Gas prices. Rough ride

Date: 18/03/06

Record prices raise questions about Britain's gas market

BRITONS shivered through a cold snap at the start of this week when temperatures plunged to unseasonable lows and snow dusted much of the northern half of the country. Businessmen shook harder than most, as the frigid weather again played havoc with Britain's volatile natural gas markets. Prices climbed from 59p per therm ($1.02) on March 10th to touch 255p on March 14th, before falling back a bit. That beat the previous record of 165p, which looked bad enough last November.

Making moods worse this time was the first-ever "balancing alert" issued by National Grid, the company that runs the gas network. On March 13th the firm warned that tight supplies meant big industrial users might face cut-offs. The Confederation of British Industry, whose warning of a winter supply crunch was dismissed by the government in November, said that firms might have to cut production.

Why are British gas prices so high? The effects of the cold snap were compounded by a fire last month that knocked out Rough, Britain's only big gas storage facility. A depleted North Sea field, Rough provides around three-quarters of Britain's limited gas storage which, at just 13 days' supply, is already far less than the several weeks' supply that the rest of Europe stores up.

But there are more fundamental reasons. The decline of the North Sea (see previous story) means that domestic production no longer always meets demand. Because that has long been forecast, new import facilities are being built, including a pipeline to Norway and two new Liquid Natural Gas (LNG) terminals. But the transition to imported supplies is happening faster than most expected. Much of the new infrastructure will not be ready for another year or two. Once it is, says the government, the supply crunch will abate.

Will it? The import facilities that do exist--including a newly-upgraded pipeline to Belgium and a new LNG terminal on the south-east coast--have not lived up to expectations. The pipeline often runs half-empty, despite the high prices, and few ships dock at the terminal.

Ministers blame European markets, which, despite a 2003 EU directive requiring them to open up, remain opaque and monopolistic. State-owned companies dominate on the continent. British ministers (as well as the European Commission) argue that the lack of proper market discipline means Britain's plaintive price signals often go unheeded.

That's probably true, but blaming recalcitrant Europeans does little to help British businesses, who now pay much more for gas than their continental counterparts and have to deal with yoyoing prices to boot. Ministers are conducting an energy review looking at, among other things, security of energy supplies. The government has insisted that it remains committed to liberalised markets. That resolve is being sorely tested.

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