Gaz de France History

Company Perspectives:

Gaz de France is determined to pursue its ambitious strategy of development along the entire gas chain, from the wellhead to the burner tip, by combining internal and external growth to strengthen its position among leading gas operators in Europe. In 2001, we intend to strengthen our role as a public service addressing local needs while accelerating our European development. Key Dates:

Key Dates:

1946:

Nationalization Act creates Electricité de France (EDF).

1949:

Gaz de France (GDF) separates from EDF

1953:

Company establishes first long-distance pipeline.

1957:

Development of Lacq gas field begins.

1973:

Oil crisis boosts natural gas consumption.

1999:

GDF tops 12 million domestic and international customers.

2000:

Company acquires 67 percent of Energia Mayakan and 100 percent of Transcanada del Bajio, boosting its presence in Mexico; company acquires Norway's Statoil oil and gas reserves.

Company History:

Not content to be Europe's third largest provider of natural gas, Gaz de France (GDF) is gunning for that market's top spot. The state-owned company has stepped up its acquisitions at the turn of the century, boosting its natural gas reserves to more than 30 billion cubic meters while expanding its operations worldwide to transform itself into a vertically integrated company capable of supplying customers 'from wellhead to burner tip.' The company has already achieved production levels of two billion cubic meters, with plans to raise production to 15 percent by the year 2003. GDF's ambitions have been spurred by the liberalization of the utilities markets in European Community member states, which has--on paper, at least&mdash-ded the traditionally monopolistic nature of these markets since August 2000. Faced with increased competition in its domestic market, which accounts for some 75 percent of the company sales (and in which GDF has already reportedly some 5 percent of its top corporate clients), GDF has been busy establishing positions in other markets--including the United Kingdom, the Eastern European countries, and Mexico and other Latin American markets. The company intends to boost its 10 percent of the European market to 20 percent by 2003. GDF remains wholly owned by the French government. However, the government is unable to provide the massive levels of investment capital needed for GDF to achieve its ambitious growth plans. An opening of its capital--most likely to fellow French-government controlled companies such as TotalFinaElf and EDF (Electricité de France)--is therefore seen as a likelihood for the early years of the century, possibly as early as 2002. Nonetheless, company chairman and CEO Pierre Gadonneix, appointed by the government in 1996, has steadfastly ruled out a privatization of the company.

Founding a French Utility Monopoly in the 1940s

GDF was first established in order to concentrate the production and distribution of gas in France. Before 1946 gas was mainly manufactured from coal, in more than 500 gas works, located throughout the country, which were owned by companies of various sizes: large companies supplied the areas around major cities, whereas subsidiaries of coal companies, such as Les Houillères Nationales, now Charbonnages de France (CDF), delivered gas to mining areas. For economical, political, and social reasons, the energy industries were nationalized soon after World War II by the Gouvernement provisoire, a tripartite government consisting of Mouvement Republicain Populaire, Socialist, and Communist parties.

Nationalization took place on the recommendation of Général Charles de Gaulle, the former head of government, and Marcel Paul, the communist minister of industry. On April 8, 1946, the Nationalization Act was effected, nationalizing the production, transport, distribution, import, and export of electricity and combustible gas; and establishing two new public corporations--Gaz de France and Electricité de France (EDF). Several gas producers remained exempt from nationalization, particularly those whose main activity was not gas production, transmission, or distribution including the producers of natural gas and gas manufacturing companies with an annual production of less than six million cubic meters. Gas distributors supplying less than this quantity were also exempt from nationalization. These included local authorities and in 1991, 21 municipal utilities remained as independent companies.

Eventually the mixed enterprises, those companies providing both gas and electricity, were absorbed by EDF, including the gas activity which was later to be allocated to GDF. Under the Nationalization Act, these companies were financially autonomous and consequently commercially and technically independent. Initially, to simplify and unify the organization, EDF was in charge of the management of GDF whose first chairman, George Reclus, was under the authority of EDF's chief executive officer, Roger Gaspard. On January 4, 1949, however, GDF was partially separated from EDF when a law came into force giving it financial autonomy, with a credit of FFr 6 billion and the order to separate its management from EDF within 6 months.

