CB CWC conference speech – final draft

Ladies and gentlemen, Minister – could I begin by thanking the organisers for inviting BG Group to give the corporate keynote speech to this conference. We regard it as a great privilege and I hope we can offer some BG perspectives that will stimulate debate.

The title of this conference is Supply Diversity and Investment Opportunities.

And I want to concentrate today on what has been and will continue to be the dramatically changing complexion of the UK’s gas market. I want to look as well at how our industry is making its investment choices in response to the changing supply requirements of that market.

I’ll reflect on the strength of gas’s position within the fuel-mix but also on the vulnerabilities that that strength brings with it. I then want to consider whether a true single European gas market might emerge following the second Gas Directive, and what might be the impact on the UK market if it does - and if it doesn’t.

I’ll spare you the detailed BG Group advertorial, as I’m sure most of you here are aware that our company is a leading player in natural gas, operating in around 20 countries across the world. What I would say is that earlier this year we outlined our strategy to 2010 and beyond. We explained our approach of working right across the gas-chain to connect low-cost gas supplies to high value markets. And we identified four key target markets: Brazil and India in the developing world and in more mature markets, the US and Europe.

Naturally, the UK will continue to be the principal focus of our European strategy, as we endeavour to retain or grow our share of what is the biggest gas market in Europe. That ambition means that we are having to devise new approaches to meeting our UK supply commitments because, increasingly, gas will have to be sourced from beyond the UKCS. I’ll say more about how we intend to do that in a moment.

But, first of all, let’s take a look at the kind of gas ‘gap’ we need to fill to meet the UK’s supply needs.

BG Group estimate the level of imports required could vary quite significantly depending on demand and on the level of ongoing UKCS production.

And I’d invite you to consider the scale of our industry’s recent achievements in facing up to the seismic shift taking place in the UK gas market, as we move from self-sufficiency to becoming a net importer within a matter of years.

And I would suggest to you that the industry has a right to feel some pride in the way it has responded to this changing context. We shouldn’t overlook the fact that, in the last three years in particular, we’ve come a long way.

Just three years ago, there were serious questions being raised as to how the UK might meet its future energy needs. On gas specifically, let me quote Transco’s Ten Year Statement of 2001: “The clear message from this year’s analysis is that there remains a potential annual supply shortfall after 2004-5.”

It wasn’t the first time Transco had warned of gas supply problems - but it was around the time at which alarm bells started ringing and the UK Government acknowledged that there was a need for a major analysis of energy policy.

But there have been three principal developments since then that have put the natural gas industry in the driving seat in terms of primary energy supply in the UK in the short to medium-term:

· First the Performance and Innovation Unit’s Energy Review published in early 2002 followed by the Energy White Paper in early 2003. Both acknowledged that natural gas would take an increasing share of the UK’s primary energy mix – at least until renewables are able to fill the gap. Both rejected the view that the gas imports that would be required might amount to a weakening of our security of energy supply.

· Second, the European Commission’s consultation on security of energy supply, which reported in June 2002. This served to reinforce the UK Government’s conclusions from an EU perspective: namely, that natural gas would be central to European energy supply security for some decades to come; but also that gas could act as a bridge to a sustainable future.

· The third development has been a vigorous response from our industry. Over the past three years, players in the UK gas industry have firmed up a broad range of supply and infrastructure proposals – some that were already on the drawing board and some brand new - that recognise fully the changing shape of the UK’s energy needs and the potential for gas to fill an energy supply gap.

In many ways, this has been a classic case of the private sector responding to market signals. Yes, it has been a tough couple of years for some in the power generation sector but – when it comes to gas – even the industry’s critics would have to acknowledge that companies with expertise and gas supply have identified the opportunities and responded.

To take our own case, we at BG plan to look for new UKCS supplies – in particular around our existing hubs. But we are also aiming to bring Norwegian gas over the median line, where possible using existing UK infrastructure to bring those imports home.

You’ll be aware too of our interests in the proposed Dragon LNG terminal at Milford Haven. Should that scheme proceed as we hope it will, then we’ll be using our strong Atlantic Basin LNG position to bring new sources of gas supply into the UK via that terminal. We’ll also have more opportunity to bring imports from a range of sources through the Bacton-Zeebrugge Interconnector once phases two and three of extra compression are fitted in 2005 and 2006 respectively.

And BG’s approach of exploring a range of methods of sustaining and developing supply to the UK market mirrors a broader response from the industry. And I believe there will be some very important consequences of this new gas-supply picture for the UK.

· First, gas-supply to the UK will be multi-sourced. Far from Britain ending up at the end of a single vulnerable pipeline that starts somewhere in Russia – as one recent parody of the position suggested – gas will come from Norway in large part, and from North Africa and the Middle East. Yes, Gazprom sees the UK as its number one target export market but, in the short to medium-term at the very least, it is by no means guaranteed a dominant role.

· Second, gas will arrive through a more extensive and more flexible network than is the case today. Existing UKCS infrastructure, the Norway-UK Vesterled line, the Langeled pipeline that will land a major tranche of imported gas from the Ormen Lange field, the BBL line from Holland and/or the North European line from Russia via Germany will form the backbone of the supply network. The Interconnector with increased import capacity is likely to act as the main source of swing.

