Memorandum submitted by ExxonMobil
INTRODUCTION
1. Several subsidiaries of Exxon Mobil Corporation
are involved in the parts of the European natural gas business
that involve the UK. For ease of reference, such subsidiaries
are referred to both individually and collectively as ExxonMobil
in this submission.
2. ExxonMobil's participation in the UK
natural gas business involves upstream production, transportation
and processing, as well as sales at the wholesale level of the
gas supply chain. ExxonMobil is also a joint venture participant
with a minority interest in the South Hook LNG import terminal
currently under construction near Milford Haven, Pembrokeshire.
3. ExxonMobil is no longer involved in the
retail gas market and our focus in making this submission is,
therefore, on the wholesale sector in the UK and factors that
are relevant to the functioning of that sector.
4. Our submission covers observations on
the evolution of the gas sector in the UK, competition in the
UK Continental Shelf and wholesale gas markets, the UK's legislative
and regulatory framework and the evolution of the European gas
market.
5. We support the Government's strategic
objective to meet the UK's need for secure long-term, competitively
priced energy by developing an open, competitive market for energy,
within a transparent and stable fiscal and regulatory framework.
As long as the current market framework remains, we believe the
UK will continue to be successful in attracting the long-term
capital investment required to meet its future energy needs.
UK GAS SECTOR
DEVELOPMENT
6. Throughout the 1980's and 1990's the
UK natural gas sector was not connected to Continental Europe,
and UK demand was met by gas produced from the UK Continental
Shelf (UKCS) and Norwegian Frigg imports to St Fergus. After the
Bacton-Zeebrugge Interconnector was completed in 1998 the UK was
in a position to import or export gas from Continental Europe
in line with domestic supply and demand.
7. In recent years, additional infrastructure
has been put in place to allow further natural gas imports into
the UK. In 2001 the capacity of the Frigg (renamed Vesterled)
import line was expanded and additional Norwegian production sources
were connected as Frigg production declined. Norwegian import
capacity was increased further in 2006 when the Langeled pipeline
was installed and again in 2007 when the Tampen Link was completed.
In 2005, the Isle of Grain LNG peak shaving facilities were converted
to an LNG import terminal and in 2006 the BBL pipeline was commissioned
allowing gas to be imported from the Netherlands.
8. Natural gas production from the mature
UKCS reached its natural plateau between 2001 and 2003 and has
been in decline since that time. UK gas demand reached a plateau
of around 100 bcm/annum in the same timeframe having grown at
an annual average rate of about 5% during the 1990's to support
new gas-fired power generation. The decline in UK production during
this period when gas demand remained on a plateau has led to a
steady increase in gas imports to meet demand. During the 2007-08
winter period the UKCS supplied around 75% of total gas delivered
to the National Transmission System (NTS) the balance of supply
coming from Norwegian and Netherlands production areas.
9. ExxonMobil believes the UK has effectively
transitioned from gas self sufficiency by allowing market signals
to prompt the need for new import capability and by creating the
right conditions for new investment. We see this trend continuing;
over the next two years over 25 bcm/annum of additional LNG import
infrastructure is expected to be completed, pipeline interconnection
capacity will increase by up to 8 bcm/annum, and new storage deliverability
of around 30 mcm/day is projected to be added.
10. The UK operates the most transparent,
stable and liquid natural gas market structure of any country
in Europe and this places it in a strong position to compete for
its future gas supply. In the future, the UK can expect gas imports
from an increasingly diverse number of sources including Norway,
Qatar, Russia, offshore West Africa and other gas-producing countries.
A global gas market is developing through LNG interconnection
which the UK is part of and well positioned to compete within
through new import capacity. Global gas prices now reflect a range
of factors including increasing international demand for oil,
gas and coal, the flexibility of these fuels to respond to market
conditions, environmental considerations, declining gas supplies
in mature production basins located close to established demand
centres and the fact that replacement gas supply sources are typically
further away, more difficult and therefore more expensive to access
and to extract. Global demand is also growing for all types of
fossil fuels and, as a result, commodity prices for gas, oil,
oil products and coal have all increased (although, on a BTU-equivalent
basis, gas remains a very competitive fuel).
MARKET CONDITIONS:
UPSTREAM NATURAL
GAS PRODUCTION
11. Natural gas production activity in the
UKCS has seen a significant trend towards diversification over
the past eight years. This period has seen asset restructuring
as established oil and gas companies have sold part of their interests
in maturing fields and, in some cases, infrastructure to new entrants
to the UKCS.
12. Information produced by Wood Mackenzie
shows that in 2000 there were 32 companies producing gas from
the UKCS; this number has increased to 49 in 2007. In 2000, the
largest single producing company accounted for 19% of total UKCS
gas production, in 2007 the largest single producing company accounted
for under 12%. Overall, we see no evidence of consolidation among
UKCS gas producers; rather the trend is in the opposite direction
with increasing numbers of companies producing gas and decreasing
levels of individual production share.
13. The construction of major new infrastructure
(LNG import terminals, storage facilities and interconnector capacity)
is continuing to widen industry participation in various segments
of the UK gas market. LNG import terminals, in particular, enable
the UK to access gas from producing countries across the globe
including Qatar, Algeria, Indonesia, Malaysia, Brunei, Nigeria,
Egypt, Trinidad and Tobago, Oman, Norway and Australia. Overall,
this geographical diversity enhances security of supply for the
UK.
