Imports seen taming UK gas prices next year

Relief is in sight for Britain's hard pressed energy consumers as new projects to import gas look set to boost supply and help bring down soaring bills.

But the threat of gas supply problems and ballooning wholesale prices this winter still looms large and bills may rise again before falling.

Britain's biggest energy supplier, British Gas, on last week raised bills for the second time this year, extending a string of big increases imposed by all the country's utilities during the last two years on the back of rising wholesale costs.

"This winter is crunch time for the wholesale cost of gas," British Gas Managing Director Mark Clare said. "We can see some light at the end of the tunnel but it's still a winter away."

British Gas owner Centrica and the UK's other utilities have to buy gas on the wholesale market, which they then sell on to consumers.

Climbing wholesale prices, on the back of dwindling output from Britain's ageing North Sea fields, have hit their profits and prompted them to pass the extra costs on to consumers.

As imports boost gas supply and wholesale prices retreat, utilities are likely to recoup losses before allowing any price falls to filter through to final bills.

High gas prices have encouraged so much investment in pipelines and terminals to import liquefied natural gas (LNG) that the country could be awash with gas from next year.

"We have a really rather large surplus looming, certainly for three years, maybe four," said Niall Trimble, managing director at consultants the Energy Contract Company.

John King of the Eclipse Energy Group consultancy said the market could be over supplied for five years from next summer. Both analysts agreed there would be a big fall in winter gas prices as a result of new import capacity becoming available.

Mr King said the price of forward gas for Winter 2007/08 was "hugely overvalued". Mr Trimble said spot gas prices could fall by as much as 30 per cent next year.

But David Cox, director of Poyry Energy Consulting in Oxford, said that while there was potential for over supply, any excess gas would probably be re-exported.

"We don't see a high risk of a gas bubble," he said. "We don't expect a crash in prices."

Analysts stressed that more import capability does not guarantee the gas will arrive and stay in the UK.

"There is a risk that people equate import capacity with import volumes," Ben Hollins of Wood Mackenzie said.

Just because new LNG terminals open does not mean tankers will unload at them. Vessels can be lured away with the promise of more dollars per tonne as the global thirst for LNG grows.

Last winter, when UK gas prices hit record levels, the pipeline between Belgium and England did not pump to Britain at full capacity, according to UK energy regulator Ofgem.

It accused utilities in mainland Europe of holding back gas and failing to help a supply squeeze in the UK market.

The UK-Belgium pipeline can export gas as well as import. So long as it is working properly, the link should ensure that any excess gas in Britain, as new import projects come on stream, can find a home in mainland Europe.

Three new import projects are due on stream before the end of this year. But if any of these new facilities are delayed there could be further big gas price increases this winter.

Even if they do come online on time, there is still a threat of price rises if there are supply interruptions amid an unusually cold winter, analysts said.

North Sea gas platforms can break down at any moment. Analysts also cited the possibility that Russian gas exports to mainland Europe could be reduced as they were in January because of a price dispute between Russia and Ukraine.