Examination of Witnesses (Questions 828-839)
MR ANDREW
DUFF, MR
VINCENT DE
RIVAZ AND
DR PAUL
GOLBY
24 JUNE 2008
Q828 Chairman: Gentlemen, we are running
just a little later than I had hoped so we will need to crack
straight on. Can I begin by thanking you for coming to the Committee
and thanking you for your written evidence. Can I ask you to introduce
yourselves, perhaps starting with you, Mr Duff.
Mr Duff: My name is Andrew Duff.
I am Chief Executive of RWE npower.
Mr de Rivaz: My name is Vincent
de Rivaz. I am Chief Executive of EDF Energy.
Dr Golby: Paul Golby, Chief Executive
of E.ON UK.
Q829 Chairman: Gentlemen, I am going
to begin with a question I asked our last witnesses, I do not
expect to get a very different answer from the answer I got last
time. To be honest, I rather expected their answers. What is going
to happen to energy prices for the rest of the year, here and
in Europe? Apart from the fact they are going to go up, can you
be more specific?
Dr Golby: Let me start—I
think it is very difficult to be more specific. We are facing
a seismic shift quite frankly, I think, in commodity prices. Since
I came into this industry in 1998-9 we have had a 14-fold increase
in the oil price; it has doubled over the last 12 months. We have
seen other commodity prices—oil, gas and coal—increase
by about 60% over the last four months. So it is not difficult
to see that the pressure is upwards. I think what will happen
will very much depend on what happens to the forward price over
the next weeks and months. I do not think I can be more specific
than that.
Chairman: I think this Committee accepts,
as we all do, that energy prices are rising. We cannot deny that
reality and one of the fundamental reasons for it is other markets
in the world, particularly in places like India and China. We
understand that. Our concern is to make sure that the different
sectors of the market are getting the best possible deal they
can in the circumstance—domestic customers, particularly
those in fuel poverty, small and medium sized business and the
large industrial users, because there are different issues for
each of them—to sustain a standard and quality of life or
sustain your business and sustain competitors in the UK. We understand
that. I think it is probably best we move on to the one of the
key determinants of that issue—the wholesale gas market,
Q830 Mr Hoyle: There was a report
done by the DTI back in 2005 and it suggested that 70% of the
physical volume in the UK is sold on long-term contracts. There
are other arguments that say it is 40%. It tells us that most
of it is done on secretive long-term contracts. To what extent
do you buy your gas on contract, as opposed to by the open market?
Mr Duff: The physical gas market
in the UK two or three years out is very liquid, and trades at
about ten times the underlying size of the physical market. My
company purchases about 30% of its total gas requirements through
long-term contracts. There are commercially confidential aspects
of that, but not really very much. There is not much that is not
known about long-term contracts, because most of them were negotiated
in the expansion of gas production in the North Sea back in the
1980s; and many of them have been in the public domain as companies
have divested assets and divested contracts in the years since.
We buy a small proportion of the gas, and my company is very comfortable
living for the vast majority of its requirements in the open wholesale
markets. They are very liquid; delivery is secure; and there is
a rich diversity of major upstream suppliers from which we can
procure.
Mr de Rivaz: I confirm that as
far as EDF Energy is concerned we are buying nearly all of our
gas on the open market.
Q831 Mr Hoyle: That is 99%?
Mr de Rivaz: Yes, it is important
for the committee to recognise the simple fact that, since the
beginning of 2007, the gas price on the wholesale market has increased
by 270%. It is a real challenge for companies like ours to mitigate
the impact of these costs on our customers, which we are trying
to do.
Q832 Mr Hoyle: So you have no long-term
contracts in reality?
Mr de Rivaz: No.
Dr Golby: In the situation of
E.ON, we purchase about 70% of our gas requirements from the market
at market related prices; the balance of 30% do come from fixed-price
long-term contracts; and those long-term contracts have a combination
of factors inflating the prices: RPI; gas oil; heavy fuel oil;
crude or electricity prices. The long-term contracts which are
clearly a diminishing proportion of our portfolio are linked to
a whole series of indexes in terms of their prices; but 70% comes
from the short-term market.
Q833 Mr Hoyle: It is interesting—and
I do not know what you would like to make of this—Allan
Asher, Chief Executive of energywatch, told us that in his opinion
it was 70% of all gas coming from mysterious contracts and he
would regard them as highly anti-competitive and needing to be
exposed and broken up. What would you like to say to that?
Dr Golby: I am not sure where
he gets that information. It is certainly not something that he
has shared with me. Certainly from my point of view the majority
of our gas is bought in the market at market prices. I think Allan
Asher actually identified that the current levels of churn in
the market at ten times physical actually is an indication of
a very liquid market. I think that market is working.