MARKET CONDITIONS:
WHOLESALE NATURAL
GAS
14. The UK's main natural gas wholesale
trading point, the National Balancing Point (NBP), is the most
liquid and transparent gas trading hub in the EU. It has seen
continued growth in trading, with the volume traded reaching a
record 3.4 billion cubic metres per day in December 2007. Liquidity
is enhanced by the high level of trading churn, with total volumes
traded in 2007 around nine times physical throughput on average.
In 2007, the NBP had around 150 participants registered as shippers
and approximately 60,000 trades were carried out. Evidence of
the willingness and ability of new participants to continue entering
this market can be seen from the estimated 20 companies that have
applied for and been granted a gas shipper licence by Ofgem over
the last 12 months.
15. Significant market information is available
to participants, providing an effective level of transparency
that allows clear market signals to develop. National Grid provides
real time access to detailed information on demand and supply
flows. In addition, a number of independent industry publications,
such as Heren, Platts and Argus, provide news on developments
in the market and publish gas price indices that enhance participants'
ability to trade. The International Commodity Exchange also provides
an accessible trading platform that facilitates entry by new participants.
16. We believe that the wholesale sector
in the UK is increasingly competitive and liquid and we remain
confident of our ability to place gas and receive a market price.
ExxonMobil is not active in the retail gas sector so we are unable
to comment on this area.
LEGISLATIVE AND
REGULATORY FRAMEWORK
17. The UK energy sector has steadily evolved
since the 1986 Gas Act when the British Gas Corporation was privatised,
the gas and electricity regulators (at that time Ofgas and Offer
respectively) were formed, and markets for industrial consumers
first opened. There have been numerous milestones in the evolution
of the UK's regulatory framework including the 1995 Gas Act (which
paved the way for the introduction of competition into domestic
gas and electricity markets) and the ownership unbundling of British
Gas (leaving Transco as a separate, regulated-monopoly gas pipeline
business). This led to a Network Code in gas being established
and regulators' powers being enhanced to include aspects of competition.
The Utilities Act 2000 went further by creating the Gas and Electricity
Markets Authority (GEMA) and contained provisions to make regulation
more transparent and predictable.
18. ExxonMobil believes that strong, independent
national energy regulators in Europe exercising well-defined powers
within a clear, legal framework are essential to the correct functioning
of energy markets. ExxonMobil believes Ofgem has progressively
earned its reputation as a strong and competent regulator. Over
the years, its activities have helped to create a market with
the following characteristics:
Transportation access
— Open access on non-discriminatory
terms and at efficient, regulated transportation prices.
Market transparency
— A mature system for the assessment
of long-term energy supply and demand and investment plans (NGG
10 year statements).
— On-the-day access for all to detailed
information on demand and real-time supply flows.
— Storage and LNG import terminal stock
information.
Ease of Transaction
— Standard contracts at the National
Balancing Point (NBP) which make the selling and buying of gas
more accessible for interested shippers.
— Several sources of independent market
pricing and gas supply information.
Investment Environment
— The ability for shippers to stimulate
new pipeline investments through participation in well structured,
long-term transmission capacity auctions.
— The opportunity for investors to
seek exemption from regulated Third Party Access for major, new
infrastructure under the Gas Act.
UK AND EUROPEAN
ENERGY MARKETS
Regulatory Development
19. In North West Europe we have seen many
significant developments that enable us to anticipate greater
integration and increased liquidity in the wholesale gas market,
in part led by the First and Second European Gas Directives. There
has been steady regulatory development in the Netherlands over
the last five years or so and, in Germany, changes over the last
couple of years have been considerable including the establishment
of an independent regulator (the Federal Network Agency) in 2006
which has already ruled on tariff reductions in 2006 and on a
new grid access model in 2007.
Hubs and Liquidity
20. There are now a number of trading hubs
established across North West Europe including the TTF (Netherlands),
EGT and BEB (Germany), PEG-Nord (France) and the Z-Hub (Belgium).
Standard contracts are available at each, along with independent
reporting of trades. Price indices are reported for both TTF and
Z-Hub.
21. At the TTF in the Netherlands there
has been rapid growth in liquidity, the Z-hub remains important
and the level of business being conducted at France's PEG-Nord
has exceeded what many might have expected. Overall we see a growing
trend in trading and liquidity across North West Europe.
Investment Access and Competition
22. Transmission System Operators are offering
open seasons to enable network expansion and to improve access
for new entrants, whilst new LNG and storage terminal proposals
are being actively developed across Europe. This demonstrates
how hitherto national markets in Europe are beginning to integrate,
that independent regulation is proving effective and that there
are increasing opportunities for participants to trade.
23. This process is evolutionary, often
having to overcome historic network complexity. ExxonMobil believes
there is clear evidence of wholesale market integration and increased
competition; it is important to allow these changes to take hold
and that further changes to legislative frameworks are made with
care to avoid unintended consequences or the slowing of progress.
CONCLUSIONS
24. Overall, ExxonMobil believes that the
UK's current approach to energy policy will enable it to continue
to attract the future natural gas supplies it will need.
25. The increasing diversification of ownership
of upstream oil and gas assets in the UKCS and the large number
of companies operating in the wholesale gas sector are, we believe,
indicative of healthy market conditions.
26. We believe Ofgem to be an effective
and well informed regulatory agency for the UK's energy sector
which has created the right conditions to attract capital investment
and ensure market transparency; cross-border trade in gas will
continue to increase as long as investment in new capacity is
encouraged.
April 2008
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