Gas Crisis: Proposals for security of supply - Spain charging Penalty Price of 150% of UK price

6.34.48pm GMT Mon 28th Nov 2005

John Hemming MP, Chairman of the Independent Energy Scrutiny Panel, has today put forward proposals to government calling for urgent action to improve UK gas supply.

"I have been told," he said, "that Spain puts pressure on suppliers to supply Spain rather than the UK. It is said that they charge a penalty of 150% of the UK price of gas if people fail to supply Spain. This is quite a clever mechanism as even if gas is £10 per therm in the UK it is still in suppliers' interests to supply Spain rather than the UK when supply is tight."

"The UK needs to make some changes to the way in which market mechanisms are handled to improve supply through the Isle of Grain and through the Interconnector. At the Isle of Grain the UIOLI contracts need to be changed to encourage people to ship gas. The market as a whole should take on the risks of insurance at the Interconnector rather than individual suppliers. This is done in the electricity market and should be done in the gas market as well."

"The fact is that even if it does get warmer at the end of the week we are still in a very difficult situation. Gas is still being taken out of storage at a faster and earlier rate than last year and we remain in danger of breaching the Safety Monitors before the end of winter. If it gets cold we could have difficulties supplying more than 400 mcm/d for more than a week."

ENDS

*UIOLI - Use it or Lose It.

Copy of letter to Malcolm Wicks

Thank you for your responses on various matters relating to gas. I will give you a detailed report at some stage into proposals for handling the gas shortage this winter.

There is, however, considerable urgency in handling matters at the moment.

Clearly every day counts and the normal glacial pace of government and regulatory procedures will be insufficient. Even if we have an average winter we will face problems and it seems that on current levels of supply including storage we would not be able to support a real cold spell. With a bit of luck it will be milder at the end of this week, but one can never be totally certain.

One area to assist would be to look at improving the supply situation. There are two areas in which suggestions have been made which could affect an improvement in supply.

It is reported that Spain is threatening a penalty payment of 150% of the UK price for failure to supply in Spain. It is suggested that changing the UIOLI system for berths at the Isle of Grain to a system whereby suppliers lose the facility for a longer period or even the season if they fail to supply would give suppliers a commercial incentive to make use of the IOG facility. It has been averaging 2 mcm/d which is very low compared to the 13 mcm/d in the Winter Outlook Report from National Grid.

Secondly it is suggested that one of the reasons for a relatively low usage of the Interconnector to import into the UK is that the market risk of operating a firm futures contract is too risky for shippers. The existing contract on NBP97 terms would have to be continued, but the risk of failure of the inter-connector and possibly other European Supply risks could be insured against by the whole market.

Thirdly it strikes me that at the weekend there should have been a facility to use the spare capacity at Rough to transfer gas into Medium term storage. The worst possible situation in which Medium Term Storage breaches the safety monitors whilst LTS and STS are also being depleted could cause massive havoc nationally. It is sad that the opportunity to protect against this was not taken last weekend.