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The Independent: N Sea producers forced to give gas away

By: Michael Harrison, The Independent – United Kingdom
Published: Oct 04, 2006

Britain’s big energy suppliers came under renewed pressure to cut bills yesterday after wholesale gas prices fell below zero, forcing North Sea producers to pay customers to take supplies off their hands.

In a highly unusual development, spot prices fell to minus 5p a therm due to a combination of weak demand and excess supply in the system, catching out a number of big producers, including BG and Shell.

This is the first time in nine years that wholesale prices have fallen below zero. But domestic gas users failed to benefit because all the free gas was snapped up by power stations and large industrial consumers. This caused prices to rebound later in the day.

Meanwhile, oil prices plunged by more than $2 a barrel to their lowest level in eight months. Brent crude fell to $58.37 – down by a quarter from its record high in mid-July. The renewed fall was caused by high levels of US oil stocks and prompted the Opec president Edmund Daukoru to call on other members of the cartel to follow the lead of Nigeria and Venezuela and restrict supplies.

The plunge in UK gas prices was caused partly by the Norwegians pumping huge amounts of gas into the UK to test the newly-opened Langeled pipeline from the Orman Lange field in the North Sea. This coincided with unusually low demand because of the warm weather.

When gas producers are pumping more gas into the system than there is demand for, they can either pay a charge to National Grid, which is responsible for balancing the system, or pay traders to take the gas off their hands. Most producers with “long positions” are thought to have done the latter because it was cheaper than paying the balancing charge.

A Centrica spokesman said that household gas consumers were unable to benefit from the price collapse because virtually all supplies for the domestic market had been bought months in advance at much higher prices. The price of wholesale gas for delivery in January was still being quoted at 74 pence a therm yesterday. However, Centrica, in common with a number of other operators of gas-fired power stations, did take advantage of the price fall to buy on the spot market. Large industrial customers on flexible contracts will also have benefited.

A National Grid spokesman said: “It’s the first time the industry has seen negative prices in the modern day gas market. It’s just market forces at work.”

John Hemming, the Liberal Democrat MP for Birmingham Yardley who has fought a long campaign over alleged manipulation of the gas market, said: “Consumers should get a cut in their gas bills from the temporary negative prices as the shippers use their higher prices to justify putting prices up. I am not holding my breath on this though.”

Wholesale gas prices have fallen by about a quarter since June because of expectations that supply will be plentiful this winter. Four newprojects, including the Langeled pipeline, are due to come on stream. Between them they will be capable of supplying more than 150 million cubic metres of gas a day – a third of the country’s record daily demand.

In addition, British Gas’s Rough storage facility in the North Sea, which has been out of action since February because of afire, is virtually full once again. Rough accounts for 80 per cent of Britain’s gas storage capacity and is able to supply about 10 per cent of demand for 100 days.

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