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Page added on May 27, 2010

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UK adjustment to oil production drops is a success story so far

Consumption

It has also meant that the country is much more tightly connected to international gas markets: both the continental European market – which is heavily influenced by pipeline supplies from Russia, Norway and Algeria – and the global LNG market – which is shaped by demand in the US and Asia.

So far, this integration into global markets appears to have been working well. During the exceptionally cold winter across Europe, there was sporadic tightness in gas supplies, but this was entirely due to problems with regional networks, rather than shortages of gas across the country as a whole.

Wholesale prices have remained subdued, and are typically less than a third of their peak in 2008. The fall in US prices caused by the surge in gas production from unconventional sources such as shale rock appears to have put a cap on British prices. If the UK price rises too high, LNG cargoes that would have gone to America are diverted to Britain instead.

Many analysts have worried that the continental European market, which is less liquid, transparent and competitive than that of the UK, and is dominated by long-term contracts with prices linked to oil, might force up UK prices, as the oil price has recovered since February 2009.

Instead, the opposite appears to have been the case, with continental European companies such as Eon and GDF Suez using the availability of cheaper gas priced on the spot market in Britain as a bargaining tool against Gazprom, the Russian gas export monopoly, to force it to concede greater flexibility and lower prices in its contracts.

“The sudden emergence of shale gas as a global driver on gas supply and prices means that security of supply concerns are certainly dormant and possibly dead,” says Nick Grealy, an energy analyst who runs the No Hot Air website.

He adds: “If gas is the new game-changer in world energy, then much of UK energy policy must move with it. Coal carbon capture, and possibly nuclear generation and gas storage, the most expensive solutions to a problem we more than likely no longer have – that of gas scarcity – need to be updated to reflect reality, not paranoia.”

FT



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