A deal in the desert involving the British prime minister, British Gas owner Centrica and the Kingdom of Qatar may seem more like the plot of a low-budget movie than a key factor shaping household bills. But with the UK’s production of natural gas dwindling fast, in 2011 Centrica executives headed for Qatar – the world’s largest exporter of liquefied natural gas (LNG) to secure UK gas supplies.
Qatar is already essential to our energy mix, providing 30% of UK gas demand last year, according to the company.
However the volatility of gas prices from this region has already had an impact in the UK, where Ofgem data suggests average energy bills rose by £150 during the last year - £100 of which was driven by the rising cost of gas.
To limit such rapid changes – and back their claim that gas should be used to generated electricity -Centrica wanted a 20-year deal with the Qataris to ship gas to the UK.
To get it, the documents suggest, it was even willing to offer a stake in the company and a seat on the board.
That would have meant the UK’s largest domestic energy supplier being partly owned by the Qatari royal family. Controversial, but clearly a price Centrica felt was worth paying.
But it failed in its mission.
By the time David Cameron arrived on 23 February (for what the documents call a “VIP visit”) he had to endorse a far smaller, three year deal. A very similar deal to one described in the private documents as “unacceptable” because it was too short-term, too expensive and, perhaps crucially, the cargo’s could be diverted to a higher bidder. Centrica haven’t clarified whether they secured any last minute improvements on the deal described by government officials.
Analysts at Merrill Lynch Bank of America recently warned that: "Qatar has consciously sent tankers to Asia… thus increasing the risk of gas shortages in Europe… It is not implausible that UK LNG imports fall to zero by the end of 2012."
In practical terms what that means is that the risk of rapidly rising prices – and the cost of finding new suppliers if Qatar decides to divert – is passed on to consumers. The company would claim that at least its three year deal is linked to the UK price – not the international oil price which can be even more volatile. But with increased demand from Asia – Qatar recently signed a deal with India – Qatar has little incentive to tie itself down.
The Department of Energy and Climate Change point out that the UK could secure supplies from elsewhere, including Norway and continental Europe – which will often mean Russia. But friendly as UK-Norway relations are, it doesn’t mean they will sell us their gas on the cheap – not when it is just as easy for them to supply Germany whose gas demand is rising as it closes down its nuclear power plants. For Centrica – which argues that gas is a key part of the UK’s energy mix for years to come – securing long term deals is key to making its case.
In a speech to the Adam Smith Institute at around the time that Centrica were entering the failed talks with Qatargas, CEO Sam Laidlaw said, “The absence of long-term LNG contracts tied to the UK market means that we will not be able to rely on imports in times of tight global markets. Additional destination specific gas contracts to replace our North Sea production are essential for security of supply.”
Unless it succeeds in doing so, the risk of global events – or rising demand from Asia – pushing up gas prices is borne almost entirely by the consumer.