HOWZAT

The EIUG’s complaints eventually led to official action. Ofgem, the energy-market regulator, and the Financial Services Authority (FSA) have since looked into whether the market was being manipulated without finding anything substantially wrong. The FSA later wrote to the chief executives of organisations that participated in the oil and energy markets, including oil and gas producers and suppliers, independent trading companies and the energy trading desks of financial institutions. It threatened to end its “light touch” regime if participants did not improve their compliance with regulations.

Jeremy Nicholson, chief executive of the EIUG, this week urged the FSA to revisit the issue. “Malcolm Wicks told parliament this week that the behaviour of the spot-price gas market was irrational,” he said. “So why doesn’t the government look into it? We think there should be a comprehensive review of both the upstream and downstream markets and this should encompass the trading of gas, which would fall under the FSA’s remit.”

National Grid has published details on daily gas flows from North Sea fields since October. But a spokesman for Ofgem called for offshore oil producers to be even clearer about the way they ran their operations.

“A number of suppliers and customers would like to see even more information published,” he said. “Ofgem has always supported greater transparency in the workings of the offshore market but does not have the same powers as it has in the electricity market to collect this information or to require its publication.”

There are other quirks in gas supply that concern industrialists. The supply margin is so tight that small upsets can quickly drive up prices.

Production problems at just two North Sea fields, Brae and Britannia, have meant the supply of North Sea gas is only now starting to reach National Grid’s assumed average level as stated in its winter forecast.

There are also question marks over the operation of the pipe that carries gas between Britain and the Continent. The capacity of this interconnector was recently increased, but despite prices being much higher in Britain than mainland Europe, it is not operating at anything like full capacity.

The shortfalls mean National Grid has had to draw on reserves that are normally held back until later in the winter.

The Rough facility, an underground cavern in the North Sea that holds 100 billion cubic feet of gas, and other gas storage facilities around the country have been called on.

“We would really want to see North Sea gas and the interconnector going flat out before we started drawing on long-term storage,” said Alan Eastwood, head of competitiveness and utilities at the Chemical Industries Association.

Wicks claimed last week that the industry was building more storage facilties, with 10 projects under way. But according to a DTI report released in July, only three of these have received planning permission.

One came on line this month at Humbly Grove, Hampshire. Roland Wessel, chief executive of Star Energy, the company that built it and runs it, said efforts to open a second facility in Lincolnshire had been waiting for planning approval for more than two years.

“If we are going to import gas, we need to be able to manage it, which means storage, and we are very poor at storing gas in this country,” he said.

The soaring price of gas on the spot market is particularly galling for industry, which was advised by the previous energy minister, Mike O’Brien, to switch from long-term contracts to short-term ones when complaints were made about the rise in forward gas prices earlier in the year.

Jones said the government appeared to have been caught flat-footed by the sudden price rises. “We have known for five years that Britain faced a gas problem this winter because of the drop in production from the North Sea. Their lack of preparedness amazes me.”

And what consultation the government has done has ignored industrial users, said Jones. “They had no idea what the reality of interruptible contracts was. They thought it was a neat way of preserving consumer supply. They didn’t realise that in most energy-intensive industries you can’t switch the plant off for a couple of hours — production will stop altogether or go offshore.”

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