Memorandum submitted by Shell
INTRODUCTION
In the UK, Shell is engaged in exploration and
production, oil refining and marketing, gas and power, chemicals,
renewables and research and development.
As regards gas:
— Shell does not sell gas to UK
households. Indeed Shell does not have a domestic gas supply licence.
— Shell sells gas to ca 6500 Industrial
and Commercial (I&C) customers in the UK. The volumes represent
about 2.5% of the total UK gas market.
— We believe Shell is one of approximately
60 companies involved in UKCS gas production. Our share of UK
gas production is approximately 8%.[364]
This gas is sold to a range of UK energy companies.
— Shell also brings in its own
gas from abroad, mainly Norway. In 2007, these volumes amounted
to less than 1% of UK annual demand.
— Shell trades gas at the National
Balancing Point (NBP), partly for supply/demand balancing purposes
to support the above activities.
Our comments below concentrate on the wholesale
and I&C market.
STRUCTURE AND
COMPETITIVENESS OF
THE UK GAS
MARKET
The UK gas market was the first to liberalise
in Europe and provides in our view a good framework for a competitive
market. An unbundled, price-regulated grid operator that is prohibited
from engaging in other commercial activities provides for the
correct environment in which competition in non-monopoly activities,
eg shipping and supply can develop. Shell believes that this market
structure has also been conducive to the development of a liquid
traded market at the National Balancing Point (NBP), thus helping
to facilitate gas-to-gas competition.
The traded market for instance has witnessed
growth both in terms of traded volumes and the number of parties
involved. The growth in recent years of the APX Exchange illustrates
this point. Traded volumes, for example, have grown from 106 TWh
in 2004 to 131 TWh in 2007. During the same period, the number
of members has grown from 55 to 74.[365]
In the I&C sector we now experience a market
where not only are margins low but customers readily able and
willing to switch, and also where intermediaries invite several
potential suppliers to compete for business.
Shell sells gas from own production and third
party gas in the UK market partly under medium- or long-term contracts
with other merchants and partly by selling directly to I&C
customers under short-term contracts. The conclusion we draw from
Shell's involvement in the gas market is that we see competition,
with the company both losing and gaining business.
In a mature and liberalised market, one would
expect not only new market entrants but also consolidation to
take place in parallel. The UK gas market has seen both and this
is likely to continue in the coming years. So far as we can see,
any consolidation so far has not diminished competition in the
market. This is our practical experience. In that context, we
note that BERR's own calculation of indices such as the Herfindahl-Hirschman
Index that assess market concentration, appears to indicate a
satisfactory position.[366]
Should there be any tendency in future for consolidation to diminish
levels of competition, we believe national and EU competition
authorities have the necessary information and powers to intervene
effectively.
INTERACTION BETWEEN
THE UK AND
EUROPEAN GAS
MARKETS
It should be noted that the gas market is developing
towards a global market with global effects on availability and
prices. With ever more physical interconnections and LNG regas
terminals (Interconnector upgrade, BBL pipeline, Langeled pipeline
and LNG regas terminals on the Isle of Grain and in Milford Haven),
the UK has an increasing number of gas supply options and is increasingly
part of the European and even global gas market.
In saying this, however, it is important to
note that additional capacity does not directly translate to equivalent
gas flows. Rather, gas flows to the UK will be determined by market
attractiveness and price. This is supported by our own experience.
Shell has in late 2007 and early 2008 redirected gas volumes to
the UK that were originally destined for the European continent
(in the same way, LNG cargoes initially earmarked for Spain have
been diverted to North America). With the integration of the UK
into European and global markets, the number of such transactions
is set to increase.
Given that gas prices are a response to the
demand and supply balance, the impact of the globalisation of
the gas market as described above must be considered when assessing
market effects in the UK. Energy prices in general must be taken
into account, as primary energies are in principle interchangeable.
In the UK, natural gas is mainly used for power
generation and space and water heating. In power generation gas
is competing against coal and nuclear energy and against oil and
electricity for space and water heating. In addition there is
gas-to-gas competition between different gas installations. Policy
decisions on the energy mix and climate protection will also have
an impact on overall energy price levels.
In line with the above, the changes we have
seen in wholesale prices appear broadly consistent with supply
and demand fundamentals, inter- and intra-fuel competition and
an increasing reliance on imported gas.
REGULATION OF
THE GAS
MARKET
A clear distinction should be drawn between
the role of a regulator and the role of competition authorities.
These bodies should, of course, have adequate powers to carry
out their respective functions but the two roles are not the same
as each other.
Competitive market activities such as shipping
and supply should not be subject to economic regulation of the
type that logically applies with respect to monopoly grid operators.
Rather, such activities should be subject to regulatory oversight
and, where necessary, applicable competition rules.
Additionally, we would question the extent to
which regulatory policy has concentrated on the core activity
of the economic regulation of grid networks. Increasing emphasis
appears to have been placed on subjecting competitive market activities
to increasingly complex market rules and arrangements. The result
is that the complexity of market rules and arrangements that are
also subject to constant change—see for example the development
and growth of the Uniform Network Code over the past 10 years—create
difficulties not only for only market participants but also for
regulatory authorities in understanding the market. As such, there
may be some merit in the regulatory authorities waiting for new
rules and arrangements to bed-in and take effect before trying
to demonstrate the need or otherwise for further change.
SUMMARY
In our view, the UK gas market is characterized
by:
— Competition in the sectors in
which we are involved.[367]
— More and more integration—physical
and financial—into European and global markets.
— Increasing diversity in terms
of players and sources.
— A market framework, as described
earlier in this response, that does not appear to have any obvious
deficiencies and, notwithstanding the comments above, to a large
degree this comment also applies to the regulatory framework.
11 April 2008
364 https://www.og.berr.gov.uk/pprs/pprsindex.htm Back
365
Source: http://www.apxgroup.com/index.php?id=106 Back
366
http://www.berr.gov.uk/energy/statistics/publications/indicators/page39558.html Back
367
As mentioned, Shell does not sell gas to the UK's residential
market. Back
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