Royal Dutch Shell Group .com

Financial Times: Soaring prices raise concerns over operation of energy link: "We need to know why supplies were physically available, but did not reach the market," said Mr Buchanan. The contracts involving Centrica, Shell, BP, Exxon Mobil, Total, Amerada Hess and Perenco affect three North Sea gas fields: Sean, Indefatigable and Leman. (ShellNews.net)

 

By Andrew Taylor

Published: October 6 2004

 

The opening, six years ago, of a 145-mile, sub-sea gas pipeline connecting Bacton in East Anglia to Zeebrugge in Belgium was expected to herald a steady flow of cheap North Sea gas exports to continental Europe to the benefit of Britain's balance of trade.

 

The recent experience has been rather different. Energy prices in the UK have soared over the past 18 months, as North Sea reserves have declined and gas imports from the Continent, through the Bacton pipeline, have become increasingly important.

 

Concern that trade through the interconnector may have been manipulated has prompted Ofgem, the energy regulator, to question whether imports of cheaper Continental gas may have been withheld last autumn in order to force British winter prices even higher.

 

The regulator, which has called for a European Commission investigation, wants to know why European companies opted to store gas rather than take advantage of higher prices to sell into the British market. It questions why European companies did not take advantage of surplus capacity on their pipeline networks to transport gas to the interconnector "so that it could be imported to Britain".

 

Contrasts between liberalised competitive trading arrangements adopted by Britain in the 1990s and the more rigid structures of continental European markets, still dominated by former national and regional mono-polies, have become an in-creasing source of friction since the interconnector opened.

 

Most long-term continental European gas purchase contracts, unlike in Britain, remain linked to world oil prices, which have jumped by more than 60 per cent since last year.

 

Alistair Buchanan, Ofgem's chief executive, said that the effect of record oil prices, imported through the interconnector, were costing British customers 1.4bn this winter. A more liberalised energy market in continental Europe would weaken the link between oil and prices. "Experience from the UK gas market shows that that there is little doubt that stronger competition in Europe would have diluted any oil price effect, and its significant impact on British customers' energy bills," he said.

 

The regulator is also looking at the impact of a small number of long-term gas contracts negotiated before the industry was privatised in 1986. It wants to know why this small "knot" of contracts, accounting for about 4 per cent of available British North Sea gas production, failed to get into the market when prices rose last autumn. "We need to know why supplies were physically available, but did not reach the market," said Mr Buchanan.

 

The contracts involving Centrica, Shell, BP, Exxon Mobil, Total, Amerada Hess and Perenco affect three North Sea gas fields: Sean, Indefatigable and Leman.

 

Centrica, which owns British Gas, the country's largest household and electricity supplier, and has contracts to buy gas from all three fields, suggested that there was no case to answer as far as it was concerned.

 

It said: "In the case of Sean we inherited prices negotiated in the 1980s, which were mostly higher than the prevailing rates last winter, making it uneconomic to trigger the contracts other than at very peak demand. We have been unsuccessful in trying to renegotiate this contract but have renegotiated our contracts for the Indefatigable and Leman fields where we took our full contracted amount last winter."

 

Niall Trimble, managing director of Energy Contract Company, a consultancy, said it was naive to blame rising wholesale prices on oil-related rises in European gas charges and legacy contracts, which had only a modest effect on the market. "None of this explains why German wholesale prices for the first quarter of next year are less than half the equivalent price in the UK."

 

INCREASED COMPETITION PAYS OFF FOR CUSTOMERS AS THEY SWITCH SUPPLIERS Britain led the way in liberalising its energy markets starting with the privatisation of British Gas in 1986, writes Andrew Taylor. The electricity industry was then privatised in 1990. The approach to removing obstacles to competition, even if this meant fragmenting the industry leaving it vulnerable to takeovers from larger continental European rivals, has differed from that of other European Union countries. Former national and regional monopolies continue to dominate many domestic markets particularly in France and Germany. Out of the 14 British regional electricity supply companies privatised in 1990, nine are now owned by three large Continental utilities: RWE and Eon, of Germany, and EDF of France. One of the biggest differences in the British market has been the separation of ownership of national electricity and gas transmission networks from the ownership of power stations and energy retail suppliers selling electricity and gas to household and business customers. British competitors have complained that integrated European utilities have used their ownership of electricity and gas networks to manipulate markets and prevent rivals from competing by blocking the access to their pipes and wires. Increased competition has also allowed the UK to move faster than other EU countries in liberalising retail markets with the result that household energy prices since 2002 no longer have to be regulated. Some 50 per cent of British customers have taken advantage of increased com- petition to move to another supplier. This compares with only 4 per cent in Germany where the retail market is also unregulated. Ofgem, the British energy regulator, says that increased competition has benefited customers even after recent price rises. Combined annual household electricity and gas bills are still 200 cheaper than before privatisation, it says.


Click here to return to Royal Dutch Shell Group .com