· Third, LNG will add significant flexibility to the new UK supply picture. Yes, Britain will have to compete for supplies against two markets that could be capable of paying a premium – the US and Asia-Pacific. But we at BG – who are among the world leaders in LNG - would not be involved at Milford Haven, were we not confident that we can provide sufficient, competitive sources of supply to this market.

The overall picture is such that some industry analysts are now forecasting that – post 2010 – the UK could even face over-supply. In our view, a gas-glut is not a real risk – in part because we don’t expect renewables to grow as fast as the Government would like.

And, with the EU emissions trading scheme putting the squeeze on coal and the economics of nuclear still debatable, it could be that gas-demand will not flatten at around 100bcm-a-year, as the DTI forecasts, but will instead bump up to 120, 130 and perhaps even 140bcm in time, as gas takes an increasing share of power generation on the back of a second dash for gas in the next decade.

But, in case you think that these are rose-tinted glasses I’m wearing, let me enter a few caveats at this point:

• No-one should be blasé about potential tightness in gas and power supply during winters up to 2007. National Grid Transco warned in June of last year that they “continue to be concerned that the present commercial and regulatory infrastructure is unlikely to lead to the type of ‘insurance investment’ that would help safeguard against a major (gas) supply shock”. NGT also express concerns about NTS investment required to handle new imports.
• It may be the case that some key projects are delayed. What would happen if Ormen Lange’s 20bcm or so were nudged back by a year? What if BBL isn’t complete in 2006, as now appears to be the target date? Depending on levels of UKCS production, slippage may be serious or it may not.
• Could it be the case that the new import-heavy UK gas-market might lack sufficient storage capacity, following the decline of the Morecambe Bay field? Or will the enhanced Interconnector, LNG and a broader gas import network render our system sufficiently flexible.
• Above all, could there be a backlash against gas imports, as the fuel increases its share of the UK’s energy-mix and critics of the industry seek to portray the position as over-reliance – rather than multiple supply sources reaching Britain through a significantly more extensive network?

Looking at each of those potential hurdles, it is our view that the leading players are keenly aware of the time-sensitivity of their projects. No-one can take hitting deadlines for granted but there is already clear evidence of the DTI, Ofgem and National Grid Transco working with industry to ensure major projects do not come up against unforeseen obstacles.

In this respect, JESS - the Joint Energy Security of Supply Committee set up as a result of the Energy White Paper - is a welcome addition to the UK’s security of supply mechanisms.

But, in creating the right climate for security of supply, I’d like to single out Ofgem at this stage. I know that it may not be fashionable to praise regulators but Ofgem does deserve credit for the way in which it has improved its consultation processes and developed its regulatory impact assessments – particularly in the period since publication of the Energy White Paper.

Yes, the upstream gas industry has had a lively recent debate with the regulator over issues around upstream information release but, in its overall approach to regulating the downstream UK market, Ofgem has acknowledged and acted upon the recommendations of the Better Regulation Task Force. The consultation process over the second Gas Directive and the instigation of quarterly meetings with shippers are evidence of this more open and transparent approach.

More recently, Ofgem’s support in the bid to win exemption from third party access for Dragon LNG has been exemplary. It’s easy to knock the regulator when sometimes we feel they’re seeking to micro-manage, but let’s give credit where credit is due.

Naturally, none of us were particularly thrilled by the Treasury’s tax-increase a couple of years ago but I would suggest that both the DTI and Ofgem are now adopting an approach that is constructive. This can only enhance the sense in our industry that the right climate for investment is developing.

I mentioned storage a moment ago. It could well be that the next market signal that our industry responds to will relate to storage – specifically whether there is a need for more physical storage capacity for the UK, or whether the developing network is sufficient to handle the peaks and troughs of demand.

As for the threat of a backlash against gas, we welcome the way in which the Energy Minister in his major speeches rejects suggestions that gas imports mean the UK will inevitably be less secure in its gas supply. And I would make two points here:

• First, the UK has been one of the few countries with the luxury of gas self-sufficiency over the last three decades. Many countries that are significant consumers of gas - such as Germany - have coped with import dependence for a long time even when their gas has tended to come from one principal supplier.
• Second, we have to remember that once a gas-producing country begins to receive revenues for its exports, history suggests they are never keen to turn off that tap. The supply records of both Russia and Algeria have been exemplary – despite, respectively, Cold War and civil war. If you like, security of supply for we consumer countries represents security of revenues for producer countries.

I would just make the point that, while the Minister has done a good job in arguing that security of gas supply can come from multi-sourced gas and an extensive import network, it is time for the industry itself to begin to make that case more forcefully. I know this is something UKOOA is considering – and I look forward to a vigorous case being made as to why natural gas is the key to energy security in the UK. We at BG Group certainly intend to play our part.

So, in summing up the UK position – yes, we all need to work to ensure supply tightness up to the winter of 2007 does not catch us out. Beyond that, projects need to come onstream on time but there is every possibility that, by 2010, the UK gas-market will be very different but no less resilent - supplied from a range of sources via a new more robust network.