Mr de Rivaz: We would not agree
with the idea that the wholesale gas market or the electricity
market in the UK are "opaque" as some say. It is clear
there are some ways to improve their liquidity. I think the industry
is working on that on the electricity side, which is slightly
less liquid than the gas market. It is certainly not possible
for us to accept the idea that these markets are opaque and there
are some secretive deals which are made—this is not the
reality.
Q834 Mr Hoyle: I just wonder whether
you will be able to agree that gas producers are the same for
the UK operations as they are for the European operations and
why they do not purchase gas on the open forward market. Have
you any views on that? If you look at the UK operations and the
European operations, how does that work? Is there a differential
between the two, between the UK and European in the way the gas
is bought?
Dr Golby: Take my sister company
in Europe, we probably buy more of our gas through international
sources from Russia, for example, and those contracts I think
again are reasonably transparent. They are linked to crude oil
prices, but so are the majority of Russian gas prices; and increasingly
the nationalised gas companies around the world link their gas
prices to crude oil; it is a fact of life, I am afraid.
Q835 Mr Hoyle: Do you think it should
be broken?
Dr Golby: I do not know how it
could be broken, because increasingly it is the oil companies
or the gas companies owned by sovereign states. Whilst we might
try to persuade them that that is not any longer valid, I think
it is very difficult for us to say to the Russians, for example,
"You must change the way in which you decide to sell your
gas". I would like to see it but I do not think it is very
credible.
Q836 Mr Hoyle: So it is there to
stay?
Dr Golby: I think so.
Mr Duff: I think it is important
to say that in the UK we are actually very fortunate in terms
of the diversity of access to gas that we do have. It feels uncomfortable
at the moment because as an importing nation we are vulnerable
to global price effects in a way that we have not been for many
years. The UK North Sea still produces over 60% of the gas that
we need. The Norwegian sector of the North Sea produces 40% of
the gas that we need in the UK. Pipeline capacity coming into
the UK is another 80%-odd. By this winter we should have 30-35%
capacity for LNG imports into the UK. None of that protects us
from price affects, which I think you are referring to; but it
does ensure that we have some negotiating leverage in our ability
to source gas from a variety of sources.
Q837 Mr Hoyle: What about storage
capacity?
Mr Duff: Storage capacity is something
that needs to be increased ideally. It is not as simple as a matter
of comparing UK storage capacity with, for example, European storage
capacity. We have a number of things that make the UK more robust.
For example, the amount of gas that comes from the North Sea which
is a flexible sort of source, through contracts which in many
cases, and particularly our own, give flexibility that allow us
to capitalise on the supply flexibility as a virtual kind of storage.
One of the things that would help a lot in the UK would be greater
transparency of production, not just from our own sector in the
North Sea but the Norwegian side and pipeline transports. There
have been times in previous years, and particularly last year,
when for example supplies through the Norwegian pipelines were
very hard to predict and had quite a significant impact on prices
in the UK.
Q838 Mr Hoyle: It would be fair to
say that UK customers are the losers by not having more capacity.
Presumably at peak times we are vulnerable and we are paying the
spike on the market; yet some are exporting North Sea gas which
could go into storage in Europe and then be exported back to us
at a higher profit. Does that not seem ridiculous?
Dr Golby: Let me pick that up.
Firstly, historically we have not needed storage because of the
North Sea. I echo the points made about transparency if production
is important. I think at the moment we have about 15 days' storage
in the UK. I think that certainly has to double. My company is
currently investing up to a billion pounds into gas storage facilities.
One has started in Cheshire, and one we hope to see planning consent
for in East Yorkshire, but these take time to bring on-stream.
I might just add, it is very pertinent at the moment that one
billion cubic metres of storage has already been turned down at
the planning stage; so it is not so easy to get planning permission
for gas storage. In terms of your question about storage of gas
in Europe, I do not want to be provocative but that actually is
a market that is working; because 50% of the gas fields in the
North Sea are associated fields; and that means that they produce
oil and gas. At the time the oil companies are trying to produce
maximum oil—which I think we all would like them to do at
the moment—they are producing gas during the summer, which
currently we cannot store in the UK and yet that is sold to Europe
and the European companies sell it back at higher prices in the
winter. That I am afraid, whether you like it or not, is a competitive
market that is working.
Q839 Mr Hoyle: At the disadvantage
of UK customers where they see something they believe is sovereign
being exported and then being ripped-off when they buy it at a
higher price because companies have not invested in storage and
they have let down the people of the United Kingdom?
Dr Golby: Firstly, of course,
the gas is sold by the oil companies, so in that regard it is
not sovereign. The market did not respond to the gas storage situation
as quickly as I think any of us would have liked. The pricing
signals were not there, and that is where improved transparency
of production would be helpful. I think that investment is going
in now, but we do need to see the planning consents coming through
so we can get ahead and build that storage.
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