Jantra

Jul 18, 08 - 1:54 PM

FAO Jeremy

Jeremy

why are we seeing runaway gas prices of yoy increases of about 15%? I thought most energy companies either hedged or forward bought rather than settled at spot? Is this a case of simply getting the cash in now to pay for future gas supplies or have most companies been caught short in someway or another thus having to close their positions? i have no real knowledge of the energy industry but it always seems that consumer price increases coorelate with market rates in tandem rather than some time lag as you'd expect if the bought forward.

Jeremy

Jul 18th, 2008 - 9:57 PM

Re: FAO Jeremy

The problem of natural gas supplies in the UK is a result of poor forcasting and poor planning. The UK was self sufficient in gas until around 2004. By 2010 we will probably be importing 50% of our supplies.

While plans had been made for a decline in production the fields are actually crashing and output falling far faster than was predicted.

A gas pipeline was opened late last year with Norway and the LNG plants around Milford Haven are under construction. But as the production is falling faster than anticipated we are importing gas but not all the facilities are available. In particular we do not have any large storage fields under salt traps to take excess summer production, when costs are lower.

Because production has fallen faster than expected we did not have long term contracts in place to guarantee supplies. We are the last in the queue for production in Europe which is why there is genuine concern that a cold winter could result in supplies being switched off and rationed. That could also have serious reprecussions for electricity production. Lets hope it is mild!

On top of all that, the Dutch have realised that their giant field is nearing peak and they will be limiting production to conserve supplies.

The LNG is going to be imported from Qatar but again the goverment there changed tack, two years ago, I think, to limit production. Obvious knock on affects for trade prices.

All of which means that we have not secured long term contracts at a lower price and will have to buy gas after other European contracts are settled leaving a lot to be bought on Spot, if available. Centrica is trying to buy actual reserves in the Norwegian sector but that is of limited use when contracts are already in place.

While the companies will try to hedge, the rest of the market can see the pickle we are in so I would suggest they will only have limited success in offsetting the risk.

Shortly we will be reliant on Russian gas like most of Europe. I would not wish to bet on how prices go then.

jantra

Jul 19th, 2008 - 9:04 AM

Re: FAO Jeremy

Jeremy

Thanks for that, I'm sure it's a bit more involved but that was nice and succinct. Can I put it even more succinctly...

This administration has truly made a pigs ear and when we inevitably become reliant on the Russians we'll be better off investing in thermal underwear

Kyle

Jul 19th, 2008 - 12:21 PM

Re: FAO Jeremy

Great post Jeremy. Bloody worrying though it has to be said.

Author	Comment
Jantra Jul 18, 08 - 1:54 PM	FAO Jeremy Jeremy why are we seeing runaway gas prices of yoy increases of about 15%? I thought most energy companies either hedged or forward bought rather than settled at spot? Is this a case of simply getting the cash in now to pay for future gas supplies or have most companies been caught short in someway or another thus having to close their positions? i have no real knowledge of the energy industry but it always seems that consumer price increases coorelate with market rates in tandem rather than some time lag as you'd expect if the bought forward.
Jeremy Jul 18th, 2008 - 9:57 PM	Re: FAO Jeremy The problem of natural gas supplies in the UK is a result of poor forcasting and poor planning. The UK was self sufficient in gas until around 2004. By 2010 we will probably be importing 50% of our supplies. While plans had been made for a decline in production the fields are actually crashing and output falling far faster than was predicted. A gas pipeline was opened late last year with Norway and the LNG plants around Milford Haven are under construction. But as the production is falling faster than anticipated we are importing gas but not all the facilities are available. In particular we do not have any large storage fields under salt traps to take excess summer production, when costs are lower. Because production has fallen faster than expected we did not have long term contracts in place to guarantee supplies. We are the last in the queue for production in Europe which is why there is genuine concern that a cold winter could result in supplies being switched off and rationed. That could also have serious reprecussions for electricity production. Lets hope it is mild! On top of all that, the Dutch have realised that their giant field is nearing peak and they will be limiting production to conserve supplies. The LNG is going to be imported from Qatar but again the goverment there changed tack, two years ago, I think, to limit production. Obvious knock on affects for trade prices. All of which means that we have not secured long term contracts at a lower price and will have to buy gas after other European contracts are settled leaving a lot to be bought on Spot, if available. Centrica is trying to buy actual reserves in the Norwegian sector but that is of limited use when contracts are already in place. While the companies will try to hedge, the rest of the market can see the pickle we are in so I would suggest they will only have limited success in offsetting the risk. Shortly we will be reliant on Russian gas like most of Europe. I would not wish to bet on how prices go then.
jantra Jul 19th, 2008 - 9:04 AM	Re: FAO Jeremy Jeremy Thanks for that, I'm sure it's a bit more involved but that was nice and succinct. Can I put it even more succinctly... This administration has truly made a pigs ear and when we inevitably become reliant on the Russians we'll be better off investing in thermal underwear
Kyle Jul 19th, 2008 - 12:21 PM	Re: FAO Jeremy Great post Jeremy. Bloody worrying though it has to be said.