Gas don’t mean a thing if it ain’t got that swing
The Rt Hon Miatta Fahnbulleh MP
In a recent letter to The Times, Chris O’Shea, the CEO of the energy giant Centrica, rightly pointed out this and previous British governments’ apparent indifference to the country’s shortage of gas storage. The Labour Government has so far shown great reluctance to support the reopening of the Rough field in the North Sea, the UK’s largest offshore gas storage facility.
Readers should understand that Britain never invested in the kind of large-scale gas storage facilities enjoyed by our neighbours in France, Germany and Italy because we didn’t need it. As Mr O’Shea says, storage is there to provide flexible supplies to cover seasonal demand and spikes. Britain had a number of close inshore gas fields which had been developed, usually at a premium cost, to deliver such flexible gas when required. Our European neighbours did not have this advantage, and depended on supplies delivered over long distances from Algeria, Norway or the USSR. These needed to be delivered at a steady unvarying rate, and thus could not be flexible; and therefore a portion of whatever arrived in the summer had to be placed into large underground storage facilities, to be withdrawn gradually as needed during winter.
This remains the case today. There is more that could be done to revive flexible gas supply. The new Energy Secretary Miatta Fahnbulleh and her predecessor Ed Miliband, perhaps ill-advised by their officials and party activists, have spread misinformation about global gas market prices and their effect on this country’s inflated energy costs. I suspect the political motivation behind their arguments is to discourage enthusiasm for new North Sea hydrocarbons exploration and to keep the Greens and their own party members quiet.
Yet Britain is short of flexible gas capacity. That is, our own offshore gas which, under the right circumstances, can be produced and delivered to shore in response to demand surges, thus restraining market prices. We used to have plenty of it, the result of careful planning and negotiation between the former British Gas monopsony and the oil companies, which were not in those days regarded as the enemies of the people.
As a result, gas prices were kept stable for many years. Flexible gas production was largely exhausted by the early 2000s. There was evidently no political appetite to encourage oil companies to look for more; indeed, as I recall there was little evidence that anyone in government or Ofgem, and certainly not among supposedly pro-market Tories, understood what was going on. During the early years of the competitive wholesale energy market, flexible gas had been vital in supplying the new gas-fired power plants that drove out polluting coal and pushed British industrial energy costs to the lowest levels in Europe.
Throughout the 1990s, the open and competitive British gas market benefited from low spot gas prices, mainly due to its supply flexibility. As that source of supply evaporated, traders naturally turned to the emerging international market for spot liquefied natural gas cargoes from Qatar or the USA. Ever since, they have provided us with large but inflexible volumes of gas, rather than the more precise amounts produced from North Sea flexible (or “swing”) fields. British importers compete for LNG with other international buyers, especially the industrial giants of East Asia. As Ms Fahnbulleh has been stressing, these prices have been affected by the ill-considered American action in the Persian Gulf and the shrewd Iranian reaction, which have deprived the world markets of much available LNG, forcing Britain and Europe to outbid prices for delivery to China, Korea, or Japan. Hence our ever more unaffordable gas prices.
There’s another point worth making about the prices flexible gas supplies command on the market. Much of it used to be (and in future would be) uncontracted and is therefore available at short notice, which tends to reduce the overall market level. This is unlike the phenomenon Ms Farnbulleh refers to, where LNG is imported at global prices in a constrained market, or gas is imported by pipeline from continental Europe where gas prices are still partially set by reference to more expensive oil.
It is by no means certain that any new natural gas deposits discovered in the North Sea would be geologically suitable for flexible production, or that they would have an economic rationale. Unfortunately the Jackdaw gas-condensate field is technically unsuited to swing production. Even if it were, it is too distant from the shore terminal at St Fergus, north of Aberdeen. But simply to deny the possibility of developing Jackdaw is an abrogation of government responsibility for British industry and the wider economy.
Patrick Heren is the originator of the Heren Index of wholesale gas prices. He was editor and publisher of the Heren Report, 1993-2008.
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