The Interconnector Pipeline A Key Link in Europe’s Gas Network Mark Futyan Oxford Institute of Energy Studies March 2006 Mark Futyan is a postgraduate student at Columbia Business School in New York. He previously worked for Interconnector (UK) Limited between 2001 and 2005. During this period, he was involved in a variety of engineering and commercial projects. For information or questions on this research, please contact: [email protected]. Copyright © 2006 Mark Futyan The contents of and views expressed in this paper are the author’s sole responsibility. They do not necessarily represent the Oxford Institute for Energy Studies or any of its members, nor do they represent the views of Interconnector (UK) Limited. ISBN 1-901795-44-6 ii Preface The Interconnector pipeline has rarely been out of the news since it was first proposed in the early 1990s. It is probably not too much of an exaggeration to say that it has transformed short term trading in north west Europe, causing companies to enter into commercial behaviour that they had not previously considered possible or, in some cases, desirable. Equally interesting were predictions (before it was built) that the project was likely to be a waste of time, followed by periodic claims that: gas was flowing in the wrong direction; that larger or smaller volumes of gas should be flowing; and that shippers on one side or the other were responding inappropriately to price signals. For a gas research programme this made the Interconnector a particularly suitable research project which fits perfectly into our work on European gas issues. This is the first publicly available document to provide a detailed account of the Interconnector pipeline supported by primary source materials. I am very grateful to Mark Futyan for taking on such a challenging project and seeing it through from the other side of the Atlantic alongside his MBA. Jonathan Stern March 2006 iii CONTENTS GLOSSARY......................................................................................................................................... VI ABSTRACT ............................................................................................................................................1 ACKNOWLEDGEMENTS ...................................................................................................................2 1 INTRODUCTION .........................................................................................................................3 1.1 INTERCONNECTOR OVERVIEW .................................................................................................3 1.2 FACILITIES ...............................................................................................................................3 1.3 A TEN-YEAR HISTORY .............................................................................................................4 2 PROJECT HISTORY ...................................................................................................................5 2.1 EARLY CONCEPTS....................................................................................................................5 2.2 THE STUDY GROUP..................................................................................................................5 3 KEY STAKEHOLDERS...............................................................................................................7 3.1 LANDFALL PARTNERS..............................................................................................................7 3.2 UK GOVERNMENT ...................................................................................................................7 3.3 SHAREHOLDERS.....................................................................................................................10 3.4 SHIPPERS ...............................................................................................................................15 3.5 MARKET EXPECTATIONS .......................................................................................................17 4 CREATING THE INTERCONNECTOR.................................................................................18 4.1 FINANCING ............................................................................................................................18 4.2 ALLIANCE STRUCTURE ..........................................................................................................20 4.3 TECHNICAL, ENVIRONMENTAL AND PLANNING CHALLENGES...............................................21 4.4 INTER-GOVERNMENTAL TREATY...........................................................................................22 5 BUSINESS RULES......................................................................................................................23 5.1 FLOW DIRECTION ..................................................................................................................23 5.2 NOMINATIONS .......................................................................................................................25 5.3 CAPACITY AND INVENTORY TRADING ...................................................................................25 5.4 VARIABLE INVENTORY ..........................................................................................................28 5.5 DIRECT ACCESS CONNECTION ...............................................................................................28 5.6 A COMPLEX SYSTEM .............................................................................................................29 6 FLOW AND PRICE TRENDS...................................................................................................30 6.1 ARBITRAGE............................................................................................................................30 6.2 PIPELINE FLOWS ....................................................................................................................31 6.3 PRICE EVOLUTION .................................................................................................................33 6.4 DEVELOPMENT OF EUROPEAN TRADING HUBS......................................................................35 7 FLOW CONSTRAINTS AND OUTAGES ...............................................................................36 7.1 PLANNED OUTAGES ...............................................................................................................36 7.2 UNPLANNED OUTAGES ..........................................................................................................36 7.3 FLOW DIRECTION CHANGES ..................................................................................................39 7.4 CAPACITY CONSTRAINTS.......................................................................................................40 8 REVERSE FLOW ENHANCEMENT ......................................................................................41 8.1 DEVELOPMENT PHASES .........................................................................................................41 8.2 CAPACITY SALES ...................................................................................................................41 8.3 MOTIVATION OF CAPACITY HOLDERS ...................................................................................42 8.4 COMPETING IMPORT PROJECTS..............................................................................................43 8.5 ELECTRICITY MARKET EXPOSURE.........................................................................................44 iv 9 SUMMARY & CONCLUSIONS................................................................................................45 9.1 FROM CONCEPT TO REALITY .................................................................................................45 9.2 IMPACT OF THE INTERCONNECTOR.........................................................................................45 9.3 PROJECT EVALUATION...........................................................................................................45 9.4 EVOLUTION & THE FUTURE ...................................................................................................46 10 REFERENCES ........................................................................................................................47 10.1 INTERVIEWS...........................................................................................................................47 10.2 ADDITIONAL REFERENCES.....................................................................................................47 10.3 FURTHER INFORMATION ........................................................................................................47 v GLOSSARY ABBREVIATION DESCRIPTION bcm/y Billion normal cubic metres per annum CCGT Combined Cycle Gas Turbine DTI Department of Trade and Industry (UK) EASEE European Association for the Streamlining of Energy Exchange EIB European Investment Bank EU European Union Fluxys Belgian natural gas network operator Forward Flow Flow from the UK to Belgium ISIS Interconnector Shippers Information System IUK Interconnector (UK) Limited LNG Liquefied Natural Gas NBP National Balancing Point (NTS notional trading point) NGT National Grid Transco (NTS operator) NTS National Transmission System (UK natural gas network, operated by NGT) Ofgem Office of Gas and Electricity Markets (Regulator) PLUTO Pipeline