Gas giant halts North Sea production

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CENTRICA, Britain’s biggest energy supplier and the parent company of British Gas, is refusing to reopen on of its key North Sea production fields. It blames the higher taxes announced by the Chancellor in March for making operations uneconomic.

At the start of May, Centrica shut down its South Morecambe gas field for planned maintenance but said it might not restart if UK gas prices are not high enough to make up for the extra taxes imposed in the Budget.

Centrica was a beneficiary of the strong growth in the price of oil and gas during the first quarter of 2011.  It has a big North Sea operation having bought Aberdeen-based Venture Production for £1.3 billion in 2009, to reduce its reliance on acquiring gas from the wholesale market.

 

But following the 12 percentage point increase on North Sea taxes in the Budget, Centrica will have to pay around £300 million extra tax during this financial year.
The Budget tax rises are playing havoc with North Sea operations just when the aftermath of the Fukushima nuclear accident is boosting the demand for fossil fuels.

BLOW TO NUCLEAR POWER

In the decade preceding the Fukushima incident, most industrial nations had come to the conclusion that a new generation of nuclear power stations was necessary. Fukushima has altered this commercial scenario radically. In the wake of the disaster, uranium mining companies have lost a third of their value.

Last month, both Germany and Switzerland decided to close their nuclear power plants as soon as possible. However, both France and the UK – both of whose governments are heavily influenced by the nuclear lobby – are still committed to building more reactors. One reason for the extra taxes on North Sea production may be to tilt economics in favour of nuclear. EdF, the state-owned French power utility, is planning to increase its nuclear capacity by 25GW over the next decade. This includes building four reactors at Hinkley Point and Sizewell C in the UK.

However, post Fukushima, nuclear power is going to be more expensive. The key beneficiary will not be renewable energy, which (in the absence of a carbon tax) still requires extensive subsidy. Instead, expect the gas and coal industries to gain in a big way.

RETURN OF COAL

Thanks to energy hungry India and China, world coal use is alreadry rising by a steady five per cent per annum – faster than any other fuel. Global demand for coal is forecast to jump by another half in the next two decades. Even before Fukushima, coal’s share in global electricity generation was set to increase from 41 per cent to 44 per cent by 2030. Reason: coal is the cheapest form of energy on the planet.

This surge in demand for coal is having an impact on prices – particularly as Japan has to replace lost nuclear power with imported fossil fuel. In April, the London-listed mining group Xstrata signed a contract with the Chugoku Electric Power of Japan worth £81 a tonne, for Australian coal. That signalled a 30 per cent hike on last year’s level.

Despite the advent of huge supplies of domestic shale gas in the US, the price of natural gas is four times that of coal, for the equivalent energy. Which means that the real beneficiary of the Fukushima meltdown may be coal rather than gas. During the cold snap before Christmas, reliable coal-fired power stations in Britain provided some 43 per cent of all the electricity used.

Of the 60 million tonnes of coal consumed annually in the UK, two thirds is imported. Which suggests every tonne of coal mined in Scotland will find a ready market.