Gas

The first and easiest prediction arising from the continuing crisis in Ukraine and the deterioration of relations between Russia and the EU is that natural gas prices will rise. After all half the gas Europe imports from Russia comes through Ukraine. Very little of that supply can be replaced from other sources in the short term.

Russia has announced a sharp (44 per cent) increase in prices for the gas supplied to Ukraine – in part as a punishment for past unpaid bills. Surely Europe must be vulnerable to either a cut-off of supplies or a forced price rise? And yet in the real world actual gas prices have fallen over the past month and now stand at a three-year low. Is the market mad? Read more

Life in the Middle East never stands still. The inexorable progress of Iran towards some form of nuclear capability has not been halted by the negotiations which began at the end of last year and which have now run on for almost six months. In the absence of a deal others are assuming the worst. Unilateral direct action by Israel still cannot be definitively ruled out. Meanwhile, other countries are feeling the need to prepare their own deterrents. Having lost confidence in the umbrella of US security the Saudis are developing their own capabilities. The dangers for the region and for the world’s energy markets are enormous. Read more

The dispute over Ukraine has moved into a diplomatic phase and for the moment at least the prospect of a Russian advance into eastern Ukraine has receded. The consequences of what happened in the Crimea, however, continue to shape European policy making. The invasion provided a sharp reminder of Europe’s reliance on Russian gas – a degree of dependence which the EU will now reduce even if a settlement is agreed by the diplomats. It is quite possible that within two or three years European gas imports from Russia could be halved. Russia would be reduced to being one supplier among many in a world where gas-to-gas competition inexorably reduces prices. Read more

Readers will be familiar with the issue of shale gas - its potential to change the world energy market and the controversies surrounding its development. But you might be less familiar with tight oil – oil from shale rock which can also be extracted by hydraulic fracturing. That is the next story and its development particularly in the UK will be every bit as controversial. Even the publication of the initial basic survey of the resources in place is being held up by political nervousness. Read more

The full-scale competition review of the UK’s energy market which will be announced later this week is a challenge the industry should welcome. The inquiry will absorb a huge amount of time and effort over the next year but it offers the chance both for the industry to clear its name by removing the cloud of public suspicion over pricing policies and simultaneously for individual companies to examine their own strategic positioning in a market which is changing rapidly.

Of course, the competition review will add to uncertainty and will reinforce the reluctance to invest in new generating capacity, which is already evident, but the sense of doubt will exist in any case, and the review may help to produce some longer-term clarity. In the short term the government will have to find a new mechanism to ensure that supply is adequate to meet demand – and doing so with an expensive plan for emergency electricity supplies. But that is a separate issue from this fundamental analysis Read more