Examination of Witnesses (Questions 452-459)
OFGEM
1 FEBRUARY 2005
Q452 Chairman: Good afternoon. I am sorry,
it seems as if we have to indulge in megaphone diplomacy here,
Mr Buchanan, but really it is just a measure of the degree of
interest. The House authorities move at a somewhat glacial speed
but eventually they get it right, so now we have got a room which
is big enough to hold the number of interested parties. We are
very pleased that you could come today. Could you start off perhaps
by introducing your colleagues, I think some of whom have given
evidence before, but it is always helpful just to find out who
you are?
Mr Buchanan: I will be delighted
to, Chairman. On my right is Steve Smith, who is Managing Director
in charge of Markets, and on my left is Maxine Frerk, who is Director
in charge of Enforcement, Investigations and also issues relating
to Social Policy.
Q453 Chairman: We realise that in some
respects in the area which we are investigating you have no powers,
insofar as you are limited by statute, and it was always assumed
that the North Sea would be a competitive market involving world
players, very aggressive and that it would not involve necessarily
a kind of economic regulation, although obviously there is health
and safety, and things like that, there. We will come on to that
in a moment, but perhaps we could start with a sense that, people
have been saying to us, they do not really think the market has
been operating properly and that producers have become unwilling
to sell on the forward market because they feel it is risky. We
are not very sure whether they feel it is risky because they are
going to lose money or they feel it is risky because by doing
nothing they could make even more; that is part of the nature
of markets, as you know better than I. People still seem to want
to purchase forward gas and the result has been a big increase
in prices, although almost no variation in the prices quoted by
gas sellers. Do you have any information on the number of producers
selling gas into the market?
Mr Buchanan: In terms of market
shares, there are about seven producers I think who account for
about 76% of production and 14 shippers who account for about
90% of that which is shipped. In terms of markets and what we
look at, we look at effective behaviour of markets, in gas wholesale,
in retail and in electricity as well, and we see healthy signs
of competition in all three of those markets. If we take the gas
wholesale market first of all, a very strong signal of that is
investment, investment not only in new infrastructure but investment
in storage and, through Shell's Goldeneye investment, actually
in fields as well, so that is a good sign. Secondly, we see parties
willing to come into the market. We believe that there will be
three major new entrants, European players, coming into the gas
market in the next few months. We see new products, Total is offering
a new product to its customers, and we see new traders. Last week
another trader, Cargill, joined the market and they are trading
both for themselves and for others in the marketplace. Those features
of a market that you would look at to see whether there is health
in the market appear to be there. I am happy to go on and talk
about the retail market and the electricity market but maybe we
will come back to that.
Q454 Chairman: We will move on to that
in a minute or two maybe. The number of independent gas producers
and, in particular, the number of active independent market producers,
what is your take on that side of it?
Mr Buchanan: I am going to ask
my colleague, Steve Smith, to answer the detail on the independent
market, as I have given you the macro answer already.
Mr Smith: The gas production that
is not accounted for by what we recognise as the oil and gas majors
is round about 30%. Again, warming to Alistair's theme, it has
been quite encouraging that in recent years you have seen a lot
of interest from new independent producers who have either drilled
new wells or actually bought some of the older fields, and you
have seen some of the oil majors selling some of both their oil
and gas fields to those new entrants. As I said, it is about 30%
at the moment and that is probably higher than it has been in
the last five years, because, as I said, a number of small independent
players have come in and bought from the oil majors.
Q455 Chairman: There is always going
to be this number of new players coming in, picking up, you might
say, the ill-considered trifles which are insufficiently attractive
to the big players. There is also the other side of it. How significant
is the role of the gas producer as shipper? How many gas producers
are shippers as well?
Mr Smith: If you took the majors,
obviously BP is a major shipper. It has announced recently that
it is getting out of supply, so its interest sort of ends at the
NBP, and Total, a big shipper and also supplier, ConocoPhillips
the same, BG, Exxon Mobil, so all of them. As I said, if you take
all of them together, you are looking at probably, excluding Centrica,
round about 60% of equity interest offshore, they are also major
shippers onshore as well and some of them go right the way downstream
and actually sell into the I&C market, some of them just sell
their gas to other suppliers who then sell it on to end customers.
