Today Centrica struck a £10bn supply deal with the US – describing it as a “landmark agreement”.
“This… 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,” said Sam Laidlaw, Centrica’s chief executive in a statement.
Just how landmark is it? Well, it’s effectively the first time the UK has signed a gas import deal with the US – so it’s important for a number of reasons.
US natural gas prices are very much cheaper than those in the UK and Europe – around a quarter to a fifth. Here’s the thing though: this deal won’t lower UK prices all that much, as although the price of the contract is indexed to the US gas market, there is a significant fixed fee on top, which roughly doubles that price. In addition, the volumes of gas involved aren’t big enough to have much of an impact on price anyway.
But the important thing about this deal is that it’s the first – and therefore a gateway for all sorts of similar contracts.
“More and more deals will get signed with the US from Europe” says Jonathan Lane, Head of Power Consulting at GlobalData. “This will push the US price up, and the European price down. Natural gas prices will eventually harmonise”.
The other benefit of the deal is one of security. At the moment the UK relies on a small number of gas suppliers – and heavily on Qatar. The contract with the US will bring some diversity, increasing potential sources and energy security if a pipeline fails.
This is all set very much in the future though – the first shipments aren’t due until 2018, so the current strain on our gas supplies may continue for a while.