Inside Britain’s scramble to lock in long-term supplies of gas from overseas

Jacob-Rees Mogg and Saad Sherida Al-Kaabi grinned as they shook hands for the cameras in front of the UK and Qatari flags in London earlier this month.

Both the Business Secretary and Qatar’s energy minister have an interest in maintaining friendly relations. Qatar is a key supplier of gas to Britain, helping it keep the lights on despite the shock to energy markets triggered by Russia’s war on Ukraine.

The relationship is likely to deepen amid efforts to avoid a repeat of the economic turmoil caused by the last year of soaring gas prices. Officials are looking to allies such as Qatar, Norway and the US for long-term gas deals at more stable, lower prices. Yet with rising competition as others try to replace lost Russian supplies, it is very much a seller’s market. The long-term shift away from fossil fuels has also created uncertainty over demand.

“Clearly, the sellers are in a good position at the moment,” says Graham Freedman, principal analyst for European Gas and liquefied natural gas (LNG) at Wood Mackenzie. “But the market does cycle round”.

Long-term gas supply contracts fell out of fashion in Europe and the UK in the pre-Covid years, amid booming supplies, low prices, and uncertainty over long-term demand. Gas contracts now typically last five to 10 years rather than 20 to 35 years.

Things, however, are starting to shift. Governments have been forced to spend hundreds of billions shielding consumers from high prices amid a scramble for gas following cuts in Russian supplies to Europe this year.

There are warnings of blackouts this winter, with the problems likely to be repeated next winter. Security of supply is now on every politician’s priority list, and states are stepping in.

Italy is reportedly allowing utility Enel to apply for state guarantees to help it buy energy. Brussels is allowing European buyers to jointly procure gas for next year, boosting their buying power. In the UK, one of the first acts of Liz Truss’s brief premiership was to set up an “energy supply taskforce” to try to bolster UK gas supplies which rely heavily on imports.

Civil servant Madelaine McTernan, who led efforts to procure Covid vaccines, is in charge of the taskforce which the Government says “has begun negotiations with domestic and international suppliers regarding long-term contracts to increase the UK’s energy resilience”. It is not clear exactly what role the Government will play in these deals. Energy supplies in the UK are bought and sold by private companies. The Government declined to elaborate on its exact role or on what support, if any, such as financing or guarantees, it might give.

Some form of financial support may be needed if private companies are being encouraged to strike large, long-term deals as an insurance policy against supply disruption.

Where are new deals likely to come from? Many are looking to Norway, which is now the UK’s largest supplier, supplying 42pc of the UK’s gas last year and overtook Russia as Europe’s largest supplier in August.

In June, Centrica, the FTSE 100 owner of British Gas, ramped up the amount it buys from Norway’s state-owned oil and gas company Equinor, now amounting to about 14pc of the UK’s demand last year. Bloomberg has reported talks between Norwegian and UK ministers over a long–term contract of potentially 20 years. There, however, is stiff competition from European countries.

Terje Aasland, Norway’s energy minister, says that gas producers “sell their gas in the market on commercial terms… It is the decision of the companies how much gas to export and where to send it, but in general gas flows to the markets with highest prices”. Norway’s “most important contribution” to solving the gas price crisis is to “produce as much gas as possible,” he says. “With the high prices, the companies on the Norwegian continental shelf have strong incentives to increase gas production. Production is expected to increase by 8pc to 122bn cubic metres (bcm) this year.” For scale, the UK’s consumption was 76bcm last year.

Qatar is also an increasingly important supplier to the UK, accounting for about 40pc of its LNG imports last year and owning the South Hook LNG terminal in Milford Haven.

Ministerial discussions are believed to have been held last year over Qatar becoming a “supplier of last resort” to the UK. Sources claim there was “constant engagement” between the two. Mr Kaabi, the energy minister, told the Financial Times this month “we’re very committed to the UK and ultimately we’ll get to somewhere where we can support the UK”.

Again, however, there is huge competition, creating the risk that buyers will get locked into prices which look too high if spot prices start falling. Key competitors are in Asia, but also closer to home.

“Europe will push joint LNG purchasing to increase its negotiating position in the global LNG market,” says Simone Tagliapietra at the Bruegel think tank in Brussels. There are other obstacles. Mr Kaabi also spoke of the complications of governments trying to secure gas when their domestic energy companies are privately owned. Talks between Germany and Qatar hit a snag this year over the length of deals, with Germany said to be reluctant to commit to more than

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‘It is the decision of companies how much gas to export and where to send it, but in general gas flows to the markets with the highest prices’

‘We [Qatar] are very committed to the UK and ultimately we’ll get to somewhere where we can support the UK’

20 years in part due to its long-term shift away from fossil fuels. Qatar prefers long-term deals, ranging from five to 25 years.

UK energy buyers also face a degree of uncertainty on similar grounds. The climate change committee, which advises the Government, believes total UK gas consumption must fall by 50pc by 2035 and 75pc by 2050 to hit net zero goals. Some flexibility is helpful.

“I think contracts are still going to be a bit shorter – five to 10 years,” says Freedman at Wood Mackenzie. “People are not quite sure what the demand for gas is likely to be post2035.” In a report on the global gas market last week, the International Energy Agency said “high levels of uncertainty” about the long-term role of gas “still cast a shadow” over decisions among LNG developers to invest in new projects.

On the domestic front, producers are keen for the Government to eliminate the bureaucracy viewed as getting in the way of projects, with supply contracts seen by some as less of a priority. “They should be trying to tear down some of the red tape between departments,” says one industry source. It would bring new projects into production quicker.”

Chris O’Shea, Centrica’s boss, has suggested selling its North Sea gas production in effect at a fixed price underpinned by a government guarantee, with any upside paid back into government coffers. Many suppliers are wary of market intervention, however, given they compete in a global market.

Efforts in the gas market come as the Government has rushed through reforms under which wind farms and nuclear power producers will have their revenue capped. The move is aimed at bringing bills down, but experts warn it risks deterring investment in the long term. If Rees-Mogg survives Truss’s successor, plenty of challenges lie ahead.