UK's energy users call for urgent action on gas as forwards soar

London (Platts)--13Jan2006

The UK's Energy Intensive Users Group has called for government and 
energy regulator Ofgem to take urgent action to improve the functioning of the
gas market, so that businesses that are big consumers of gas and power do not 
face the same threat to their operations next winter as this winter.

     High daily gas prices this winter ranging from 60 to 170p/th--some two 
to five times normal levels--have forced chemicals plants such as Ineos Chlor 
and Terra Nitrogen and brick-makers such as Baggeridge and Hanson to halt 
production. Domestic users have been warned by Centrica of the possibility of 
25% price hikes later this year.

     "We believe that new arrangements should be put in place as early as 
possible in 2006, ie. well in advance of the 2006-07 winter period," the EIUG 
says in a recent position paper on its website. The EIUG is calling for the 
Department of Trade and Industry and Ofgem to consider a range of new 
arrangements.

     EIUG wants the role of National Grid in balancing the gas system to be 
extended to include securing options for beyond the within-day period. It 
wants the government to look at the issue of strategic storage. A recent 
report by consultants Ilex said that the market would not pay for new offshore
storage under the current regulatory framework. EIUG says that regulated
third-party access to natural monopoly infrastructure should be extended. That
would allow third parties to access liquefied natural gas import terminals and
the UK-Belgium gas Interconnector as easily as they can transport gas within
the UK's onshore pipe network. And the consumer group says that Ofgem should
be allowed to regulate the offshore gas market. It only regulates onshore now.
That would free the DTI to concentrate on promoting exploration without any 
possible conflict of interest, the EIUG said.

     When questioned about high gas prices, DTI and Ofgem have often pointed 
to the private money pouring into new infrastructure developments, such as LNG
terminals. DTI and Ofgem say the market is working to bring on new supplies 
that will ease the tightness in the market. But major energy users are 
increasingly concerned that even though these infrastructure developments are 
being built, forward prices are showing little sign of easing. The timetables 
for the new developments are widely known, so they should have been factored 
into forward gas prices.

     Despite that, winter 06 gas was trading Thursday at 84.5p/th, a couple of
pence higher than winter 05 gas ever traded as a forward period. Winter 07 gas
was trading Thursday at 74.5p/th. Both levels were above the day-ahead price 
Thursday of 60.9p/th, and above the sort of levels at which some industrial 
users have indicated to Platts it is profitable to operate. Industrial users 
were used in the early years of this decade to paying around 20p/th.

     Many commentators have assumed that the vast amounts of new import 
capacity being built for the UK should depress prices. For winter 2006 the UK-
Belgium Interconnector pipeline will be extended from 16.5-bil cu m/year to 
23.5 Bcm/year and a new 14 Bcm/year Dutch to UK pipeline comes onstream. By 
winter 2007 two new LNG terminals should start in Wales with a combined 
capacity of 16.5 Bcm/year and the 20 Bcm/year Langeled pipeline from Norway 
should be fully operational, in both northern and southern legs. Together this
new capacity over the next two winters adds up to 57.5 Bcm/year, or over half 
the 100 Bcm/year consumption of the UK gas market. Yet forward prices for
winter 07 are higher than the current winter is now trading from day-to-day.
     Major users say it is not enough to assume that the new capacity will 
bring prices down. They say steps should be taken to ensure the new capacity 
is effective. The EIUG's proposals, such as allowing greater third party 
access to infrastructure, would help to make that the case, the users say.
     Platts asked the DTI if it was concerned that new infrastructure did not 
seem to be leading to lower forward prices. The DTI's reply suggests that one 
problem could be the lack of liquidity in the forward market, which perhaps 
means the forward market does not accurately reflect market conditions. "DTI 
has indeed been concerned about the state of the forward market and its 
liquidity," a spokesman said. That was why government commissioned consultants
Global Insight to study the forward market last year. The consultants argued 
for a wider European forward market to be established, more comparable to the 
size of the US forward gas market.

     "That said, increasing the amount of import and storage infrastructure 
and pressing for greater liberalization in the European market can only have a
beneficial effect on the operation of the forward market in the UK," the 
DTI spokesman said. The government was working on these issues. "We are by no 
means complacent and, having made a commitment to the heavy users of gas 
last year to leave no stone unturned, we'll continue to push forward on 
all of these fronts," he said.

     DTI is also introducing new laws to facilitate further infrastructure 
development. It announced plans Thursday to legislate for new technologies 
including projects to unload LNG from tankers offshore direct into offshore 
salt cavern storage facilities. The US National Energy Technology 
Laboratory has been studying this technology, the Bishop process, under which
low cost seawater is used to warm up LNG.

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