Bord Gáis Energy IndexUNDERSTANDINGENERGYJuly 2012
THE BORD GÁIS ENERGY INDEX RISES 8% IN JULY AS OIL PRICES RECOVER– OIL, GAS, COAL AND ELECTRICITY PRICES ALL INCREASE IN JULY –Bord Gáis Energy Index (Dec 31st 2009 = 100) Overall summary: Bord Gáis Energy Index 12 Month Rolling Average The Bord Gáis Energy Index rose 8% in July, 180 the biggest monthly increase since February 2012, as wholesale oil prices rose on supply concerns and expectations of additional economic stimulus measures to battle global 140 weaknesses. Along with rising fuel commodity Points prices, the ongoing weakness of the euro played a significant role in the monthly rise in the Index. 100 As a result, the Bord Gáis Energy Index now stands at 144, an increase of 4% on July 2011. 60 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-121 Mth 8% 3 Mth -6% 12 Mth 4%Despite the global economic backdrop, wholesale energy prices increased in July, with gains recorded in the wholesale price of oil,gas, coal and electricity. In July we saw the vulnerability of fuel commodity prices to threats to global supplies or supply failures. Acombination of industrial action in Norway and Colombia, together with escalating tensions in the Middle East pushed prices higher.Counter intuitively, Brent crude oil prices seemed to gain some support from the raft of poor economic data which stretched fromthe US to Europe and Asia in July. As a consequence, the markets began to increasingly price in the benefit that oil would receive asit became increasingly apparent that stimulus measures and plans from governments and institutions were required and that thesemight be delivered. The euro performed poorly against its rivals during the month and lost more ground to the US Dollar and BritishPound. This weakness amplified the commodity price rise by nearly 30%, which impacts negatively on euro zone buyers.Oil Index Oil The oil element of the Index was up 10% to 180 157. Despite the negative economic backdrop, the price of a barrel of oil rose 10% in euro terms month-on-month in July due to 140 heightened geopolitical tensions and increased expectations that the governing authoritiesPoints in the US, Europe and China and the world’s main Central Banks will act to stimulate global 100 economic growth. During the month there appeared to be an escalation in tensions between the West 60 and Iran as evidenced by the ordering of Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 new economic sanctions against Iran by the US, and an increase in the slim possibility of military engagement or an attempt by Iran to *Index adjusted for currency movements. Data Source: ICE close the Strait of Hormuz. The markets fear is that Iran’s response to declining oil exports1 Mth 10% 3 Mth -6% 12 Mth 5% and revenue could result in disruption to the West’s vital oil supplies. Tensions in the oil rich region are now not limited to Iran, and there is increasing concern that the situation in Syria could ultimately involve neighbouring countries, which could destabilise the region and oil supplies.
Natural Gas Index Natural gas 250 The natural gas element of the Index was up 4% to 201. The majority of the month-on-month increase was due to the ongoing weakness of the euro versus the British 200 Pound. Ireland purchases its gas on the wholesale markets in the UK and a weakening euro makes those purchases more expensive.Points 150 Month-on-month, the average Day-ahead UK gas price rose in sterling terms due to a pensions dispute at the start of the month which raised the possibility that 100 Norwegian oil companies would lockout workers on the Norwegian Continental Shelf and potentially shut down Norway’s entire offshore oil and gas output. 50 As Norway accounts for 20% of all gas deliveries Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 to Europe, concerns over gas supplies put upward pressure on prices earlier in the month. Government intervention to prevent the lockout meant prices eased *Index adjusted for currency movements. Data Source: Spectron Group back to trade within the now familiar 54-55p per therm range.1 Mth 4% 3 Mth -3% 12 Mth 13% Strong Norwegian supplies, better weather toward the end of the month and expectations of healthy LNG supplies to the UK weighed on prices but these factors were not strong enough to lower the monthly average price month-on-month.Coal Index Coal 260 The coal element of the Index was up 12% to 131. European coal prices rose dramatically in July due to a rail strike in Colombia. The majority of Colombia’s coal exports are shipped to European markets 205 and Ireland currently imports most of its coal from there. Industrial action at certain coal mines andPoints maintenance at Colombia’s main coal exporting 150 terminal has added to the impact of the strike. Workers from the Colombian private railway 95 company Fenco, which transports coal from Drummond, Prodeco and Colombian Natural Resources to coal ports in northern Colombia, went 40 on strike over disagreements with management Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 over pay and work conditions. With some vessels being unable to load coal at certain ports for export, there is a fear over future European coal supplies. *Index adjusted for currency movements. Data Source: ICE However, despite worries over physical supplies in the coming months there is no desperation yet as1 Mth 12% 3 Mth 11% 12 Mth -11% the global seaborne market has been described as ‘oversupplied’, with stocks in Amsterdam– Rotterdam–Antwerp ports still high. The current price increase could prove temporary in nature should the issue be resolved.Electricity Index 180 Electricity The electricity element of the Index was up 2% to 113. As the majority of power produced on the island of Ireland is generated by burning gas, a 4% 140 rise in the average monthly wholesale Day-ahead UK gas price in euro terms put upward pressure on Points the cost of producing electricity. Higher coal prices also contributed to the rising cost of wholesale 100 power. A slightly higher average carbon price over the month also put upward pressure on wholesale power prices. Beyond commodity monthly price movements, 60 the ever changing power generation dynamics in Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 the month combined to inflate prices also. Wind turbines produced fewer volumes of cheap power; more efficient plants took the opportunity to shut Data Source: SEMO for maintenance amid lower summer demand and in advance of the winter; and the ongoing partial outage of the subsea interconnector1 Mth 2% 3 Mth -8% 12 Mth 0% between Ireland and the UK deprived the market of its full complement of competitively priced imported power.
