Energy Risk Management – 3 October 2006 Increasing interactions with global energy markets - the impact on the GB gas market Jo Witters Wholesale Markets,

Energy Risk Management – 3 October 2006

Increasing interactions with global energy markets- the impact on the GB gas market

Jo WittersWholesale Markets, Ofgem


OverviewGB gas market – meeting the ‘supply gap’

Moving from ‘energy island’ to ‘net importer’

New investment coming on stream…

Market response - changing supply picture

Importance of the demand side

Outlook for Winter 2006/07…

Will new capacity = more gas?

Split winter scenario likely

Information is key


GB as an ‘energy island’

Up to 1998

Largely self sufficient

Small volume imported from

Norway

1998 - 2003

Self sufficient

GB = net exporter via IUK

0

20

40

60

80

100

120

140

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

bcm

UK natural gas Demand


Market in transition

UCKS is a mature production area

Production rates are in decline

Imports necessary to meet forecast

demand 0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

bcm

UK natural gas Demand

Net importer – winter and summer?


Market response

Investment facilitated by Liquid traded market

Stable, light touch, regulatory environment TPA ‘exemption’ process - open for investors to apply

Over £10bn of private sector money is being invested to meet Britain’s energy needs

Market response to supply gap Investment in new infrastructure

Pipelines / Storage / LNG import facilities


Grain LNG IUK upgrade I

Teesside GasPort LNG BBL & Langeled pipelines

IUK upgrade II

Dragon & South Hook LNG Langeled II (Ormen Lange)

Grain II & South Hook II

New investment …

Planning process currently acting as barrier Canvey Island – local authorities rejected application

2005/06

2006/07

2007/08

2008/09


Diverse supply sources …

Sources of supply – 1990/91 Sources of supply – 2007/08


Part of a global marketCompeting with other markets – e.g. Asia / US

GB market impacted by events elsewhere Cargoes can be diverted to higher priced markets

Hurricanes Katrina/Rita


LNG: GB experience to date

Effective UIOLI arrangements are key

Winter 2005/06 Occasions where flows did not respond to price

Missed berths in Late Dec and Early Jan


Effective UIOLI is key

Effective UIOLI arrangements = LNG supplies optimised

Significant potential for spot cargoes to GB market

Allocation mechanism Open, transparent, non-discriminatory

Mechanism to ensure capacity is not ‘hoarded’ Facilitates secondary trading

Transparency of information is important


UIOLI at GrainWinter 2005/06

Third party concerns re effectiveness of Grain UIOLI

- Access to berthing slots

- Information transparency

Ofgem will continue to monitor effectiveness of arrangements

May need to evolve over time in response to market conditions

Formal review of exemption an option if problems persist

Effective UIOLI – key exemption requirement Grain shippers worked to address concerns Enhanced arrangements now in place


Outlook for Winter 2006/07:the markets view

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

p/th

16-May-06

11-Jul-06

20-Sep-06

Wholesale prices falling……but still suggest gas will flow to GB

Forward Gas Prices

0

8

16

24

32

40

48

56

64

72

80

88

Pri

ce (

p/t

h)

GB US Belgium Netherlands


Split winter seems likely Langeled on stream…

But limited (if any) increase in flows from Norway

IUK enhancement in place – 2 months early

Rough at full capacity

BBL on track – schedule remains tight

GasPort on track (1st flows early Jan)

Like last winter storage cycling is likely to be important

October

December

BBL enhancement due…

But what will the storage position be?March

Gas and electricity interactions also likely to be important


Winter 2006/07: supply picture

More capacity than last winter

Potential for demand

side response

Experience of last

winter…will the gas flow?


