APPENDIX 17
Memorandum by Interconnector (UK) Limited
1. The Committee has invited comments in
respect of recent developments in security of UK gas supply since
March 2005 and, in particular, whether there has been any deterioration
in the supply situation for the coming winter. Interconnector
(UK) Limited ("IUK") welcomes the opportunity to participate
in this inquiry.
2. IUK operates a sub-sea gas pipeline and
gas terminal facilities connecting the UK and continental Europe.
The company's pipeline stretches 230 kilometres between Bacton
in north Norfolk and Zeebrugge in Belgium. It is at the present
time capable of transporting 20 billion cubic metres of gas a
year ("bcm/yr") (equivalent to 58 million standard cubic
metres of gas per day ("mscm/d")) from Bacton to Zeebrugge
and 8.5 bcm/yr (equivalent to 24.6 mscm/d) from Zeebrugge to Bacton.
3. The Interconnector is a privately financed
asset which initially cost approximately £450 million to
create. IUK does not own gas or capacity in the pipeline and exists
to provide a service to customers.
4. The direction of gas flow through IUK's
pipeline is a function of market demand. The pipeline system responds
to nominated volumes from its customers. These nominations determine
flow direction.
5. The bi-directional flexibility provided
by the service allows customers to manage the large swings in
demand experienced on a seasonal and short term basis. It is clear
the Interconnector will provide an important link for ensuring
the security of UK energy supplies based within the European free
market framework.
6. The Interconnector gas pipeline provides
a strategic bi-directional link between the UK and Continental
European energy markets. Interconnector services allow customers
to meet their physical demands for natural gas and provide a vital
instrument in the development of an open market for gas by connecting
two major European trading hubs; the National Balancing Point
(or "NBP") in the United Kingdom and the Zeebrugge Hub.
The NBP is widely perceived as the only truly effective trading
hub for gas in Europe where gas may be bought on any day.
7. IUK is in the process of enhancing its
facilities to increase the amount of gas which it can import to
the UK from Zeebrugge. The enhancement, costing approximately
£150 million, has been financed privately backed by long-term
capacity commitments from customers.
8. IUK has confirmed that the first phase
of its project to enhance UK import capacity of its pipeline system
remains on target to be commissioned by 1 December 2005, although
it may in fact be ready ahead of schedule. With the commissioning
of the first phase the current UK import capacity of the Interconnector
will be increased to 16.5 bcm/yr (equivalent to 47.8 mscm/d).
A second phase of the enhancement due to be completed in December
2006 is progressing to schedule and will bring the UK import capacity
of the system up to 23.5 bcm/yr (or 68.1 mscm/d), roughly 20%
of UK annual demand for gas. A possible final phase of enhancement
to 25 bcm/y (equivalent to 72.4 mscm/d) is currently being evaluated.
9. All of the Interconnector's capacity
(including that resulting from the enhancement) has been sold
on standard long-term contracts. In line with the free market
model developed in the UK and adopted by the wider European community
customers are free to use this capacity in response to the incentives
set by the market. It is clear that by committing to the capacity
enhancement IUK's customers are making a long term strategic commitment
to supply the UK's gas supply requirements. The Interconnector
provides a link to the continental gas grids and therefore to
a diverse range of supplies which have been developed over the
past four decades.
10. The increase in the Interconnector's
physical capacity will go some way to alleviate concerns regarding
security of supply for the coming winter. It is however worth
noting that the direction and magnitude of gas flows through the
pipeline will depend on the market forces at play in the UK and
on the Continent, including but not limited to: severity of weather
conditions experienced, business requirements of industrial users,
price, balancing penalties, storage inventories and national restrictions
imposed on the use of stored gas, reliability of offshore production,
availability and reliability of LNG cargoes, reliability of gas
transmission systems and market sentiment.
25 October 2005
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