FX Rates FX rates The euro continued to weaken in July and fell 3% versus both the US Dollar and the British 1.60 Pound. Nearly a third of the 8% rise in the index this month can be attributed to the euro’s weakness as commodity fuel prices like oil and 1.40 coal (which trade in US Dollars), and gas (which Ireland buys in British Pounds) are traded in 1.20 currencies that are gaining versus the euro, making them more expensive for euro zone 1.00 buyers, ceteris paribus. Despite a brief reprieve for the euro in June following the euro zone leaders agreeing to 0.80 instruct their finance ministers to implement a new plan that would involve for the first time 0.60 the possibility of ‘Europeanising’ national debt, Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 deepening problems in Spain (as reflected in the Spanish ten-year bond) and resurfaced worries about Greece’s future, pulled the euro down once again. Until a euro zone backed1 Mth -3% 3 Mth -7% 12 Mth -15% EURUSD plan that the market believes is economically sufficient, politically feasible, implementable,1 Mth -3% 3 Mth -4% 12 Mth -10% EURGBP and that delivers growth is presented, bouts of weakness will continue to plague the euro along with fears of contagion.Market OutlookThe outlook for Brent Crude oil prices remains a struggle between market fundamentals, including geopolitical concerns, andthe performance of the global economy. Unfortunately, oil prices remain high despite what appears to be a weakening globaleconomic situation, and the enormous cost that economies are having to pay for fuels is challenging. During the month, OPECreported oil export revenues for 2011 of over $1 trillion for the first time due to escalating global oil prices. As an importer offuels, Ireland remains very exposed to market shocks and price movements which are beyond its control.We did see a fall in natural gas spot prices in Asia over the last month which could mark the end of the very aggressive Japanesebuying following the Fukushima disaster and perhaps the start of higher LNG gas supplies to Europe which have been declining.However, Japanese LNG imports are expected to remain high as its nuclear reactors are only expected to return gradually during2012 and beyond so the competition for limited LNG deliveries will remain intense. Forward gas prices had been supported in therecent past by the uncertainty of vital LNG supplies to the UK this coming winter. Future weakness in the euro has the potentialto amplify price rises or negate price falls for euro zone countries.Re-weighting of Bord Gáis Energy index Oil 64.93%Following the SEAI’s 2009 review of energy consumption in Ireland, released inQ4 2010, there was a 9.3% drop in overall energy consumption. The most notabledrop of 1.39% was in oil consumption in the form of gasoline and diesel. Thisreflects the economic downturn experienced at the time. The share of natural gas Gas 13.52%and electricity increased by 0.63% and 0.57% respectively. An increase in the useof renewables and peat, at the expense of coal in electricity generation was alsoobserved. As a result the Bord Gáis Energy Index has been reweighted to reflectthe latest consumption data. This has had a minimal effect on the overall shape of Electricity Coalthe Index, but may indicate future trends. 18.40% 3.16%For more information please contact:Fleishman-Hillard — Aidan McLaughlin — 085 749 0484Bord Gáis Energy — Christine Heffernan — 087 050 5555The contents of this report are provided solely as an information guide. The report is presented to you “as is” and may or may not becorrect, current, accurate or complete. While every effort is made in preparing material for publication no responsibility is acceptedby or on behalf of Bord Gáis Eireann, the SEMO, ICE Futures Europe, the Sustainable Energy Authority of Ireland or Spectron GroupLimited (together, the “Parties”) for any errors, omissions or misleading statements within this report. No representation or warranty,express or implied, is made or liability accepted by any of the Parties or any of their respective directors, employees or agents inrelation to the accuracy or completeness of the information contained in this report. Each of the Parties and their respective directors,employees or agents does not and will not accept any liability in relation to the information contained in this report. Bord Gáis Eireannreserves the right at any time to revise, amend, alter or delete the information provided in this report.