Energy Highlights Q4’23:US-UK Energy Trade Agreement

Our Energy Economist, Dominic Whittome where he dissects the complexities of the US-UK Energy Trade Agreement and its implications. Delve into the intricacies of balance of payments affected by energy imports and unravel the challenges and trends in the realm of electricity. This marks the concluding part of our 3-part series, providing a holistic perspective on the current energy landscape.

A quietly-reported energy trade agreement with the USA affecting UK gas consumers and energy policy

A recent, discreetly-negotiated energy trade agreement between the UK and USA, known as the Energy Stability and Affordability Partnership (ESAP), is reshaping the dynamics of UK gas consumption and energy policy.

ESAP, while not the sought-after ‘trade deal,’ is more of a US-UK import agreement facilitating the sale of US shale gas to major UK buyers. Despite its potential impact on consumers and investors, ESAP remains largely underreported, with limited information available from official UK government channels.

The partnership, initiated in the latter half of 2022, involves significant volumes of US shale LNG—up to a forward commitment of 10 billion cubic meters per year, roughly 17% of the national supply. The exact operational details of the partnership remain undisclosed, but UK energy utilities engaged in LNG purchases without direct government involvement.

With gas deals crucially needed, especially as Russian supplies waned and an uncertain gas supply outlook prevailed, UK officials may have provided assurances or incentives to secure deals. The gas imports, however, were reportedly purchased well above prevailing prices, exposing the UK utilities to potential mark-to-market losses.

As we scrutinize the Price Cap, which Ofgem has been reducing, it raises questions about its intended purpose. Originally a shield against high gas bills, it now seems to act as a form of ‘price control.’ This has contributed to a less competitive I&C market, with higher business gas prices and fewer suppliers.

Speculatively, the Price Cap might be influenced by earlier promises to make good on assurances made to UK gas buyers involved in the Energy Trade Agreement discussions. This theory gains traction as Ofgem announces plans to increase the Price Cap, citing the need to prevent energy firms from going bust due to unrecoverable debt. This move, however, appears incongruent with a significant drop in wholesale gas prices.

In summary, the Energy Trade Agreement developments and their potential impact on UK gas prices raise questions about the true function of the Price Cap and its alignment with consumer interests. The recent announcement by Ofgem to increase the Price Cap adds another layer of complexity to an already intricate energy landscape.

Potential costs and consumer price implications of the imported LNG

Research to date suggests the US LNG was bought by UK utilities at various price points. Some was negotiated over $60/MMBTU, in some cases by quite some margin.

To convert S/MMBTU into p/th, one can just divide by the exchange rate and add a zero to get from $60/MMBTU to 600 p/th or a £6.00/th import price, which is four times the OTC market price for an Annual Contract gas supply sourced at the UK National Balancing Point (NBP) or Title Transfer Facility (TTF) in Holland.

Of course, one would expect to pay more for LNG gas; to cover shipping costs, process losses, boil-off and so forth. But evaluated term prices like the ones here are exceptional, even by (discounted) LNG spot contract standards. The fact remains that the alternative Annual gas contracts trade at the NBP and TTF at quarter of most US LNG import prices.

Cutting to the chase, this may explain why UK businesses and other consumers are paying stubbornly high prices for energy, the highest in the OECD in fact. ESAP itself is expected to run indefinitely. The press release confirms the volumes involved at “9 bcm/y to 10 bcm/y” but hints of expanding these later.

Assume a ‘low case’ US LNG gas import price of $60/MMBTU and $1.20 to £1.00 exchange rate and £1.00 = € 1.15

Gas prices below expressed in p/kWh[h] [to be updated in future bulletins]

These figures should not be taken as gospel. However, they are based on first-hand research, cross checking and they should serve as a generally-accurate reference point.

They do seem to vindicate concerns expressed in the market that UK businesses are being placed at a competitive disadvantage. The above figures (which will be rechecked and updated now) were for the USA and for France, although France is reflective for much of Europe, with comparatively little price variance or relative to Britain.

Balance of Payments implications of the imported LNG

It is might seen unusual that so little publicity (let alone information) has been disseminated, especially when we look at the trade flows or balance of payments’ implications involved. For the ‘value’ of the agreement, or any such LNG agreement for that matter is significant.

For simplicity, let’s assume a lower-end expectation: 9 bcm/y (billion cubic metres per year) is and it remains the maximum US gas export figure to the UK – even if the ESAP declaration entertains higher volumes and conservatively assume a mean import gas price of $ 60/MMBTU – even if some deals have already signed well above this $60/MMBTU figures with reports of deals done at circa $80/MMBTU) then we can estimate a ‘low case’ value of gas purchased.

Assuming 9 bcm/y of LNG is imported over a forward ten year time-horizon (which coincides with the contract length of EASP-related deals publically reported so far), we can then approximate as follows:

Using the industry shorthand conversion of one billion cubic metres approximating to one million therms per day, if we assume that just 9 bcm/y of US shale LNG is purchased, all of it under a ten year contract and at an average prevailing contract price of $60/MMBTU (which works out at £5/th (($60/MMBTU ÷ 1.2) ÷ 10))) then a ‘rough estimate’ of the cost of these imports may be expressed as 9 bcm/y x 10 years x 365 days x 1,000,000 therms/day x £5/therm = £165 billion.

This import bill is based on the US LNG only and at the lowest amount, 9 bcm/y envisaged under EASP, which is seen as a long-term partnership. But UK gas consumption in 2022 was over 71 bcm/y according to the Department for Energy Security and Net Zero, so as indigenous North Sea gas volumes recede, the UK’s overall gas import bill will grow wit further imports from America and other gas exporting nations filling the void.

Explore the comprehensive picture of the Energy Trade Agreement and energy sector by reading the first and second parts of this series.

Dominic Whittome

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

Energy market are in a state of change. For sound, independent financial advice for your energy project or advice on the Energy Trade Agreement, our team of experienced energy financiers are able to help.

Contact Dominic directly to arrange a call.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

Prospect is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, insurance and risk management specialists, and finance experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.