On February 23, 1949, Jean Le Guellec, former General Inspector of Industry and Commerce, was elected first chairman of Gaz de France, with George Combet, former chairman of Société de Gas et d'Electricité de Nice, as chief executive officer. Their first task was to modernize and concentrate gas manufacturing facilities and to develop the local transmission networks. The first long-distance pipeline was established in 1953, from the Nancy area to Paris, to open up a new market for the Lorraine coal gas. In southwest France, meanwhile, several small natural gas fields remained unexploited. A new law, the Loi Armengaud, came into force on August 2, 1949, excluding natural gas transmission from GDF's monopoly. This was in opposition to the Nationalization Act, which excluded only natural gas production from GDF's monopoly.

In 1951, the Lacq gas field in southwest France, then one of the largest in the world, was discovered by Elf Aquitaine and launched in 1957. The first transmission system, 4,000 kilometers long, was built to supply gas to southwest France, Brittany, and the Paris area. As a result, sales of natural gas increased threefold over the following five years from 1957 to 1962. Cities connected to the mains switched progressively to natural gas and by 1965 approximately half of France was supplied with natural gas. This was known as the natural gas revolution. The period was marked by the birth of the Fifth Republic and the arrival in 1959 of Général de Gaulle as head of state. It was also the period of the Algerian War and the loss of this colony was to be significant for French energy resources. In 1958, a special regime was established for the transmission and sale of natural gas in France. The Société Nationale des Gaz du Sud Ouest (SGNSO), owned by GDF, retained a monopoly within its area and the Compagnie Fran&ccedilse du Méthane (CFM), owned 50 percent by GDF, 40 percent by TOTAL Compagnie Fran&ccedilse des Pétroles and 10 percent by Elf, was established to carry out all operations relating to transmission and sale outside southwest France. With these subsidiaries GDF had a virtual monopoly of gas transport and distribution in France.

Choice of Natural Gas in the 1960s

By the end of the 1960s, 70 percent of gas supplied to customers by gas utilities was natural gas, as opposed to 99.5 percent in 1991. Supplies from Lacq were insufficient and it was necessary to import gas. The French tradition of strong government intervention and involvement in the energy sector influenced negotiations for contracts. The purchase of gas was a useful diplomatic ploy, as confirmed by the first contract with Algeria, which procured gas from the Hassi R'Mel gas field. Signed in 1965 with the Algerian company Sonatrach, this initiated GDF's international involvement. The second gas import contract was signed with the Netherlands in 1967, linking GDF with the Dutch company Gasunie until 2005. Gas from the Groningen field was carried by pipeline via Belgium to northern and eastern France, leading to the extension of the transport network in Europe as well as in France, where the network reached a length of 13,000 kilometers in 1970.

Aware of its important role in the national program and in international energy markets, GDF extended its research and development, particularly in the field of high-pressure pipelines and gas liquefaction, to improve transmission and storage facilities. GDF participated in the construction of the first natural gas liquefaction plant, GL4Z, in Algeria; designed and built the LNG (liquefied natural gas) receiving terminal at Le Havre; and ordered its first LNG carrier, the Jules Verne. Later, the Fos-sur Mer, Provence, and Montoir de Bretagne, Brittany, terminals were designed and built, the latter being larger and more efficient. Underground storage facilities had been in operation since 1956 and GDF had pioneered the development of storage engineering. From a strategic and load-matching viewpoint, these needed to be developed to allow GDF to cope with winter's peak demand. The largest unit, 2,760 million cubic meters, was put into service in 1968 at Chémery in central France and in 1991 was still the world's largest underground storage facility.

In 1969 Robert Hirsh, a former state representative at Commissariat à l'Energie Atomique (CEA) and a member of the board of Electricité de France, replaced Jean Le Guellec as chairman of Gaz de France. Hirsch's nomination was particularly significant for the French energy policy. The period leading to the 1973 oil shock was characterized by cheap oil which boosted France's industrial development and more than doubled energy consumption. The use of oil greatly increased, demand for gas and electricity grew substantially, and the French nuclear power program was started. The period of the two main oil price rises, 1973 to 1979, boosted natural gas consumption in France and throughout the world.