But, of course – in gas terms – Britain is not an island. And the way in which the single European gas market does or does not develop will have an impact on us.

And, again, I’d like to swim somewhat against the tide of fashion by suggesting that the prospects of developing a more liquid and transparent gas market across Europe are not as gloomy as many people suggest.

Why do I say that? Well, I’d remind you first of all of the pessimistic forecasts that preceded agreement over the second Gas Directive last year. Many analysts said it was impossible and yet EU leaders came away with a deal that promised full market opening by July 2007.

Some analysts are now saying that the game is up for competition in Europe – that the big power and gas companies like E.On, RWE and EdeF have carved up the market between them. There may come a point when the Commission may wish to consider whether the power market has been carved up but I would make a different point. The power market is not the gas market and there is still plenty of scope for players of a range of sizes to find market openings – just as we at BG Group are seeking to do in Italy.

Now everyone acknowledges that the first Gas Directive did not go far enough and some member states’ zeal in implementing it left a little to be desired. But I believe there are increasing signs that the Commission recognizes that we are now entering an important new phase in the liberalization of Europe’s gas markets – and that is the implementation phase.

Commission officials are now stating publicly that they do not need a third Gas Directive. What we have in place now should be sufficient to create a true gas market, provided the detailed steps are taken to ensure that theoretical market opening becomes real, practical market opening.

In that respect, the Commission is correct to place a lot of store in the detailed provisions being produced by the Madrid Forum. Regulations relating to issues such as access to pipelines, cross-border arrangements, tariffing systems and so on are the essential small print required to make market opening real.

In an internal study that we at BG Group carried out recently into the state of the European market, we concluded that the principal obstacle to gas companies accessing new areas was transportation and the difficulty of coping with a patchwork quilt of access, cross-boundary and other technical rules rules.

Yes, there have been some misgivings at the Commission’s proposal to turn guidelines agreed at Madrid into a legally binding regulation. The fear has been that Brussels might subsequently use powers contained in that regulation to add new requirements without consulting industry.

However, I believe that it is only by giving these guidelines legal force that we can move down the road towards real implementation of the gas directives. I would urge the Commission to provide solid assurances that industry will always be at the heart of framing any additional regulations – but, if we want the slower vehicles in the single gas market convoy to speed up, we have to ensure that legally binding regulations are in place.

There is also fresh hope for progress towards a truly open market in the Commission’s public acknowledgement last month that it needs to scale up significantly its benchmarking of progress on market opening. Just a few weeks ago, one senior official from DG Tren, the energy directorate, committed the Commission to putting significantly more resources into benchmarking. And he accepted too that benchmarking had to be meaningful – no use putting a green traffic light against the German market and declaring it open for business to all-comers when that is not the true picture.

But it’s not just a question of the Commission getting on with the job. I think those of us who support the liberalization process need to keep pushing too. We need to flag up where there are blockages on the ground. We need to push for them to be removed.

And we need to consider the supply, the infrastructure and the political problems challenges that face us. And there are some big issues here. For example, can we find means of bringing Caspian gas directly to European markets? How quickly can we access Middle East reserves currently not destined for our markets? Do we need to support major new pipelines to bring Caspian and Middle East gas into Europe? How significant can LNG be in the mix?

But this has to be a joint effort – the private sector working with governments and the EU. Companies like our own have to come up with the strategies for locating and producing gas. And we need our governments and the EU to use their foreign policy efforts to crack some of the trickier political problems that can make working with producer countries difficult. Iran is a case in point where the resources are potentially massive but the political hurdle extremely high.

I certainly think the UK Government and the Commission are increasingly aware of the need to align energy policies and foreign policy but this is an unremitting task that we have to keep working at.

But let me say: if we can make progress towards a single gas market, in my view it can only be good for the UK. We shouldn’t be fearful that, if gas consumption increases as we expect it to in the UK and in Europe, that we’ll be too many markets chasing too little gas. The more vibrant the competition is, the better it will be for the consumer.

But let’s be clear: without major progress on liberalization, the UK can still of course meet its gas supply needs. The supply and infrastructure projects I alluded to earlier are proof of that. But ours will be a still more comfortable situation in the event of a liquid European market emerging with trading hubs offering opportunities for suppliers to be flexible and make imaginative choices about where and how they sell their gas.

But let me end now with some conclusions about the situation we find ourselves in:

• We can be justifiably proud of the way in which our industry has responded to the changing demands of UK gas-supply but we need to work with DTI, Ofgem and NGT to ensure that major supply and infrastructure projects are delivered on time;
• We need to focus on getting through the period of supply tightness until we’re beyond the winter of 2007;
• We should encourage the more enlightened approach towards regulation that both Ofgem and the European Commission appear to be showing;
• And we need to play a role in supporting Commission efforts to remove obstacles to free movement and trading of gas across the EU.

It is easy to be gloomy about the prospects of an open European market but the pessimists are not always right. Market signals have prompted a vigorous response from the industry in the UK. Given the right climate, perhaps they can do the same in Continental Europe.

Ladies and gentlemen, Minister. Thank you.