The Anglo-Dutch gas pipeline will be a key route for continental gas imported into the UK. Centrica [CNA] is to take 8bcm per year from Gasunie through the BBL, in addition to agreeing a recent 1bcm fixed price contract with Statoil [STL.OL]. Fixed price contracts are particularly appealing right now as a tool to guard against future price volatility and protect margins.
The BBL interconnector will be a vital source of imported gas as the UK shifts from being a net exporter to a net importer of gas over the next few years. This dynamic means that UK retailers must consider a number of options when approaching the area of gas purchasing. Centrica, the UK's largest gas retailer, is one such retailer. It is a major recipient of BBL gas and has recently signed a fixed price gas contract with Statoil.
Common practice in purchasing for UK gas retailers is to index contract prices to floating NBP prices. A decision to fix the price of a gas purchase contract arises from a need to balance procurement strategy; traditionally utilities cover retail load through a combination of purchasing (bilateral contracts and OTC deals) and trading (short-term forward contracts and the NBP spot market).
Mitigating price risk through fixed price deals seems particularly appealing at the moment. This is due to the current climate of high oil prices and the context of the UK transition from a net gas exporter to net importer in the near future. The latter factor will also serve to limit visibility of price fluctuations, meaning that retailers securing fixed price contracts could realize a significant upside from them.
Traditionally, UK spot purchases have provided better value than forward purchases. As the UK moves to become a net importer of gas this dynamic may change, and gas retailers must ask themselves whether they should index to the NBP, to another index, or fix the price?
Centrica's retail competitors could enter into similar fixed price deals. However, without its scale - 40% of the UK retail market by volume - it is unlikely that the competition could secure a contract at a better or even equal price. UK gas retailers need to calculate what proportion of their retail load, if any, should be covered through fixed price purchasing.