Shell’s Corrib gas and Shannon LNG prices will rise if Shannon LNG wins court case over being forced to pay for the gas interconnector which it won’t use – Valerie Flynn
A High Court challenge to certain Irish gas tariffs by Shannon LNG could pave the way for Shell to raise the prices it will charge for gas from the Corrib gas field in Mayo.
Gas market insiders are sceptical of Shannon LNG’s claim – widely parroted in the press – that it will help to bring down rocketing gas prices in Ireland if it builds the country’s first liquefied natural gas (LNG) terminal in Kerry.
Market experts are also raising their eyebrows at the suggestion by Minister for Communications, Energy and Natural Resources Pat Rabbitte, TD, that the Shannon LNG project, a joint venture between US gas multinational Hess and an energy broker, will significantly improve security of gas supply in Ireland.
Shannon LNG has taken the Commission for Energy Regulation (CER) to court over the regulator’s decision to charge tariffs subsidising Ireland’s gas interconnectors, the underwater pipe to British gas terminals, to new entrants to the Irish market. Shannon LNG says it shouldn’t have to pay tariffs because it won’t use the interconnectors, instead it will import liquefied gas from the US in tankers and re-gassify it at a facility it plans to build in north Kerry.
If Shannon LNG wins its case, which will be heard in February 2013, Shell too will be exempt from contributing towards the €50 million the CER says needs to be raised each year for paying off Bord Gáis’s investments in the interconnectors.
Ireland imports 95% of its gas through the interconnectors, with Irish prices pegged to the British price, except that the unit price for the interconnector is then added in.
When Corrib and Shannon LNG begin supplying gas into the Irish market, use of the interconnectors will plummet. So if Shannon LNG wins the case and is exempt, along with Shell, from paying tariffs, the unit cost on the interconnector will soar, pushing up the price of imported gas from Britain.
This presents Shannon LNG and Shell with the chance to price up their own gas, topping the price of their fuel with an opportunity cost, while still slightly undercutting the price of imported gas from Britain. The CER is certain that this will happen and that’s why it decided to charge the new entrants interconnector tariffs – it’s the only way to stop Irish households and businesses being hammered with even higher energy bills.
Shannon LNG claims it will help Ireland to get access to “competitive energy” which will “create jobs” and “enable economic recovery” and has been highly effective at getting this spin into the Irish media. Shannon LNG has been painted as a sort of Santa Claus figure, whose only wish is to gift cheap energy to poor, struggling Ireland, but whose laudable entrepreneurial spirit has been frustrated by ham-fisted policy-makers.
But gas market insiders know there’s no way that Shannon LNG and Shell will pass up the opportunity to boost their prices if the CER loses the court case.
“If the cost of the interconnector is not included, they [Shannon LNG and Shell] have the advantage of putting up the price because the cost of the NBP [British price] with the interconnector will be much higher”, says David Gascón of Dublin-based independent energy supplier Vayu. “There is a huge opportunity cost for Shannon LNG. There is the potential for a high fixed cost for consumers”.
Energy consultant Paul Hunt believes the CER’s decision to charge interconnector tariffs to new entrants was unfair, but he agrees that Shannon LNG will only slightly undercut British import prices. “The [market] price is being set by the NBP and the unit cost of the interconnector. Shannon and Corrib will have to charge below that and there will be some benefit [for consumers] but it will be a small benefit”, he says.
“If Shannon win, the government will look at getting the money elsewhere, and that will be imposed on consumers. One side or the other will win, but consumers won’t win either way”, Hunt says.
It is not clear whether the Shannon LNG project will proceed if the company loses the court case.
Shannon LNG has also had considerable success in marketing itself as a munificent investor whose attempt to create hundreds of jobs in Ireland is being choked. Local politicians have been vocal in their support for the project and in their opposition to the CER’s decision. Labour TD Arthur Spring told the Dáil in July that he was unhappy with the CER’s ruling and that the Shannon LNG project “would bring foreign moneys, create jobs and provide a positive start to energy provision which would ultimately realise more jobs in Kerry Group and the Tarbert fuel station”.
This Shannon-LNG-as-David and CER-as Goliath story, backed by politicians courting local concerns, has enabled Shannon LNG to keep the real story away from the public’s attention: the story of a corporation looking forward to making a fat profit in a country dangerously dependent on imported fuel, without actually creating many Irish jobs. In fact, once construction is finished, the terminal will directly employ only 50 people, a spokesman for Shannon LNG confirmed.
Security of supply
Ireland’s heavy dependence on imported gas is a major concern for energy security, the International Energy Agency warned earlier this year. Minister Pat Rabbitte has told the Dáil that the LNG project, along with Corrib, “would provide important security of gas supply for Ireland”.
But some energy-market experts say that even if Shannon LNG commits to some long-term bilateral supply deals, large quantities of LNG won’t necessarily hit the Irish market unless and until the price is right – for Shannon LNG.
“LNG tends to go where gas prices are highest because you can move it. So if prices are higher in Asia, they’ll send the gas there”, says one LNG consultant who asked not to be named. “The one thing it doesn’t bring is security of supply. It just gives direct exposure of the Irish market to LNG price”.
David Gascón points out that while gas prices in the US are around £0.20/therm and the UK price is around £0.60/therm, Asian prices are around £0.90/therm.
“Most spot cargoes are going to the Asian market. We could end up with a terminal that is underutilised”, Gascón said, adding that while around 30% of Britain’s gas needs were met by LNG last year, this year’s figure is closer to 3% because of the better prices available in Asia.
Shannon LNG and Shell declined to comment on the issues raised in this article, citing the court proceedings underway as the reason.
A spokesman for Minister Rabbitte said: “The creation of connectivity to the global LNG market could be beneficial to our security of supply in that it would improve the diversity of our sources of supply. However, it would not reduce our reliance on imported gas”.