UK regulator finds steeper oil, lower supply pushed up gas prices

Singapore (Platts)--5Oct2004

British gas and power industries regulator Ofgem Tuesday said record oil
prices and declining UK gas supplies were the main causes for the recent highs
in wholesale gas prices in the country. Releasing the findings of its
comprehensive analysis into the causes of the recent high gas prices in
Britain, Ofgem said high oil prices were feeding through to British prices,
predominantly via the pipeline link to the rest of Europe. Most gas contracts
in Europe were linked to oil prices, the same as in Britain before competition
was established, the regulator noted. The second factor was a faster drop in
winter gas supplies than expected by the market. "The fall does not undermine
security of supply, even in an extreme winter, but it does require more
expensive alternatives such as gas from other European markets to replace UK
supplies," it said. The regulator called on the European Commission to "put
more resources into making competition work". Meanwhile, it said it continues
to examine why some UK gas supplies did not reach the market.

Said Ofgem Chief Executive Alistair Buchanan: "Record oil prices are costing
British customers around GBP1.4-bil ($2.49-bil) this winter. Experience from
the UK gas market shows that there is little doubt the stronger competition in
Europe would have diluted any oil price effect and its significant impact on
GB customers' bills." Ofgem launched its review of the gas market following
concerns by customers about rising wholesale gas prices in October 2003. It
extended the probe in May to look at high gas prices this summer and for this
winter. The EC had been successful recently in establishing a new regulatory
framework for competitive European energy markets, Buchanan noted. "Ofgem is
now calling on, and will be working with, other national regulators and the
Commission to use their powers to make this a reality." While declining gas
supplies explained a large portion of the recent price rises, it would not be
a permanent influence on British gas prices as significant new sources of
supply streaming now ensure the UK has access to cheaper gas, he added.

Ofgem said its probe also uncovered a number of specific issues relating to
the supply of gas from other European markets and from the North Sea, which
may have prevented more gas flowing to the British market. Higher supplies
from either source would have lowered prices, it concluded. On Europe, the
regulator has presented its findings to the EC and will work closely with its
Competition Directorate and other national regulators to pursue any potential
breaches of competition law, Buchanan said. "In UK, we are concerned that, at
times of high prices, around five per cent of UK gas supplies were physically
available but did not reach the market under existing contractual agreements.
We will report on this issue shortly." Ofgem said it has also been in regular
contact with the Financial Services Authority over the recent unprecedented
levels of volatility and a decline in liquidity. Gas prices for Oct/Nov 2003
averaged 25.2 pence/therm, 42% higher on the year. For Aug/Sep 204 they have
averaged 25.9 p/therm, while forward winter prices are 42.2 p/therm.

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