Economic Report 1999 Index

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Gas Price Trends/Market UK gas prices have remained depressed throughout 1998/99. In real terms the average price of gas has fallen by some 50% since 1985m, (see Figure 8). Although the majority of gas sales are under long-term contracts, producers are increasingly using the spot market for gas sales. The UK spot price of gas for producers has averaged 10.7p/therm over the last twelve months, and 11.1p/therm over the last 24 months and continues to be amongst the lowest in Europe. The fundamental supply over-hang has been amplified by events both in the UK and European market. Figure 8 - Gas Prices Chart Source:  DTI On the supply side, several major new fields have added significantly to the deliverable capacity of the UKCS. These fields include Britannia which started production in 1998, and Elgin, Franklin, and Shearwater which are under development. In addition there have been a number of smaller developments both in the Southern Gas Basin and the Central and Northern North Sea. Although domestic and industrial gas demand has continued to grow on trend at approximately 1.5% per year, the Government's moratorium on the construction of new gas-fired power generation has reduced the overall expected growth in gas demand. In addition, it has been estimated that the proposed Climate Change Levy could substantially reduce gas demand in the long run. These issues have added to market uncertainty and increased the downward pressure on UK gas prices. The opening of the Interconnector between the UK and Belgium in October 1998 did not provide the floor to UK gas prices that some commentators had expected. With low gas prices on the European continent as a result of indexation to oil prices, and the strength of sterling against European currencies, flows through the Interconnector were initially small, and on some occasions have been imports to the UK rather than the anticipated exports to the continent. During 1999 the flow of gas has been from the UK to Europe, as the rise in oil prices has worked through to continental gas prices. However, there is no evidence to date of low UK prices being relieved by exports to Europe. In 1998, gas revenue accounted for 40% of all hydrocarbon revenue compared to only 21% in 1990. Indeed, much of the recent increase in UKCS production levels has been driven by rising gas production. The influence of gas price expectations on industry behaviour is now of equal importance to the oil price expectation. The recent recovery in oil prices has not been shared by UKCS gas prices which remain depressed. Figure 9 - Share of Hydrocarbon Revenue