Centrica, the parent company of British Gas, has signed a new multi-billion pound deal to import gas to the UK from the US, in turn providing around 1.8 million homes with energy.
The £10 billion, 20-year contract will help to ensure the UK’s future energy security, according to Centrica chief executive Sam Laidlaw; a sentiment shared by the government, which welcomed the peace of mind the agreement will create.
“Future gas supplies from the US will help diversify our energy mix and provide British consumers with a new long-term, secure and affordable source of fuel,” Prime Minister David Cameron said.
Under the terms of the arrangement, Centrica will purchase around 1.75 million metric tonnes of liquefied natural gas (LNG) volumes for export from the Sabine Pass plant in Louisiana every year.
The company noted that this is equivalent to the yearly gas demand of around 1.8 million British households and will also provide a long-term guarantee of supply; something that could not be agreed with Qatar.
In 2011, Centrica could only settle on a three-year LNG supply agreement with Qatar, after talks to broker a 20-year contract collapsed, while volumes of LNG from Qatar fell by almost 70% in January this year, compared to the same time in 2012, recent figures from Waterborne suggested.
As Britain’s energy supply deficit is increasingly being plugged by LNG from Qatar, the key concern was that the country could lose out in the absence of binding contractual agreements, particularly as Asian demand will continue to rise and divert Qatari cargoes.
According to Centrica, the sensible option was to sign a long-term contract, and the new US deal assures this, with the initial 20-year agreement also having the the option for a 10-year extension.
Under the terms of the agreement, Centrica will pay Cheniere, owner of the Sabine Pass plant, a fixed fee of $3 per million British thermal units, in addition to a commodity fee of 115% of the prevailing Henry Hub price, by which gas in North America is typically traded.
A great result
Charif Souki, Cheniere chief executive, told the FT that the Centrica is a great result for all concerned: “With this contract, exports from the United States will become an important part of the UK’s overall energy supply portfolio.”
The benefits for the consumer were further highlighted by Mr Laidlaw, who noted that the secure supply chain will mean Britain is less at the mercy of fluctuating prices due to demand from the east.
“In an increasingly global gas market, this landmark agreement represents a significant step forward in our strategy, enabling Centrica to strengthen its position along the gas value chain and helping to ensure the UK’s future energy security,” the Centrica chief added.
The deal has also been welcomed by Energy Minister John Hayes, who was recently compelled to play down the threat of any potential gas shortage in the UK.
He explained that a combination of pipe delivery from the UK, Belgium, the Netherlands and Norway is already being complemented by LNG shipments, and this will be boosted further still by the US-Centrica deal, which will see commercial delivery begin in September 2018.
Diversity is key
“Security of UK energy supply lies in diversity. The UK already receives gas from a range of countries and we can now add the US to Norway, the Netherlands and Qatar as sources of supply,” he added.
The deal has raise concern among some commentators, however, with Liberum Capital analyst Peter Atherton noting that Centrica will have rights to sell the gas wherever it likes.
This will mean that that the LNG will only land in Britain if gas prices are great enough to exceed the potential returns on offer by delivering it to demanding Asian markets, he told the Telegraph.
Centrica finance director Nick Luff played down any fears, however, explaining that the LNG will not simply go to the highest bidder.
“If the UK gas market is well supplied … [the purchased US gas] won’t need to come here and we have the flexibility to sell it elsewhere, he explained. “But if the UK needs it and the economics reflect that then the gas can come here.”