in the region, said Daniel Marini, director of economic and international affairs at French chemical makers federation UIC.
“It’s a real issue,” said Gilles Galinier, a spokesman for Arkema, which makes fluoro-gases and polymers in the region.
The north-south divide in gas should be eliminated at some point by merging prices, Rosier said. That would in effect mean gas users in the north subsidizing those in the south.
As a result of high production and fuel costs, petrochemicals makers, including Paris-based Total SA, are shutting European ethylene plants while rivals Exxon Mobil Corp. and others add capacity in the U.S. to benefit from cheaper energy. France banned shale gas drilling that’s driving the resurgence in the U.S.’s industrial base. Ethylene derivatives are used to make everything from plastic bags and packaging to car parts and window frames.
Hydraulic fracturing, used to recover shale gas by blasting underground rocks with water, sand and chemicals, has increased U.S. gas production. That has made U.S. ethylene production about 75 percent cheaper than two-thirds of global competitors who rely on naphtha as a raw material, according to Bloomberg Industries.
It’s prompting companies from Dow Chemical Co. to Exxon to invest in new ethylene plants in the U.S., where capacity is set to rise by 10 million tons, or 40 percent, by 2017 or 2018, Jean Pelin, executive director at French chemical federation UIC, said at a Jan. 9 press meeting near Paris.
When new plants are set up, the extra production will go first to local customers in the U.S., then to Latin America and Asia, said Jose Mosquera, director of industrial policies at chemical lobby group Cefic, based in Brussels. Such distribution is a concern for Europe, he said.
With lower raw-material costs, the transfer of production of some materials, such as methanol, ethylene and derivatives, to the U.S. has started, said Solvay’s Rosier. Solvay’s energy bill, which amounted to 1.25 billion euros ($1.7 billion) in 2013, would have been 300 million euros less had the price of gas in Europe and the U.S. been on par, he said.
Ethylene capacities are set to fall by 4 million tons in Europe in coming years as Total and rivals shut steam crackers amid struggling construction and car markets, and increased competition from Middle East imports, Pelin said.
With fuel costs set to stay high in France, companies are now looking for alternatives. Pelin will be part of a French delegation traveling to Iran in early February to revive ties if the embargo on the Islamic state is lifted under an international deal aimed at curtailing nuclear activities.
It would take at least until 2020 to build liquefied natural gas export infrastructure in Iran, if supplies were available to trading partners, according to Jean-Marie Dauger, executive vice president of GDF Suez SA, the former French gas monopoly.
“I would welcome a long-term supply agreement with Iran,” said UIC’s Pelin. “The world’s biggest gas reserves are in Iran, so there’s a potential revolution.”