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UK INDUSTRY SHOCKED BY LATEST GAS PRICE RISESIndustrialists in the UK are seeing their worst fears materialise as gas prices in the UK have rocketed again this week, sending shockwaves across the country's manufacturing industries. In the last 10 days, the cost of spot and forward wholesale gas in the UK has risen to more than double what manufacturers are paying on the Continent. Comments Tom Crotty, CEO of INEOS Chlor: "With prices this high UK industry, and in particular those companies that use large amounts of energy in their processes, is put at a huge competitive disadvantage making it impossible to make products economically. Companies are now faced with a clear-cut decision - whether to produce or not. "With prices this high, it is clear that for some companies the economics of production will mean that they have no choice but to cut back or cease production altogether, which is not good news for the industry, those people who work in it, and for the wider economy that relies so heavily upon a competitive manufacturing base." Over the last 18 months or so, INEOS Chlor has been one of many voices warning the Government of the potential threat to UK gas (and electricity supplies) for the current winter. The latest of these warnings was given in evidence submitted to the recent Trade and Industry Select Committee into Fuel Prices - the second investigation in under a year. Comments Tom: "We have repeatedly warned of the very serious threat to the UK gas market arising from distortions created by the interaction between the liberalised market in the UK and the non-liberalised markets on the Continent. This week the European Commission issued a statement that serves to amplify our concerns. The Commission has raised the threat of significant fines to the large energy companies on the Continent due to the incumbents' control of imports to prevent competition, and their failure to adequately separate their supply and generation businesses." Adds Tom: "Along with other energy intensive users we have put forward a number of recommendations to the Government that could have helped to address this very serious threat - actions that could have been taken ahead of the coming winter. We are very disappointed that very little appears to have been done." In the last few days UK temperatures have fallen, but only to levels that are around the norm for this time of year. Current gas demand has not been very high, and indeed has only reached around 75% of the expected peak demand even for a normal winter. Despite this, prices have climbed to around 80ppt, which means that the UK (the EU's largest gas producer) has the highest gas price in the world. Comments Tom: "The trend in prices is deeply worrying. Our concern is that prices will escalate at even greater rates should the predicted colder than average winter materialise this year. There has to be a point at which we reach a crisis and the Government will have no choice but to act, if not only to save thousands of jobs that are dependant upon a competitive UK manufacturing base." Manufacturers have been warning for some time that the building of new infrastructure, some of which has come on line this year, would not guarantee gas imports would actually arrive to the UK. This has fuelled concerns that prices in the UK will not fall to a competitive level for some considerable time. In particular, industry has levied criticism at assumptions made by National Grid, arguing that predictions for the expected levels of imports through the Zeebrugge to Bacton Interconnector and Liquified Natural Gas Imports through the new Isle of Grain Import Terminal were far too optimistic. Adds Tom: "We're concerned that imports will simply not arrive in the event of cold weather in the UK coinciding with cold weather in the rest of Europe. The flow of "beach gas" from production fields is much lower than expected. Production rates have struggled to increase above 250 MCM/day while National Grid's Winter Outlook Report assumes peak flows of around 330 MCM and a sustainable level of 303 MCM/day "Flows through the Interconnector are failing to respond adequately. Earlier this month Interconnector UK announced that they were doubling import capacity. However, so far this new capacity remains unused and imports have not responded to price signals, which should theoretically limit prices in the UK to more or less those levels seen on the Continent. There are market rumours of capacity hoarding in Europe, which denies the UK access to gas that would otherwise flow to the UK." Imports of LNG have failed to arrive even though prices are at levels at which we would expect deliveries at full capacity. The Isle of Grain terminal has not supplied any significant volume of gas to the system despite expectations of high utilisation this winter. We note that Spain has chartered two LNG ships to ensure Security of Supply that removes LNG capacity from the market. "The lack of gas supply to meet a modest demand goes well beyond industry's worst expectations. The UK is now facing the prospect of an energy crisis this winter if the Met Office's forecast of a colder than average winter is realised. Unless action is taken to ensure gas supplies are available there is a massive threat to large and small industrial users and to the UK economy." ENDS Editor's Notes In the space of the past ten days, the spot price
of gas in the UK has risen by 46 pence from 36ppt to 82ppt. Also, in the same ten day period the Q1 2006 forward wholesale price for gas in the UK has risen by 14 pence from 66ppt to over 80ppt.
For further information please contact the INEOS Chlor Press Office: Craig Welsh
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