Wednesday 3 May 2006

NETWORK CODE MODIFICATION: A REGULATORY REFINEMENT WITH NEGLIGIBLE BENEFIT, SAY PRODUCERS

The UK Offshore Operators Association (UKOOA), the representative body for UK oil and gas producers, is extremely disappointed by the Gas and Electricity Markets Authoritys decision to press ahead with a modification to the network code which will allow commercially sensitive information about offshore gas production to be released to the market in real time (UNC 006). This is despite the majority of respondents voicing opposition to the proposal following Ofgems recent consultation about its impact.

David Odling, UKOOAs gas issues manager, said:  We think that those who lobbied for the modification, believing it would secure more competitively priced gas, will be bitterly disappointed.   Last winters high gas prices were driven largely by fears of supply shortages.  What the market needs above all else is more gas but UNC 006 is not the means to deliver it.  Rather, it will expose commercial positions when fields run into production difficulties and therefore risks creating even greater price volatility.

The modification is a regulatory refinement, with negligible benefit, which will serve to increase investment risk and do nothing to secure the maximum recovery of oil and gas reserves from the UKCS in line with government policies.  It will benefit traders and probably nobody else.

UNC 006 will allow real-time information about the flows of gas delivered from offshore fields into the national transmission system (NTS) to be shown for each sub terminal.  The same information is currently available for the previous hour, but aggregated into two zones, north and south.   The gas market balances over a 24 hour period (unlike electricity ) and trading takes place at the NBP (National Balancing Point).

UKOOA argues that because of dominant flows at some sub-terminals, any major failure will expose the field in question to the market almost in real time, as a result of UNC 006.  The parties to the DTIs information release scheme, which included Ofgem, had previously agreed that this should not happen, as do some users groups.  Similar details about demand are not made available, only being estimated by National Grid at an aggregated, national level. 

Furthermore, the modification will have limited economic benefit, if any.  Ofgems calculations suggest that the overall gain would be worth just £20-£59 million over some 15 years in NPV (net present value) terms, compared with the value of the gas transmitted through the national transmission system (NTS) of about £10 billion each year.   However, Ofgems calculations include benefits which cannot be attributed to the UNC 006 modification.  Oxera has concluded in a separate study that the NPV could be even smaller and may actually be less than the costs.

UKOOA also argues that Ofgem's recent Impact Assessment does not properly consider the potential effects on the upstream sector.  UKOOA's members are investing hard to sustain UKCS production which is currently declining at about 7% per year.  Without current investment, it would decline at twice this rate. 

UKOOA is currently reviewing the Authoritys decision and will consult its members regarding its next steps.  UKOOA believes that the desire for details of producers business has to stop with UNC 006 and go no further.  It calls on Ofgem to give this assurance. 

For more information, please call 020 7802 2400.

Notes to Editors

·         The UK Offshore Operators Association (UKOOA) is the representative organisation for companies licensed by the British Government to explore for and produce hydrocarbons in UK waters.  It has 37 members. 

^·          The physical characteristics of gas and electricity are very different.  Gas moves slowly through the pipeline network (~ 50 km/hr) and is compressible; by contrast electricity moves almost instantaneously and has therefore to be balanced in real time.