Gas Emergency Cash Out – A Shipper Perspective Transmission 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 NG’s 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 shipper’s 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. 11 th 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 who’s 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.