APPENDIX 16
Further supplementary memorandum by INEOS
Chlor Ltd, INEOS Fluor Ltd and INEOS Vinyls Limited
Further to our further written supplementary
evidence (sent 9 November) the situation in the UK gas market
has once again changed very significantly such that we considered
it appropriate to provide some further supplementary evidence
to the Committee. We have provided the key summary points below
which we consider put into ever sharper relief the extent of the
issue faced by the UK this winter.
1. Since presenting our earlier supplementary
evidence, the spot gas price has risen from around 40ppt to over
80ppt. In the same period forward prices for Q1 2006 have risen
from around 66ppt to over 80ppt.
2. While weather conditions have recently
turned colder, temperatures to date have been very mild and the
consequent gas demand has only now approached seasonal normal
levels. Indeed, current gas demand has only reached around three
quarters of the expected peak demand for a normal, let alone a
cold winter.
3. We have analysed the data publicly available
on the three main sources of supply. This assessment causes us
very significant concern. We have summarised our key observations
and concerns in paragraphs 4 to 6 below.
4. Beach supplies—beach supplies to
date have only managed to achieve levels of around 270MCM per
day. This is very significantly below the forecasts by NG in Winter
Outlook which were around 330MCM peak flow and a sustained level
of 303MCM. At current price levels (and indeed at significantly
lower levels) there should be sufficient incentive for all fields
to be producing at maximum rates. However, production data would
suggest evidence that field output is being "flexed"
with fields now being operated like storage facilities.
5. Interconnector Imports—Despite
prices now being more than double those on the Continent, the
interconnector has failed to deliver gas up to its newly installed
capacity. Imports have increased, but only to around the capacity
pre-expansion. This provides very strong evidence that the assumptions
made on the likely imports through the interconnector are not
correct even when the UK has the highest gas prices in the world.
We have already heard market rumours of transportation capacity
being hoarded and failure by European Utilities to release gas.
We note the recent report by the European Commission confirming
our views of the situation in Continental markets.
6. Liquefied Natural Gas—As prices
have risen, we have not seen any evidence of LNG being supplied
to the UK market through the Isle of Grain terminal, again despite
UK prices being the highest in the world.
7. The shortfall across all supplies has
now resulted in UK storage reserves being depleted at relatively
low demand levels. This seriously tests the key assumptions that
have been made about supply security this winter.
November 2005
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