UK GAS MARKET

UK's answer to gas dependency lies in the salt caverns of Dorset
By Tim Webb
Published: 18 February 2007
AIM-listed Egdon Resources will submit final planning applications to turn salt caverns in Dorset into a huge, £350m underground gas storage facility within the next six weeks.
If approved, the facility on the Portland peninsula will increase the amount of gas that can be stored in Britain by a quarter.
The UK became a net importer of gas in 2004, and as the North Sea matures, imports will rise further. If supply is disrupted, Britain's stored gas would run out after only an estimated 17 days. In comparison, France has capacity to store about 91 days' consumption of gas, while Germany has 77 days' worth.
Egdon Resources is submitting the application to Dorset County Council. The company expects a decision in six months.
If the project gets the go-ahead, the first gas will be stored on the site in late 2010. Total capacity will be 1bn cubic metres. The UK's current total capacity is 4bn cubic metres. The company will sign long-term contracts with gas suppliers to auction off storage capacity.
Later this year, Egdon Resources, which also has an oil exploration and production arm, will spin off its gas storage division, Portland Gas.
The investment bank NM Rothschild will lead the fund-raising for the development of the site. The estimated £350m costs will mostly be met by debt but new Portland Gas shares could be placed in the market to raise more funds.
Last year, the Government stressed the need for more gas storage sites to be built to enhance security of energy supply. But a cumbersome planning regime has discouraged the construction of new facilities.
Andrew Hindle, the managing director of Egdon Resources, said: "Dramatic structural changes are taking place in the gas market as we move from a net exporter of gas to importing an estimated 90 per cent of our gas by the middle of the next decade. Having sufficient gas storage capacity is one component of the market being able to function. Portland is one of several projects needed to satisfy that requirement."
Gas storage facilities tend to be filled mostly in the summer, when gas prices are lower, and emptied in the winter, when prices and demand increase.
A fire in March last year at Britain's largest existing facility, off the Yorkshire coast at Rough, caused gas prices on the wholesale market to double almost overnight. UK gas prices last winter were already at record highs, remaining above 60p per therm most of the time.
Prices have now slumped to less than 20p per therm because new pipelines linking Britain to the Continent have increased supply, and also on account of the mild winter.
British Gas owner Centrica belatedly reacted last week by cutting its tariffs for consumers, as did Powergen's owner, E.ON. RWE npower, Scottish & Southern and Scottish Power are all expected to follow suit soon.
Industry experts have begun speculating that the Russian gas giant Gazprom - which supplies a quarter of Europe's gas - could be planning to start a retail operation in the UK. Last year, it bought the marketing company Pennine Natural Gas, which sells gas to small and medium-sized businesses. Gas is now sold to these customers under the Gazprom brand name.
The Russian company has also been rumoured to be thinking of acquiring Centrica to get access to residential consumers. But instead of buying a supplier such as Centrica, it could start selling gas to households from scratch instead.
It is thought that the company, which is looking to hire a public relations firm in Britain, believes selling gas directly in this way will help to change its often negative image and that of Russia in general.
A spokesman for Gazprom said: "We have ambitions to sell all forms of energy in the value chain. But at the moment, we do not have plans to get into the residential market."