Gas Emergency Cash Out

1
Gas Emergency Cash Out A Shipper
PerspectiveTransmission Workstream 3/7/08

• Steve Rose

2
Background

• Mod 44 significantly increased the financial
  incentives on shippers to take actions which
  collectively should avoid the declaration of a
  gas supply emergency by
• adopting the SMP Buy price prevailing prior to
  the declaration of the emergency as the emergency
  cash out price for negative imbalances
• introducing ECQ trades which negate any
  commercial benefit arising from load which failed
  to interrupt prior to the emergency being
  instructed to emergency interrupt
• Mod 61 introduced further measures to prevent the
  likelihood of an emergency occurring such as
• introducing a Gas Balancing Alert (GBA)
• allowing NG to accept OTC offers from non OCM
  participants following declaration of a GBA
• allowing NG to accept multi day balancing actions
  for up to seven days
• Despite these positive enhancements to supply
  security emergency situations could still arise
  e.g. due to extreme weather, offshore FM events
  or critical transportation constraints.
• At this point NGs residual balancing role ceases
  and the Network Emergency Co-ordinator (NEC)
  takes command of the network under statutory
  powers and acts a primary balancer of the Total
  System.
• No shipper or any other gas market participant
  should underestimate the seriousness of the
  financial and reputational damage that would
  arise either to itself, or to GB as a whole, from
  the declaration of an emergency.
• Shippers currently have every incentive to avoid
  an emergency but in the event one is declared the
  emergency cash out arrangements should recognise
  the practical limitations on shippers abilities
  to continue using market arrangements to help
  resolve it.

3
Obligations on parties during an emergency

• The following parties have statutory obligations
  under the Gas Safety (Management) Regulations
  1996 to co-operate so far as is necessary with
  the NEC to enable it to comply with its Safety
  Case
• licensed gas shippers and suppliers
• persons in control of a gas production facility,
  gas processing facility, terminal, storage
  facility or an interconnector
• Stage 2 of a Gas Deficit or GSMR Safety Monitor
  emergency allows the NEC to instruct shippers to
  source as much gas as they can and for delivery
  to the relevant beach entry facilities.
• Gas shippers have a licence obligation to use
  their best endeavours during an emergency to
  comply with all requests made by the relevant
  transporter for the purpose of averting danger to
  life, or property, or securing the safety of the
  pipeline system.
• UNC shippers are required to maximise delivery of
  gas to the Total System by exercise of all
  contractual rights if instructed to by the NG NTS
  at stage 2 of a Gas Deficit Emergency,
  irrespective of the commercial terms of such
  supplies.
• In an emergency therefore shippers will already
  be sourcing and delivering as much gas as they
  possibly can to beach entry points and production
  facility/interconnector/terminal operators will
  be obliged cooperate so far as is necessary to
  facilitate delivery of such gas.

4
Licensed shippers

• The following organisations which are active in
  shipping Norwegian gas to beach entry points and
  gas through interconnectors and LNG terminals all
  have subsidiaries with GB shipper licenses and
  the majority have also acceded to the UNC
• Langeled (Easington) and Vesterled/Tampen (St
  Fergus)
• ConocoPhillips, StatoilHydro, ExxonMobil,,Shell,
  Centrica, Total, ENI, Dong
• IUK
• BG, BP, Centrica, ConocoPhillips, Distrigas, EdF,
  E.On Ruhrgas, Total, ENI, Essent, GdF,
  StatoilHydro, Gazprom, RWE
• BBL
• Centrica, Gasunie
• LNG import facilities (Grain, South Hook, Dragon,
  Teeside)
• BP, Sonatrach, Centrica, GdF, ExxonMobil, Total,
  South Hook Gas, BG, Petronas, RWE
• In an emergency the licensed shipper entities of
  these organisations will be obliged to source as
  much gas as is available to them for delivery to
  beach entry points, regardless of their business
  interest.

5
Principle barriers to effective shipper market
arrangements during an emergency

• Understanding your imbalance position
• in the event the NEC instructs transporters to
  commence firm load shedding (Stage 3) shippers
  are unlikely to know which of their sites have
  been interrupted.
• can NDM nominations persist in a Stage 4
  emergency if DNs are deciding how to allocate gas
  across their network
• gas over and above normal contractual
  requirements may be made available only on a
  reasonable endeavours basis and a shipper may not
  know how much has actually been delivered until
  well after the event
• Credit
• prices in the run up to an emergency may well be
  extremely high and these would roll over into
  emergency cash out prices
• Shippers individual credit positions, and those
  of its counterparties, are likely to hit their
  limits very quickly making trading very difficult
• OCM requires full collateralisation and a
  shippers ability to substantially increase the
  security it posts may well be limited
• Fear and panic
• GB has never experienced a gas emergency before
  and even with best laid plans moving into
  emergency arrangements is likely to result in a
  climate of fear and panic spreading throughout
  the market amongst customers
• parties do not always act logically or rationally
  in such circumstances and liquidity is likely to
  reduce through indecision and uncertainty as
  price cannot properly reflect risk as risk is
  unknown (e.g. 11th Sept 2001)
• an emergency could happen at any time and if it
  occurred out of office hours, or during a major
  holiday period, shippers collective response is
  likely to be less efficient than if it occurred
  during business hours on a typical weekday
• a gas emergency could well have knock on
  consequences in the electricity market
  potentially compounding the fear and panic

6
Role of the NEC

• The NEC has a statutory duty to prepare a Safety
  Case and follow this strictly during a gas
  emergency.
• The NEC will have access to the most up to date
  information about the events that triggered the
  emergency and the supply and demand position of
  the Total System.
• The Joint Response Team (DTI, NG NTS, Ofgem and
  other parties in the event of isolation) provide
  guidance to the NEC on the wider aspects of a gas
  supply emergency.
• The NEC is appointed by NG NTS to direct and
  co-ordinate the actions of shippers during an
  emergency and has sole discretion over when each
  of the five stages of an emergency are declared.
• The NEC can direct parties to take actions
  intended to minimise the safety consequences of
  an emergency.
• To the extent that any gas over and above that
  sourced by shippers is available the NEC seems to
  be the best party to secure it.

7
Advantages of the NEC securing any further gas

• NEC will know the criticality of events and how
  the emergency could develop and so can take
  decisive action based on that understanding.
• NEC will be liaising closely with government and
  will be made aware (through JRT) of any gas that
  might be sourced through any emergency
  EU/governmental agreements.
• NEC is employed by NG NTS whos credit rating is
  likely to be higher than that of most shippers.
• NEC can instruct NG NTS to post bids for
  physical/locational gas on the OCM and NG will be
  able to assess whether any offers accepted are
  from shippers who should already be maximising
  their beach supply.

8
Alternative Way Forward

• Emergency Cash Out prices to stay the same.
• OCM to remain open throughout the emergency for
  all OCM market participants.
• On instruction from the NEC NG NTS allowed to
  post OCM bids and accept OCM offers that result
  in Physical Market Transactions.
• On instruction from the NEC NG NTS allowed to
  enter into OTC trades based on physical gas
  supply.
• NG NTS to publish details of the counterparty,
  volume and prices of any Physical Market
  Transaction or OTC trade on their website.
• NG NTS allowed to enter into multi day trades as
  per Mod 61.
• Cost of any trades entered into by NG NTS to be
  smeared back to shippers based on their daily
  imbalance.