U.K. adopts natural gas trading benchmark

A gas supply contract between the U.K.'s Centrica plc and Enron Europe Ltd. is the first with prices linked to gas futures trading on London's International Petroleum Exchange (IPE). The contract calls for Enron to deliver 5 billion cu m of natural gas over 10 years to Centrica, the gas supplier formed when former monopolist British Gas plc was split in two. Sales will begin in 2001.

Feb. 23, 1998

4 min read

A gas supply contract between the U.K.'s Centrica plc and Enron Europe Ltd. is the first with prices linked to gas futures trading on London's International Petroleum Exchange (IPE).

The contract calls for Enron to deliver 5 billion cu m of natural gas over 10 years to Centrica, the gas supplier formed when former monopolist British Gas plc was split in two. Sales will begin in 2001.

Linking of the sale price to IPE gas trading prices marks a coup for IPE, which is working to establish its screen-based gas futures trading price as a benchmark for gas dealing throughout Europe (OGJ, June 3, 1996, p. 31).

Seen as positive

Jake Ulrich, managing director of Centrica's energy management group, said, "This is an innovative deal that paves the way for a new type of long-term contract, in keeping with the competitive market. The long-term purchase of gas at a market-responsive price enables Centrica to compete with the knowledge that its supply costs will remain in line with the market."

Enron said the market-responsive pricing structure will enable both companies to manage physical and financial risk, and that the contract demonstrates the key role a gas futures contract can have in the evolution of a more liquid and competitive European energy market.

Richard Ward, IPE executive vice president responsible for business development, said, "Centrica and Enron's decision to use the IPE's natural gas futures prices as a benchmark is a major vote of confidence in the contract. The IPE is delighted that the transparency, liquidity, and security offered by the natural gas futures contract are providing the industry with a reliable and credible benchmark for physical transactions."

IPE futures

IPE's gas futures contract was opened for trading on Jan. 31, 1997. On the first day, 465 lots were traded, and business increased throughout the year to a current average of 850 lots/day, with a peak of 2,000 lots/day reached in December.

The exchange says 40 companies regularly trade gas futures through London, and new traders are expected to join IPE this year. Prices quoted by IPE are increasingly being used as a guide by U.K. gas firms.

In the near future, IPE aims to extend the current 12-month range of its futures contract to 15 months. It also plans to introduce a new "day ahead" contract so companies can manage short-term risk.

U.K., EU deregulation

By the end of March about 10 million of Britain's 19 million residential gas customers are scheduled to be able to choose between gas suppliers, under U.K.'s full gas market liberalization.

Gas industry regulator Office of Gas Supply (Ofgas) intends to open the remaining areas of the residential market to competition by the end of May, when 3.2 million customers in Greater London and Surrey will be offered competitive supply.

Clare Spottiswoode, director general of Ofgas, said recently that more than 1 million U.K. households have transferred their business from Centrica to one of 20 independent suppliers.

Meanwhile, the European Union has agreed on a formal, common position on the Gas Liberalization Directive, which was first agreed to by the Energy Council in December 1997.

After years of wrangling among Europe's mainly government-owned monopolistic gas supply industries, EU energy ministers finally decided to open only one third of the EU gas market to competition (OGJ, Dec. 15, 1997, p. 22).

John Battle, U.K. energy minister, said, "The directive represents the first real step in opening the EU market in natural gas. Under it, large gas consumers throughout Europe would be free to purchase gas from competing gas suppliers. This should mean lower gas prices.

"The opening of the European gas market required by the directive is comparatively modest. However, as experience in the opening up of the European markets in electricity and telecommunications shows, it is likely that market forces will drive the benefits of competition deeper and faster than presently envisaged under the directive."