Q456 Chairman: Have you any idea how
much of the market is accounted for by people who are both suppliers
and shippers?
Mr Smith: I would not have, off
the top of my head, but I would hazard a guess that probably it
is somewhere around 70 or 80%, as an order of magnitude.[1]
Q457 Chairman: Five or six have 60% and
then they have 70% of the next market also. It is quite a concentration?
Mr Smith: I think we need to distinguish
quite carefully; if you take the overall breakdown of demand,
roughly two-thirds is going to industrial and commercial and power
stations and one-third to domestic. Obviously, the picture is
very different in domestic, where the major energy retailers we
all know well, like the EDFs, the SSEs, the SPs, are the major
suppliers. I am talking here about those producers that are selling
into the I&C market, which represents, as I said, roughly
60% of the overall gas demand.
Q458 Chairman: If you were looking at
this, well, you are looking at it, in some respects, as a spectator,
if you were looking at it as a market analyst and you were saying,
"Well, is vertical integration in itself a good thing?"
and there is a debate about that, do you think that there is adequate
separation between producers and shippers?
Mr Buchanan: I think the key issue
comes down to evidence of either abuse of markets or of an instrument
abusing the market. As you know, on the gas side, we have spent
the last year doing a very detailed review, the report of which
came out in October, analysing whether there were such abuses,
either in behaviour or in structure, and we came to the conclusion
that was not the case. If you look elsewhere within the energy
markets, quite often we are asked a question relating to the retail
markets, there are six major suppliers in the gas and electricity
retail markets, is there evidence of competition? We believe
that there is profound evidence of competition. There is a very
high level of switching, there are new products, new prices, a
range of prices, new entrants into the market, affinity deals
as well; we look at a range of criteria to see whether the market
is behaving. With particular regard to gas in the last year, in
a way we have done yet more than that because we have carried
out a detailed review of it, and, as you are aware, the conclusion
to that in October was that we had found no evidence of market
abuse.
Q459 Chairman: We will go into that in
a minute. In your October report, and colleagues will want to
quiz you on that, you said you did not think there was market
abuse but there were early stages of spiking. The report which
you produced, were you satisfied that you had sufficient knowledge
of or information about the market to come to clear opinions on
it?
Mr Buchanan: As far as information
is concerned, I can break it down into four areas where we look
at information. First of all, with regard to gas, 2004 I think
will be regarded as a breakthrough year for the industry. Because
of the voluntary arrangement put in place by the DTI and the industry,
there is now a much higher level of gas information available
to us. We receive that information in its raw form, and really
that came through in its final phase in the autumn of last year.
We have good information on gas, we have good information on electricity,
from power station to doorstep, and indeed we seek to enhance
that, as we did last year, by seeking further information on mothball
plant and distillate fuels at the CCGTs. However, one additional
area which I think it is worth focusing on is Europe and we outline
clearly our concerns relating to transparency and information
with regard to Europe. It is why one of my colleagues is talking
today to DG Competition, to try to ensure that DG Competition
take forward a review of gas and electricity markets this year
as their primary focus. Another colleague is talking to European
Parliamentarians exactly on this issue, on information concerns;
a large part of our report and our concerns from our report rest
within Europe and we are concerned about improving the quality
of information. The final area which I am sure you will want to
touch on is our review of the Sean field, and Steve will take
the questions in detail on that. I think one of the interesting
features about the Sean field is that we have used what I call
Ofgem's brand, in terms of getting information on a voluntary
basis from three major oil companies and Centrica, British Gas,
and I am very encouraged that they have come forward in the way
that they have to provide that information. We get information
from a range of sources and I am happy with the level of information
we have.
1 Note by witness: the actual figure is approximately
95%. Back
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