In response to the first oil price shocks, French government policy was to adopt a far-reaching nuclear power strategy, enabling France to rely more on nuclear power for energy production. This resulted in significant diversification of primary energy suppliers. The idea was to avoid a situation where one supplier accounted for more than 5 percent of France's total energy supply and this remained the case in 1991. To follow this policy, GDF looked for alternative suppliers of natural gas, resulting in the purchase of Soviet and Norwegian North Sea gas in addition to the former Algerian and Dutch contracts. With the most important natural gas reserves in the world, Russia became its largest producer. Three contracts were signed between GDF and Soyouzgazexport, one from 1976 to 2000 for 2.5 billion cubic meters per year, one from 1980 to 2000, and the third, from 1984 to 2009, for eight billion cubic meters per year. The Norwegian contracts were signed with four separate producers--Ekofisk in 1977, Statfjord in 1985, Heimdal in 1986, and Gullfaks in 1987. In 2003 other deliveries were planned to come from Norway--Troll and Sleipner--after contracts agreed with Norway's Statoil. Two more contracts were signed with Algeria, one in 1973 for 3.5 billion cubic meters per year, and one in 1982 for five billion cubic meters. Both were long-term contracts, 25 years and 20 years long, respectively, and have been renegotiated.

In 1976 Robert Hirsch left Gaz de France and Jean Blancard became chairman after a long career in the energy sector. In 1979 Blancard was in turn replaced by Pierre Alby, former chief executive manager of GDF. The nomination of such distinguished representatives of the energy industry demonstrated the government's concern with the gas industry. Furthermore, by 1979 Paris was relying solely upon natural gas. Production of manufactured gas had ceased and GDF was importing huge quantities of natural gas to meet increasing French consumption. GDF had been induced to align with other gas companies in managing the transmission of purchased gases and in supplying security clauses. The 1970s, marked by the energy crisis, saw the total transformation of Gaz de France into an active member of the international energy market and network.

Natural gas consumption's share of primary energy, which was 7.9 percent in 1973, increased to 12.7 percent in 1979, while the electricity share increased from 9.2 percent to a mere 11.7 percent. The competition between the two sources was strong, and GDF, aware of changing times ahead for the enterprises, whether private or public, developed a new attitude toward its friendly rival Electricité de France (EDF). GDF was divided into a number of operating divisions which dealt only with GDF. At a local distribution level, GDF and EDF shared a joint role. Distribution regions were divided into a number of distribution areas. Each distribution area had a budget for each type of energy, but for the general public EDF and GDF were closely connected with private consumers of both gas and electricity generally invoiced on the same bill.

To differentiate between gas and electricity as energy sources was a daunting task for GDF. GDF programs and rates were regulated by the Minister of Industry and the Minister of Economy and Finance. Despite this close link with the government, GDF was ostensibly run as a commercial enterprise, financially independent and taxed in the same way as a private firm. In the early 1980s GDF recorded severe losses which it was necessary to restrict.

Historically, GDF had a difficult position in the national economy compared to EDF. France traditionally exported electrical energy and EDF had to face overcapacity of electricity, whereas huge quantities of gas were imported. In 1985 Pierre Alby, then chairman of GDF, summed up the problem in a speech on the competition between natural gas and nuclear power during the 15th World Conference of the International Gas Union when he said that in France, a country lacking major national gas resources, 'the gas industry is a factor which cannot be neglected by a policy striving to establish a balance between imports and exports.' He added, however, that the gas industry could not isolate itself from balance of trade concerns. His analysis of the position of gas as opposed to nuclear energy revealed the new policy GDF decided to adopt. After major technical achievements at national and international levels, GDF needed, he said, to accept the laws of competition on the energy market and, above all, nuclear competition.

Independent Utility in the 1980s

Once again GDF was ready to accept a new commercial challenge. GDF could not compete with lower prices as the government controlled these closely. Initially GDF continued to implement its strategy of promoting the export of French gas expertise by becoming involved in several trans-European pipeline companies and obtaining part ownership of two tankers used to transport LNG from Algeria. In this respect, GDF developed its industrial activity and thereby reduced the import bill.

The next stage was to promote a modern image of the gas industry to the general public as well as domestic, commercial, and industrial users, in order to compete with electricity. To this end natural gas was promoted as a plentiful, flexible, powerful, and clean source of energy. The environmental safety of the product, particularly important in the industrial sector, helped GDF to increase its market share significantly. The promotion of clean energy was also welcomed by the increasingly vocal ecology movement, which was strongly against nuclear energy. Fondation du Gaz de France was established to promote protection of the environment.

To tackle the domestic and commercial market was, however, more difficult. GDF was in fierce competition with EDF for the domestic market, the new housing sector being one of the main targets. EDF had an advantage with the public authorities who were concerned about the excess of electric energy and tended to favor electrical installations. GDF therefore had to develop efficient marketing methods as well as new communication skills and the company structure was modified to cope equally with government control and with the competitive energy market. The new logo, a single flame designed in 1987, was a sign of this change.