Commercial options for customers – managing price risk

Contract terms reflect opportunity cost to customer

Customers can contract for different types of interruption

Commercial

Interruption

FuelSwitching

GBA Based Contracts

Turn Down

A range of commercial options developed by industry


Demand side response last winter

Power Station78%

Industrial22%

Industrial customers reduced consumption by

up to 16.6mcm/day

Most customers switched fuels Provision of flexibility to gas system – effective form of gas storage

0

10

20

30

40

50

60

70

01

-No

v-05

15

-No

v-05

29

-No

v-05

13

-Dec-0

5

27

-Dec-0

5

10

-Jan-0

6

24

-Jan-0

6

07

-Feb-0

6

21

-Feb-0

6

07

-Mar-0

6

21

-Mar-0

6

mcm

0

20

40

60

80

100

120

140

160

180

200

p/

th

Actual industrial comsumption Modelled industrial consumption SAP


Factors affecting gas supplies

Impact on flows

Price

VolumeAvailability of gas /ships

Information transparency

Access to capacity

Gas Quality

Operational factors

Market liberalisation

Political instability

Will new capacity equal new gas?


Why the gas should flow: Positive developments in Europe

More storage information now being released Gas quality – working with Fluxys to establish

materiality

New supplies from Egypt (to France & Spain) New train in Trinidad & Tobago

New terminal at Fos Cavaou (France) New terminal + increased capacity at 2 existing

terminals in Spain

Upgrade of East-West transportation in Germany Working to remove constraintsNew Investment

New LNG

Increased

transparency

EU Commission continues to take steps forward in sectoral enquiry


European storage: information available for winter

Quantities of gas in store

Examples of information available from GdF and Total

Injection volumes

Withdrawals


Positive developments in GB: New information this winter

System Entry Name 06:00 06:02 06:04 06:06 06:08 06:10Avonmouth - System Entry 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000Bacton - Philips 9.98755 10.01123 10.11491 10.24528 10.42872 10.61217Bacton - Shell 30.47342 30.60110 31.87790 32.00558 32.16002 32.31446Bacton Interconnector 36.51360 36.59040 36.66720 36.79488 36.94932 37.05372Bacton Seal Subterminal 21.60274 21.65794 21.71314 21.76834 21.82354 21.90850Barrow - BGE&P 29.85459 31.05459 31.05459 31.05459 31.05459 32.03060Dynevor - System Entry 0.00000 0.00000 0.00000 0.00000 0.00000 0.00456Easington - BP Dimlington 10.25160 10.27560 10.29960 10.39560 10.41960 10.44360Easington - Other 9.85470 10.00015 10.52680 10.20289 10.00578 9.99753Glenmavis - System Entry 0.10563 0.10563 0.10563 0.11043 0.11043 0.12243Hornsea - System Entry 11.85620 11.95462 11.82880 11.86542 11.48439 11.94654Isle of Grain Sub Terminal 12.50343 12.50703 12.50943 12.51183 12.51195 12.51207Partington - System Entry 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000Rough - System Entry 35.40821 35.40821 35.40905 35.40989 35.41073 35.39873ST Fergus - Mobil 38.65370 38.89370 39.31901 39.35438 39.81527 40.01018ST Fergus - Shell 24.92600 25.70313 26.55176 27.32663 28.13838 28.58776ST Fergus - Total Oil Marine 61.09500 61.44000 61.62720 62.43000 63.08348 63.66097Teesside - Amoco 18.24000 18.48000 18.96000 19.20000 19.56000 19.77250Teesside - Enron 11.25863 11.47463 11.59943 10.87943 10.84343 10.84583Theddlethorpe - Conoco 27.99000 28.20600 28.33080 28.25880 28.18360 28.22040

Instantaneous Flows (mcm/day)

Latest available Instantaneous Flows into the NTS

0

1020

3040

5060

70

mc

m/d

ay

06:10

New gas flow data – released to market

today Users to develop

understanding NG workshops held in

September


Positive developments in GB: new incentives on NG

Ofgem developed new incentives on NG Working with customers and shippers

Customer concerns re: quality of market information

Website performance incentive

Availability/timely delivery of key gas data

Gas demand forecasting incentive

System gas demand Day ahead forecast

Incentives take effect today


Summary

Declining GB production means increasing reliance on imported gas

Market has responded…significant levels of investment

But…new capacity may not equal new gas

Effective and transparent arrangements are key

Outlook for Winter 2006/07…

Market responding to reduced infrastructure risk

‘Split winter’ scenario still likely

Commercial options for customers – manage price risks


Promoting choice and value for all gas and electricity customers

Documents

Energy Risk Management – 3 October 2006 Increasing interactions with global energy markets - the impact on the GB gas market Jo Witters Wholesale Markets,