Fuel Prices

Gas prices rise again: Are we being ripped off?

By Nick Louth 

(Published by MSN Money June 2011)

News that Scottish Power is going to increase domestic gas prices by 19% in August has shocked consumers already reeling from high inflation and static wages. Is it right when we are told that the world has a glut of natural gas?

The rise is bound to be followed by double-digit increases by the rest of the industry, and will make for a miserable autumn for thousands of hard-pressed families across the country .

“This huge increase will be a body blow for consumers and we fear other firms will follow Scottish Power’s lead,’ said Audrey Gallacher of government watchdog Consumer Focus. “Companies have been softening customers up for price rises for months but customers will be shocked at the scale of this rise.”

Industry experts agree that this is an unusually large increase.

“This [the Scottish Power rise] really is a significant increase for the middle of summer,” conceded Ed Cox, UK wholesale gas specialist at energy information group ICIS Heren. Prices rises were traditionally announced in the autumn

So are the gas companies ripping us off?

The global glut of gas: where’s ours?
On the face of it, yes. The world now has a glut of natural gas, with transport of liquid natural gas (LNG) by tanker coming from giant new fields in places like Qatar, and huge new gas reserves in shale being uncovered in Australia, the U.S. and even in parts of the UK.

The International Energy Agency, which should know what it is talking about, put out a report all about the natural gas glut just yesterday. It’s title: The Golden Age of Gas. The report says “Global natural gas resources can comfortable meet demand…through to 2035.”

We should already be feeling the benefits.  A third of Britain’s gas now comes from LNG, which is shipped in from the Middle East and stored in huge new storage facilities on the Isle of Grain in the Thames Estuary and at Milford Haven in Wales.

So shouldn’t that extra supply make prices lower?

In theory, yes. But we have to look at the wholesale gas market for a clearer answer.

Scottish Power blamed the rising wholesale price of gas for its decision. Yet   prices of gas for immediate delivery, what are called spot prices, haven’t increased for six months.

“If you look at spot gas prices they are the same as they were at the start of the year,” Cox said. “But it is in the forward contract for delivery in winter 2011/12 that prices have risen,” he added.

Winter is the crucial determinant of prices
In fact it is the winter gas prices, when we use most of our fuel, that really determines not only what our own gas bills are, but also what the nation’s gas bill will be. So although Scottish Power is implementing its price rise this summer, it’s decision is really all about meeting demand in the winter

The January 2012 wholesale contract is trading at 71.7p per therm at the moment, compared with 60p that contract traded at last winter. That increase is 19.5%, and seems to be where Scottish Power got its price increase figure from. 

Indeed, with the odd gap, prices have been rising consistently all the way back to 2005, when they were around 30p a therm or less for spot gas.

The end of the boom as N.Sea gas runs out
Britain’s North Sea oil and gas fields for decades provided cheap natural gas. But now, with most fields maturing, we get 5% less from that source every year. We have had to look further afield, and we see rival buyers who are still paying more.  

“It may seem hard to believe, but our wholesale gas prices are still a few per cent lower than Germany, France, Belgium and the Netherlands. They are 10% or so below that of Italy, which has very little competition in its market,” Cox said.

If that is supposed to make us feel better, it probably won’t. However, changes in the UK gas market should mean that Britain is more and more exposed to the global price of gas.

“The wider impacts of the UK being part of a global gas market are hard for the UK to escape now,” Cox noted.

Competing for LNG shipments
Take a shipment of LNG, about to leave from Qatar in the Gulf. That supertanker’s destination will be determined en-route by the delivery point where it is going to make the best return. That could be Brazil, South Korea, or Britain. With Britain taking more LNG every year, we are firmly competing in a global market.

There are advantages to this. Already, the volatile nature of gas prices in the UK has been smoothed by our supply being increasingly sourced internationally, rather than being determined solely the level of demand in the European winter.

If there really is a global glut of natural gas that should be good news. Thanks to shale gas, the US should soon move from being a huge importer of natural gas to being an exporter. Spot prices in the US are forecast to fall by a  third by December. Shipments from Qatar’s huge fields  continue to increase, while Asian demand is being increasingly met from shale deposits in Australia.

While all this is true, it might be a while before we feel the effect of the glut.

Libyan gas, which comes to Europe via Italy, is currently in short supply because of the civil war. Germany has just decided to close 17 nuclear power stations, and will increasingly turn to gas. Finally, Japan’s nuclear troubles may yet make itself felt in higher demand there for natural gas shipments for electricity generations.

Last but not least, our own government’s increase in North Sea taxes have persuaded a few companies, including Centrica the owner of British Gas, to halt production at some coastal gas fields.

So it seems like squeeze today, glut tomorrow. In the meantime it looks like we may just have to pay up.

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