During the mid-1980s, the European gas market had become considerably more international in character, including significant developments regulating competition, the establishment of a European Economic Community internal market program, and environmental issues. Jacques Fournier, who, before his appointment as GDF chairman in 1986, was secretary general of the former Socialist government, was at the same time chairman of the CEEP, European Center of Public Enterprises, and was thus aware of the importance of an internal European market. During a meeting organized by the Fondation Europe et Société early in 1988, he said that GDF would have to adapt itself to the changing situation in Europe concerning standardization, markets, and the fiscal system, at the same time declaring that public services and the spirit of enterprise were not in opposition. State control, he said, was necessary in order to preserve GDF's autonomy. Francis Gutmann, former French ambassador in Madrid, appointed GDF chairman in August 1988, continued the battle for the autonomy of his company while the monopoly of imports and distribution began to be contested at national and European levels.

GDF showed a loss of FFr 96 million in 1990 on a turnover of FFr 41.8 billion--more than twice the loss of 1989. Despite these losses, the company had by 1991 proven an ability to cope with technological changes and marketing adaptations. With its industrial assets, research facilities, and expertise, GDF's active part in worldwide gas development made the company a major factor in French economic growth. The need to make a profit was recognized.

EC Market Liberalization for the 21st Century

A contract signed with the government in February 1991 enabled GDF to make a profit. Based on discussions underway since the fall of 1989, the contract covered objectives and management during the period 1991 to 1993. At the press conference held soon after its signing, Francis Gutmann declared: 'At a time when natural gas is recognized as a major source of energy and when GDF continues to increase its strategic weight in France and abroad, the new contract provides the responsibility and the autonomy necessary to accomplish a continually improved public service.' The tariff policy was also covered in the contract allowing GDF, among other things, to follow the fluctuations of supply costs. This enabled GDF to stand up to international competition and protect its distribution monopoly from challenges by the French parliament and the European commission.

In France, as Elf Aquitaine and Total threatened GDF's gas market shares, a parliamentary amendment was signed which changed the statute of 1946. The new amendment gave communes, the basic units of French local government, freedom in organizing their own gas distribution. This amendment, known as the Desrosiers amendment, was later revoked. At the same time, the European commission continued efforts to break up national energy policies.

Those efforts bore fruit toward the end of the 1990s when a schedule was put into place ending domestic utilities monopolies in all European Community countries by August 2000. GDF responded to this imminent revolution--which was to open up utilities markets to competition for the first time in more than 50 years--by transforming itself into an internationally operating utilities giant. By the end of the decade, GDF had nearly doubled its sales, and established strong positions in a number of its European neighbor markets.

One of GDF's first international expansion moves came in 1994, when the company bought control of EEG (Erdol-Erdgas Gommern) of Germany. The company also joined the GASAG joint venture to win the gas distribution contract for the Berlin market in 1997.

By then, the appointment of Pierre Gadonneix as company chairman and CEO in 1996 had marked the beginning of a new and ambitious growth strategy. By the end of the decade, GDF expected to boost its number of French customers to more than ten million--a target the company had reached by 2000. GDF also sought to add production capacity, with plans to build its own production to account for 15 percent of its total reserves by 2003. GDF also began developing ancillary operations, products, and services, such as cogeneration operations.

GDF moved into Italy, acquiring that country's Agip Servizi in 1997, which, coupled with the extension of its Cofethec Servizi subsidiary, gave the leading position in Italy's heating, ventilation, and air-conditioning (HVAC) services markets. The following year, GDF introduced itself to the Mexican market, through its MaxiGas Natural subsidiary, which began supplying the state of Tamaulipas in the northeast of the country. By 2000, GDF had begun to assert itself as a major utility company in the Mexican market, particularly with its acquisition of 67 percent of Energia Mayakan and 100 percent of Transcanada del Bajio, both gas transmission pipeline operators. GDF also won new gas distribution permits in Mexico, in Mexico City in 1998 and in the Puebla Tlaxcala region in 2000. During the same period, GDF was building its interests in the United Kingdom, which had already liberalized its market, acquiring that country's Volunteer Energy Ltd.

