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Article for The FT.
Published 8th September 2005
By David Howell
Why Gas Prices are Soaring When there is Plenty of Gas
(Lord Howell is a former Energy Secretary. He resigned in 1981, and was then
re-appointed as Transport Secretar , after failing to get Cabinet backing for a
major new gas-gathering pipeline in the North Sea in September 1981.)
In the bad old days back in 1981, when most of the fuel industries were still
nationalised, the craggy chairman of the state gas empire (British Gas
Corporation) , Sir Denis Rooke, wanted to build a giant new gas gathering
pipeline in the North Sea. It would be big enough to collect huge volumes of gas
from both existing and future fields, in both the British and Norwegian sectors,
and land it at Peterhead.
This would ensure, for decades ahead, that on the coldest possible day of the
coldest conceivable winter in Britain, his 14 million household customers would
get their gas at a decent pressure and his industrial customers would never have
their supplies interrupted.
The Treasury couldn’t see the point and torpedoed the idea. It all seemed far
too far into the misty future. Anyway the Treasury badly wanted to get its hands
on Sir Denis’s large ‘profits’ or surpluses to help the PSBR(Public Sector
Borrowing Requirement), not see them all spent on some mega-project with no
immediate return.
Now, twenty four years later, we are about to pay the price. There is gas a
plenty in the North Sea , and much more still in prospect when the Norwegians
open up the Barent Sea with the Russians in what they call the High North, where
enormous deposits of both oil and gas have been identified on a Middle-Eastern
scale.
What is missing is the right pipeline network to bring the gas ashore in the UK.
The Norwegians are understandably keen to sell more gas into a country where the
market is allowed to work, where they can see a clear reference price and the
longer term prospects look excellent. They are building a big new gas pipeline
as fast as they can to gather gas from their enormous Ormen Lange field and pipe
it down, through other fields and across the median line to land at Easington,
on the Northumberland coast. The project is on time and gas will be flowing in
early 2007. Britain, say the North Sea gas producers, because of its open market
system, is the place to invest in new supply lines, terminals and facilities for
handling both natural, flowing gas, and eventually the frozen variety, LNG,
which some see as a major new source of the future and which will come by
special ship to terminals now being built from places like gas-rich Qatar and
Algeria.
But this new pipeline completion is two winters away and in the meantime the
outlook is chilling. Industrialists are talking about soaring gas price
contracts this winter while households are braced for whopping bill increases –
rumoured to be as much as 15 percent. Wholesale gas prices have almost doubled
in the last year.
To add salt to the wound we appear to be currently paying noticeably more for
our gas than the Germans and the French – according to the Energy Intensive
Users Group 50 percent more than the Germans and 30 percent more than the
French?
But that ought not to last. The German and French wholesale costs are lower now
because the two countries procure their gas through state-owned or
state–sponsored power monopoly buyers, via contracts struck at prices mostly set
before the big oil prices rises in the last year which led straight on to higher
market gas prices as people turned away from oil to gas. As these contracts
terminate the situation could swiftly be reversed, since it is the British open
market which will have attracted most of the new gas supplies and the
Continental contractors, with their regulated environments, who will have proved
to be the least attractive places into which to sell gas.
But first the pipelines must be in place.
The prospect of interruption is much more dangerous now than it was in Sir Denis
Rooke’s time. This is because we are now burning gas to produce around
thirty-five percent of our daily electricity supply. Sir Denis always held that
North Sea gas was far too much of a ‘premium’ fuel to be burnt up in gas-fired
turbines in generating stations. His 14 million homes came first.
The irony is that if he had been allowed to build his pipeline all those years
ago it would have been a far swifter job, because British Gas was then the sole
UK operator and North Sea player (for gas). Now there are dozens of players and
interests to be reconciled. It would also have been very much cheaper than any
similar project today.
As it is, despite the UK gas industry being privatised fifteen years ago, it has
taken all this time to plan new pipelines and even so the largest new one is
appearing a couple of potentially very uncomfortable winters late.
Free markets only work well and reliably if the framework is set right, and in
the case of energy supplies that involves policies and decisions which are not
only politically complex but also very long term. The European gas market is
doubly complex because the larger Continental part of it is a protected system,
not an open trading system at all. It is the part which EU competition policy
has not reached. This leaves the British in effect trying to operate a free gas
market within a larger pattern of regulation – a sure recipe for frustration.
The Tories were very good at the free market bit but not so good at frameworks,
as the botched rail privatisation illustrates graphically. Labour was supposed
to be good at the frameworks and forward planning but on the energy front they
seem to have lost the plot.
The coming huge gas price surge, and possible supply uncertainty, could and
should have been avoided. In the same way the paralysis over new nuclear
electric power should have been overcome by now, the hopelessness of relying on
giant wind pylons to fill the electricity gap should have been recognised and
progress with clean coal technology vastly speeded up.
None of these things have happened, even though it is obvious that gas and
nuclear (and maybe clean coal) are going to be the future staples for
electricity production in the UK.
So through lack of energy policy planning we can expect many more bumpy rides on
the energy supply and price fronts. And the next bump is going to arrive with
our gas bills this winter.
Ends
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