ENERGY INSIGHT: Launch of gas index: A brief encounter one afternoon in December 1994
ICIS Editorial
20-Dec-2024
By Patrick Heren
LONDON (ICIS)–This is a memory from 30 years ago of an incident, minor in itself, which was, for me, a pivotal moment in the evolution of the competitive gas market.
But as it was so long ago, modern readers may need a bit of historical background.
Before the appearance of GIF’s forerunner European Gas Markets, free market gas prices were invisible.
Wholesale British gas prices were a private contractual matter between offshore gas producers and onshore consumers. Up until about 1990 there was really only one buyer, British Gas, and the output of the dozens of gas fields it purchased were priced according to long term agreements.
Prices were set at levels agreed at the time each individual field was developed and they were escalated, usually annually, by a wide range of indices – consumer price inflation, fuel oil, heating oil etc.
Prices were confidential, though fairly well known within the industry. The closest we got to transparency was when, once a year British Gas published its wacog, or weighted average cost of gas. In 1994, the year when I first began publishing spot gas prices, the BG wacog was just over 19 pence per therm.
By 1994, British Gas had been functionally divided into three: Centrica, the trading, sales and marketing arm; BG, the E&P business, plus international; and Transco (now National Grid Gas), the pipeline operator. The regulator, then known as Ofgas, had decreed that no more than 90% of the output of any new gas field could be sold to the former monopoly.
There was, luckily for the producers, a big new market for their gas, and that was the emerging independent power sector. The liberalisation of the electricity supply industry had lagged the gas industry by a couple of years, but once it had begun, 15 or 16 new independent producers built gas fired power stations which of course needed gas. As there was no spot gas market at the time, they all bought North Sea gas on more or less the same terms as British Gas.
Ironically, the origins of British spot gas trading lay with some of these long term agreements.
Gas was delivered to some IPP’s before the turbines were ready, and the power companies were forced to find alternative buyers – usually the new gas marketers trying to break into the industrial and commercial sector. Of course the prices paid were below the long term contract levels, and it was these confidential spot deals that I had been trying to report since the beginning of 1994.
That day, I had just put the December edition of European Gas Markets to bed, and taken a cab over to the BP Christmas press party at Butlers Wharf near Tower Bridge.
BP always threw a good party, and the press office ensured there were plenty of senior executives on hand, including board members, to be grilled by us hacks.
It was past 2 PM when I arrived, and the party was in full swing, crowded and noisy. I was standing just inside the entrance, trying to get my bearings, when John Browne followed me in. He was then CEO of BP Exploration, and about to become CEO of BP plc. He was also socially awkward and looked slightly intimidated by the noisy throng.
I grabbed a couple of glasses of champagne from a passing waiter, gave him one and began to ask questions.
Browne politely answered my queries about a variety of subjects – LNG, Russia, power generation – in greater detail than I would have expected. But it was all pretty routine until I put the question that most concerned me. It was the question I asked all gas executives I encountered in those days, a question most of them appeared baffled by.
“So, John, how would you feel about selling BP’s North Sea gas on a spot index?”
He suddenly became animated, even enthusiastic.
“I cannot wait to start selling on a spot gas index!” Browne exclaimed.
“Let me tell you what happens now when we find a new commercial gas field. Our people sit down with the people from British Gas, and they have a series of lunches that goes on for a couple of years. At the end of that time, they agree a price that any two intelligent people could have come up with in ten minutes. Then they agree to index it to something completely irrelevant, and I can guarantee you that by the time my gas is flowing across the beach, the price we get for it bears no relation to its value. Sometimes we get less than it’s worth, and sometimes we get more: of course I Iike the more, but I’d much rather sell all of it for its actual market value.”
I agreed that this was the wise course, and explained that I was endeavouring to establish just such a gas price index, though without much assistance from the industry, including BP.
“I can imagine,” he replied. “The gas market is in the dark ages. But we at BP have survived in the crude oil market for many years, not only survived but prospered – my gas colleagues should reflect on that. I wish you luck!”
John Browne glanced at his watch. “Oh dear, I’m late for a meeting of the BP Pension Fund.” And that was that. It took his gassy colleagues many months before they began to get the message.
But three months later we launched the Heren Index and the ancestor of ESGM and by the end of 1995, our prices were being written into contracts.
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