The year 2000 also saw GDF restructure its operations as it prepared for the August 2000 liberalization of its home market. In April of that year, the company reorganized its business into five major business units: Services; Distribution; Infrastructures; Trading; and Exploration-Production. The new organization represented the company's drive to become, as Pierre Gadonneix stated, a provider of natural gas services 'along the entire gas chain, from the wellhead to the burner tip.'

In August 2000, GDF acquired the 'exploration-production' component of its new organization when it paid EUR 371 million for Transcanada International Netherlands (TCIN), as well as a 38.5 percent share of Noordgastransport BV, giving GDF offshore drilling and production capacity for the first time in the company's history. Soon after, in October 2000, GDF added the oil and gas reserves held by Statoil, of Norway, giving it a 20 percent share of the Njord oilfield in the Norwegian Sea, and a 12 percent share of Snohvit oilfield in the Barents Sea. Together these new assets helped boost the company's projected 2001 production to more than 2.5 billion cubic meters. The company ended that year with rising sales, which topped EUR 11.2 billion. Despite higher oil prices and a high dollar, the company's net income remained strong at EUR 431 million.

The European Community's utilities industries were technically liberalized in August 2000. Pressure from France's unions, however, helped reinforce the French government's reluctance to implement the full scale of liberalization policies. Meanwhile, GDF, faced with the massive investment cost of its ambitious growth plan, was forced to consider opening its capital to outside investors. While remaining steadfast in its intention of maintaining government control of the company, the French government and GDF leadership indicated their willingness to allow a limited number of outside investors, such as fellow French government-controlled bodies TotalFinaElf and EDF to acquire shares in GDF. That decision, however, was postponed by the Socialist-led government for at least until after the 2002 elections.

In the meantime, GDF was able to secure government agreement to help finance the continuation of its growth strategy into 2001. The company began the new century by forging an agreement with Sonatrach of Algeria and Petronas of Malaysia to take a share of gas production in Algeria's Ahnet basin. In February 2001, GDF began anticipating further expansion, acknowledging its interest in acquiring part of Lithuania's state-owned Lietuvos Dujos gas utility, up to 51 percent of which was scheduled to be put up for sale. GDF's international expansion--which had enabled it to build up a client base of more than two million customers outside of its domestic market&mdash+aced it in a strong position to contend for the top spots in the world's gas utility market.

Principal Subsidiaries: CFM (16%); Cofathec Servizi (Italy); Coriance (86%); Degaz (Hungary; 55%); EEG (Germany; 40%); EMB (Germany; 64%); Estag (Austria; 68%); Gazocean Armement (55%); Gaz de Bordeaux (43%); Gazinox; Gaz Metropolitain (Canada; 81%); Gaztransport & Technigaz (93%); GDF (U.K.; 49%); GES; Gensel; Messigas (50%); Methane Transport (75%); Portgas (Portugal); Pozagas (Slovakia); SPBVergaz (Russia); Societe Girondine de Cogeneration (86%); Termoraggi (Italy; 85%); Volunteer (U.K.; 50%).

Principal Competitors: BG Group plc; Centrica plc; Eni S.p.A.; Gas Natural SDG, S.A.; N.V. Nederlandse Gasunie; OAO Gazprom; Italgas - Societa Italiana per il Gas p.A.; Westcoast Energy Inc.

Further Reading:

• Environmental Pressures and the Response of the European Gas Industry, Report of the Institution of Gas Engineers of the 10th W.H. Bennett Traveling Fellowship, 1988.
• 'Gaz de France Keeps Mum on Opening Its Capital,' Reuters, March 21, 2001.
• 'Gaz de France Open to Alliances,' Europe Energy, December 23, 1999.
• 'Gaz de France's Development May Be Slowed by Lack of Funds,' Europe Energy, May 26, 2000.
• 'Gaz de France Subsidiary Expands into Northern Mexico,' Infolatina, March 22, 2001.
• Lyle, C.D., and R.O. Marshall, Gas Regulation in Western Europe, London: Financial Times Business Information, 1990.
• Magada, Dominique, 'GDF Prepares for European Gas Spot Market,' Reuters, February 14, 2001.
  Mémoire Ecrite de L'Electricité et du Gaz, Paris: EDF-GDF, 1990.
• Mougin, Pierre, Mémoires, Paris: Imprimerie Barneoud, 1966.
• Picard, Bertrand, Bungener, Histoire de l'EDF, Paris: Dunod, 1985.

Source: International Directory of Company Histories, Vol. 40. St. James Press, 2001.