Economic Report 2000 Index

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Industry Activity in 2000 Gas Markets Unlike oil, the majority (some 85%) of UKCS gas produced for the UK market is sold under long and medium term contracts indexed to, but lagging inflation and energy prices. The remainder is sold directly into the wholesale spot market. The European gas Interconnector pipeline between Bacton and Zeebrugge was opened in 1998 and allows gas to flow to or from the European market. The facility has an export capacity of 2 billion cubic feet per day (bcfpd), or about 15% of the UK's peak demand, but a smaller volume of gas (0.8 bcfpd) can flow into the UK. To date, export gas has predominated although later in this decade, if UK gas supplies begin to dwindle, gas imports through the Interconnector may be expected to rise. In either case, UK gas prices seem increasingly likely to move up or down as European gas and other energy prices fluctuate. Europe offers a market opportunity for UKCS gas but the additional costs of transportation, distribution and market access, in a less liberalised regime than the UK, can inhibit commercial sales. Historically, in the UK, gas was regarded as a premium fuel and sold into the domestic, commercial and certain industrial markets. During the 1990s, market liberalisation and the desire to reduce the polluting emissions of coal-fired power stations have led to rapid growth of gas-fired power generation and gas demand has doubled over the last five years to over 10 bcfpd. Since the mid-1980s the real price of gas supplied by UKCS producers at UK delivery points declined by 40%. By October 2000, the real price had recovered to 75% of its 1990 value. However, the average contract prices in 2000 are estimated to be 19p/therm, still some 60% of oil's value in equivalent terms, in spite of the superior environmental quality of gas. Figure 9 shows the movement of two categories of gas prices. The top line is the gas price for large industrial users published in Energy Trends, shown in October 1999 prices. In 1995 UK gas began to be traded on the spot market. Spot gas prices, represented by the lower line, fluctuate widely, both seasonally and within day, but the average price has remained relatively weak throughout the period. Prices paid by manufacturing industry and other end-users are higher than the prices received by producers, reflecting the shippers' transportation and distribution costs. Since November 1997 the Stricter Consents Policy for gas-fired power stations has restricted the growth of demand for gas and slowed the pace of development of gas fields which had a knock-on effect on investment, jobs and research and development. However, in November 2000, the Secretary of State for Trade and Industry rescinded the policy. Although the industry will require further clarification on how the Government will consider future applications for gas-fired power stations and the guidance on combined heat and power (CHP), the industry has welcomed the removal of this obstacle to future UKCS gas field exploration and production. Gas production in 2000 is expected to set a new record in excess of the 10.2 bcfpd produced in 1999. Gas now represents almost 40% of UKCS annual hydrocarbon production and 33% of UK energy production. The UK produces 4.3% of world gas production and is the fourth largest gas producer. In 1999 the UK was a net exporter of gas with production exceeding consumption by 9%. Figure 8 - Monthly average oil and gas prices Figure 9 - The development of the competive gas market