APPENDIX 15
Supplementary memorandum by INEOS Chlor
Ltd, INEOS Fluor Ltd and INEOS Vinyls Limited
Further to our earlier written evidence and
the oral evidence session held on 31 October, we have a number
of points we would like the Select Committee to consider ahead
of publication of the final report. We are pleased that DTI and
OFGEM recognise the gravitas of the issues we face in the UK and
that these will persist for at least the next few winters.
We would like to make a number of observations
on the written and oral evidence that you have heard. While we
agree with much of what has been written and said by both DTI
and OFGEM we thought it important to ensure that the Committee
has a balanced view of the emphasis on a number of points and
also we would note a few issues where we disagree factually with
this evidence.
1. We note the differing views of price
differentials put forward by OFGEM and DTI. OFGEM quoted wholesale
prices that are available in the forward markets of
80/MWh in the UK and
50/MWh in Germany while DTI quoted industrial prices
for very large consumers in the UK being 10% higher than the EU.
We consider that this difference is due to the backward looking
view inherent in the DTI data (eg in Para 18 of DTI's written
evidence they refer to 2002-03 information). Most industrial consumers
live in the present and plan for the future. In our evidence we
have tried to ensure we have presented a balanced forward looking
view. We have seen this through comparisons of our own sites across
Europe. We have also spoken to numerous companies who report exactly
the same situation.
2. We are concerned at the inference that
businesses have "chosen" to sign up to spot gas contracts.
We have found ourselves in a position where we simply have no
choice other than to purchase gas in the "spot" market
as purchasing in the "forward" market would simply guarantee
that we would suffer a massive competitive disadvantage. Further,
we note comments that companies can "make money" by
selling back gas rather than consume it. It is very important
to recognise that this option only exists if you have been able
to afford to pre-purchase gas. If you have not, you have nothing
to sell.
3. We also note the emphasis (and burden)
that has been placed on industrial consumers to balance the market
in times of stress. We believe that too little attention and thought
has actually been given to the supply side of the market. There
should be a duty placed on suppliers to provide reliable and secure
sources of gas to meet the UK markets needs. Demand response is
a combination of gas power stations reducing load and UK industry
shutting down and should be seen as a last resort. To give some
sense of the size of demand response required, the Winter Outlook
Report forecasts the following:
— 1 in 10 winter 2.2 bcm is required:
1.3 from power and 0.9 from industry.
— 1 in 50 winter 3.7 bcm is required:
1.8 from power and 1.9 from industry.
If the interconnector does not import for 100
days there is an additional 4.2 bcm of response required, which
would have to come mainly from industry. This would require five
times the "demand response" assumed in Winter Outlook
and would have a devastating impact on UK manufacturing. It is
for this reason that we believe secure interconnector supplies
are of paramount importance.
In comparison the entire UK storage capacity
is only 4.1 bcm and of this only 3.2 bcm can be used before a
national emergency is triggered.
4. We have some concerns with respect to
the figures quoted by DTI for electricity generation and indeed
there appears to be some inconsistency. However, the more important
observation would be that with a 21% margin on generation capacity,
if there is a shortage of gas, there will still be a need for
much of the UK's electricity demand to be met by gas.
5. In our written evidence we have presented
our view of the economic impact of high gas prices on the UK economy,
as the Committee explicitly requested in its remit. We are disappointed
that the DTI have failed to undertake such an assessment and have
provided no such evidence in their written submission (as confirmed
during the oral evidence session). We must stress that the impact
is already apparent, with a number of business closures having
been announced in the press. It is imperative that the consequences
for the whole of the UK economy are recognised.
6. Your committee was presented with evidence
that Pilkington's have made a decision to relocate to Russia.
We agree with the Committee's view that this can hardly be considered
beneficial to the UK economy. Transfer of such production does
not improve the world's environmental burden at all—it may
help reduce the UK's CO2 manufacturing emissions—but it
does nothing to reduce overall emissions.
7. We note Paragraph 3.4 of OFGEM's written
evidence. We understand the reason that the average winter beach
supplies are lower than NGs maximum supply projection is that
the maximum supply assumes that all fields hit their peak at the
same time. The reality is somewhat different in that individual
fields will fluctuate; with the result the actual delivery is
slightly lower than the maximum theoretical peak flow. We do not
believe there is significant "spare" capacity waiting
to come on line. With spot prices that were seen in Feb/Mar of
around £1 per therm any extra capacity would have been used.
8. We note from the oral evidence session
the general view put forward that the decline in beach production
could not have been predicted. We have to say that we are surprised
at this. The fall in peak production in winter months has been
apparent in DTIs own field data for a number of years. Further,
the building of the interconnector, providing an additional "consumer"
of gas, was quite clearly going to have a major impact on the
depletion of UKCS reserves. The idea that the analysts throughout
the oil and gas industry could not have predicted this is difficult
to comprehend.
9. We would like to take the opportunity
to highlight that since the start of this week, we appear to be
seeing the first onset of "winter prices" in the gas
market even though gas demand is still very low. In the last week,
demand has risen from 240 mcm to 270 mcm and spot gas prices by
around 70%. Today, spot gas is trading around 54ppt, some 20ppt
above the European price. Of particular concern we have observed
from our immediate data analysis:
(i) The amount of gas actually being delivered
to the beach has so far only reached 257 MCM—significantly
short of the 303 MCM predicted in the NG Winter Outlook Report;
and
(ii) Despite what is still very low demand,
volumes coming through the interconnector have not been able to
keep prices around the European level.
This brings into stark relief, our fears for
the supply situation this winter. We are concerned that the anticipated
beach and interconnector flows may not be achieved and that gas
will be unaffordable for much of UK industry.
9 November 2005
| 
