LONDON, Feb. 6�European natural gas prices are the most important factor influencing British gas prices and were indirectly responsible for a price spike last summer, said a report for a government-industry task force.
The study, by energy consultants ILEX PLC, examined the price increases last year. It said UK gas market dynamics have "changed significantly" since the opening of the UK-continental Interconnector gas pipeline in October 1998.
Continental gas prices are now a "major influence" on UK gas prices, said ILEX Director David Cox.
"When the oil price rises or falls, continental gas prices follow, usually with a time lag of around 6-9 months," he said. "This then affects gas prices in the UK as a result of the link to continental market through the Interconnector.
"This is not just a UK issue," Cox added. "Higher oil prices have fed through to increased gas prices across all of the European and North American gas markets."
Cox noted that because supplies from Norway, Holland, and the former Soviet Union, are indexed to the oil price, which rose last year to over $30/bbl, gas contract prices in Europe shot up. That made the UK "a cheaper source of gas," resulting in a 20% jump in the volume of gas being traded into Europe both through long-term contracts and on the developing spot market at Zeebrugge, Belgium.
The UK supply/demand position was tightened by export deals, and the price of the exports became the marker for the UK spot market, though the overall percentage increase in gas supply contract prices to industrial and commercial consumers was generally lower than those seen in the spot market.
Cox said a number of "secondary factors" also contributed to the increase in prices including the introduction of entry capacity auctions, "misplaced market sentiment and inefficiencies," and the speed of regulatory reform.
He said allegations of "gaming or manipulation" of the gas market have not been substantiated by "any convincing evidence.�
The ILEX study also concluded:
� UK demand and supply has doubled since the early 1990s, and gas is now the largest source of primary energy.
� There is competition in all parts of the gas supply chain, with more than 50 producers of gas offshore, 60 licensed shippers, more than 60 licensed commercial and industrial suppliers, and nearly 30 domestic gas suppliers.
� About 85% of UK-produced gas is sold under long-term contracts at landfall. The rest is sold on the wholesale spot market.
� Gas prices have fallen "steadily" in real terms since the mid-1980s.
ILEX predicted that the recent decline in oil prices will translate into lower gas prices in the UK. In the medium to long-term, it said the wholesale spot gas price will tend towards 15 pence/therm.