Code red: David Cox interviewed

The Gas Forum's new managing director David Cox is adamant that gas supplies are plentiful, and that Ofgem's Code Review could damage the industry. He talks to Trevor Loveday.

In the title of its World Energy Outlook published last summer, the International Energy Agency asked: are we entering a golden age of gas? Its answer: “Gas use will rise by more than 50 per cent and account for over 25 per cent of world energy demand in 2035 – surely a prospect to designate the golden age of gas.” So that’s probably a yes.
The foundation of the agency’s optimism is the abundance of so-called unconventional gas supplies, including shale gas and coal bed methane. That outlook is shared by the long-respected gas market expert David Cox, who was recently appointed managing director of downstream gas industry association the Gas Forum.
“I am made optimistic for the future of gas by the sheer reserves,” Cox says. “Even conventional supplies will last for 200 years or more at the current rate of consumption. Liquefied natural gas (LNG) is more flexible and more global. And there is more coming on. We are in the luxury position of having plenty of gas in all sorts of areas, so security of supply becomes less of an issue.”
He adds: “I don’t see any risk of the UK not getting gas from pipelines or LNG. Supply security in gas is not a major concern for the Gas Forum.”
Such a boundless expression of confidence in the future of gas has not been the trend in policy circles in recent years. The drive to a low-carbon economy is clearly not in the gas sector’s favour. Furthermore, the ever-nearing demise of the UK’s North Sea gas reserves has set government and regulatory nerves twitching at the prospect of dependence on imports from countries perceived as politically uncertain or even unstable (see feature on Iran, pages 20-21).
So Cox has stepped into a battleground. More specifically, he has walked into a head-to-head argument with regulator Ofgem and the government over the security of gas supplies to the UK.
In a bid to lessen the likelihood and severity of a gas shortage, Ofgem has proposed an overhaul of the rules governing the wholesale gas market in its Significant Code Review. The review is the most recent manifestation of the regulator’s anxiety that the UK could find itself with a crippling deficit in gas supplies. But the changes it is calling for are, according to Cox, likely to cause more harm than good. “I am nervous about certain policy initiatives like the code review, which may have unintended consequences that could damage the industry rather than improve security of supply,” he warns.
Cox is particularly distressed by the support Ofgem is giving to the notion that the UK needs more gas storage, even to the extent that it is advocating the introduction of some form of public service obligation on the industry to build it. On launching the code review in January 2011, Ofgem indicated its fear that “the industry may not be able to respond adequately to price signals in time”.
Cox is unequivocal that the market is adequate to the challenge of encouraging storage construction. “There are commercial signals that indicate if gas storage needs to be built. If they are not there, then that’s probably because you don’t need to build it,” he says.
“There is a danger that if the government intervenes and puts a public service obligation on suppliers and shippers to book storage, it might add costs to gas delivered to customers.” He says such an obligation will lead to stranded capacity and the “crowding out of private investment”, which he says has topped £5 billion in the past five years “without government interference”.
In a curiously timed move (almost a year after Ofgem launched its Significant Code Review), the then energy secretary Chris Huhne called on Ofgem to look into the long-term prospects for gas. The government and regulator, Cox says, are overreacting. It is unlikely that the events they are afraid of will ever occur, yet the actions they are taking may themselves create problems. “The modelling for this is very sensitive to assumptions, and if the model is wrong it could lead to quite interventionist policies with security of supply not improved in any meaningful sense as low probability events never happen.”
Cox says the reason storage is not being built is because global supplies of LNG are undermining its economics. The business case for storage is that gas bought cheaply in the summer can be stored and sold in the winter when prices are high. “The economics of storage don’t work so well as when we had a big summer/winter differential,” he says. “LNG is now providing the flexibility, so you don’t need physical storage so close to the market. LNG trading and regasification capacity is a lot more than we need at the moment and for the foreseeable future.”
As well as criticising the government for creating what he sees as unwarranted nervousness over adequacy of gas supplies, Cox believes the government is also showing a lack of ambition for gas as it seeks to curb carbon emissions.
“Gas is now being talked about as a transition fuel to a low-carbon future. So it seems the [government’s] story is: we need some fossil fuels – and gas is seen as one of the better fossil fuels – until sometime in the future when all fossil fuels, including gas, will die away. So we have changed over recent years from the death of gas to it being a transition fuel … followed by death.”
Cox says gas has a future beyond 2050, when carbon is scheduled to be eradicated from power generation. Rather than having a transitional role, he says gas is a “destination fuel” to back up intermittent renewables. “My key message is, gas will be the most important fuel for the next 40-50 years.
“The role of gas in a low-carbon eventuality becomes a destination fuel far beyond 2050 with carbon capture and storage (CCS). Assuming the policy of decarbonisation of electricity generation remains, the future of gas in that world can only be with CCS.”
Despite his confidence in there being abundant gas supplies, Cox is concerned that moves in Brussels could undermine UK gas markets. He is particularly wary about the impact on gas trading of European legislation to curb market abuse – notably Remit and Mifid (the Regulation on Energy Market Integrity and Transparency and the Markets in Financial Instruments Directive) – which he describes as “a hangover from the financial markets”.
“We want to minimise damage there – and we’ve had some success but it’s not finalised,” he says. “We don’t want traders – financial or physical – to feel they have to reduce their trading activity. That would lead to less liquidity. The UK is seen as the only liquid gas traded market. The continental hubs are much less liquid and we don’t want to see that coming back.”
While legislative issues are presenting Cox with his most immediate challenges, he is eager to address the policy thinking behind them. “Gas has been neglected in policy spheres by successive governments,” he says. “My challenge is to take the Gas Forum to a more important place at the table with policymakers, consumers and media. The problem with energy policy is that it is set relatively short term and these are very long-term issues. Politics can derail good long-term thinking.”
Meanwhile, there is a growing body of stories about new gas sources – not just unconventional gas – to suggest that at least in a global sense there is a lot of gas available. Last month, Alan Riley of City University said gas from Azerbaijan, set to start flowing in 2017, “will be significant to European energy security, away from over-reliance on Russian Gazprom”. He said Azerbaijan could become a major gas transit hub, supplying the EU from across the Caspian region.
Cox believes the prospects for gas are growing in strength, fuelled by evidence of abundant sources and less cause for concern about market and political instability. “The momentum is with us – it had swung too far against but it’s swinging back,” he says.
But the impetus is not all one way.
Cambridge University’s Electricity Policy Research Group concluded recently that gas’s golden age has passed. The likelihood of a golden future was, it said, limited to beyond Europe. And Cox’s former employer, consultancy Poyry, in a report for Ofgem, warned that anything short of a boom in Europe in unconventional gas would leave the continent reliant on imports. And any uncertainty in US shale delivery could push import prices up.
With expert opinion split, energy policy thinking will inevitably yaw. The Department of Energy and Climate Change (Decc), in its pursuit of low-carbon options, was until recently of the view that gas’s days were numbered. “Gas was left with prejudice against it in policymaker terms,” says Cox.
Decc has since reined in that view, with frequent ministerial assertions that gas’s role is vital. A few weeks ago, energy minister Charles Hendry told Parliament: “There will be an increasingly important role for gas in providing back-up generation for the times when the wind doesn’t blow.”
There are still substantive arguments about the role of gas in the energy mix. But equally important is the need to address the political perceptions. Cox is clearly confident that he will succeed in his advocacy of gas, but his measure of the opening is probably not unrealistic. “The door is ajar for the Gas Forum,” he says.
Trevor Loveday is a freelance journalist.

This article first appeared in Utility Week’s print edition of 2 March 2012.
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