Bord Gáis Energy IndexUNDERSTANDINGENERGYSeptember 2012
BORD GÁIS ENERGY INDEX INCREASES 12% IN LAST THREE MONTHSBord Gáis Energy Index (Dec 31st 2009 = 100) Overall summary: Oil prices fell slightly in September on the back Bord Gáis Energy Index 12 Month Rolling Average 180 of efforts by global powers to address the recent record highs in oil prices. This resulted in a 1% decrease in the Bord Gáis Energy Index for September although the Index is up 12% in 140 the last three months.Points As a result, the Bord Gáis Energy Index now stands at 150, an increase of 11% on September 100 2011 following a year of rallying oil prices. Despite this month’s slight fall in the price of Brent crude oil, the price has rallied $23 or 26% since June and remains at historic highs. 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 -1% 3 Mth 12% 12 Mth 11%A combination of factors led to a slight drop in oil prices in September. Firstly, rumours of a drawdown of US emergency oilstockpiles helped ease oil supply anxieties. Secondly, a rare statement from the G7 finance ministers calling on oil producingcountries to increase their output in order to ease the ongoing pressure on oil prices appears to have been somewhat successful.In response, OPEC members signalled that a price of $100 for a barrel of oil was acceptable and that markets were well supplied tomeet any extra oil demand. This reassurance appears to have had a calming effect on the markets and led to the slight reductionin oil prices.Furthermore, lower oil prices will significantly help support fragile global economic growth. In September Central Banks in the USand Europe announced their intention to buy bonds and this is seen as an additional and complimentary policy move to stabiliseand stimulate the economic situation.However, despite these co-ordinated efforts, the price of oil continues to be under pressure due to various geopoliticaldevelopments, particularly in relation to the Middle East and the ongoing concerns about Iran’s nuclear programme. Additionally,a potential maritime dispute between China and Japan in the East China Sea and the collapse of the Iranian rial and shelling of aTurkish town by the Syrian government makes the outlook for oil prices very uncertain.Oil Index Oil 180 Despite global Central Bank action that aims to stabilise and stimulate economic growth and ongoing geopolitical pressures in the Middle East and East China Sea, the front month Brent crude future price 140 fell over $2 in September. At over $112, Brent crudePoints still remains at a historically high level. Speculation that a drawdown of emergency oil 100 stockpiles was imminent helped put downward pressure on prices as the economic and political pressures converge to justify a release. Soundings from OPEC members, perhaps responded to the 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-12 open acknowledgement of concern by the G7 finance ministers about high oil prices, also weighed on the *Index adjusted for currency movements. Data Source: ICE market in September. It was again reiterated to the1 Mth -4% 3 Mth 13% 12 Mth 14% market that members in OPEC believed that the ideal price of oil was close to $100, $12 lower than the September closing price.In what appears to be a coordinated global move from key players over the month to put pressure on oil prices to preserve the fragile global economy,individual OPEC members such as Libya, UAE and Iraq displayed their new found oil production prowess as they revealed strong current productionlevels and their future expansion plans. Other factors weighing on the market included falling Chinese oil demand, improving North Sea oil production,strike aversion in the North Sea, the resumption of oil exports from South Sudan, some poor economic numbers and the resumption of oil production inthe Gulf of Mexico after Hurricane Isaac.
Natural Gas Index Natural gas 250 The natural gas element of the index was up 11%. Despite UK gas demand being significantly below seasonal norms (due 200 to mild weather and significantly reduced demand from gas-fired generation) in euroPoints terms the average UK Day-ahead gas price 150 for September was 11% higher than in August. Despite the low demand for gas in the UK, the 100 Day-ahead price escalated due to reduced gas supplies from Norway and market concerns over the availability of future supplies 50 of Liquefied Natural Gas (LNG) cargoes 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 from the Middle East due to maintenance outages in Qatar. *Index adjusted for currency movements. Data Source: Spectron Group1 Mth 11% 3 Mth 11% 12 Mth 20%Coal Index Coal 260 The coal element of the index was down 7%. After strikes in Colombia and Hurricane Isaac in the US, the global coal supply chain 205 resumed in September and provided abundant supplies to the European market. DespitePoints strong market signals to burn coal in Europe 150 to generate electricity, constant supplies of coal ensured that stock piles were topped up and pressure remained on prices. A weakened 95 US Dollar versus the euro, weakening oil prices and softer German wholesale electricity prices 40 also weighed on coal. 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 the last 12 months, the growth in coal supplies from all major exports coupled with *Index adjusted for currency movements. Data Source: ICE weak global economic growth has depressed1 Mth -7% 3 Mth 2% 12 Mth -24% prices by 24% in euro terms. This export growth has been lead by the US, with exports increasing 58% in the first half of 2012, due to the energy surplus it has built up with the rise of shale gas extraction.Electricity Index Electricity 180 The electricity element of the Index was up 5%. UK Day-ahead and Within-day wholesale gas prices are the dominate factor determining Irish wholesale electricity prices as the 140 majority of the electricity produced in IrelandPoints is generated by burning imported gas from the UK. Therefore the 11% rise in the monthly 100 average UK Day-ahead price in September compared to August contributed toward higher wholesale electricity prices in Ireland. Despite historically low gas demand in the UK, 60 supply struggled to keep up in September due 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 maintenance outages at gas producers in Data Source: SEMO Norway and Qatar.1 Mth 5% 3 Mth 11% 12 Mth 3%
FX Rates FX rates The euro gained 2% against the US Dollar and 1.60 was unchanged versus against the British Pound in September. A key factor in the 1.40 weakening US Dollar was the announcement by the US Fed to keep the main interest rate 1.20 near zero until at least mid–2015 and buy $40 billion of mortgage debt a month in a third 1.00 round of quantitative easing until the labour market shows ‘sustained improvement’. 0.80 The focus on mortgage debt is a bid to lower yields for housing finance and stimulate growth and higher asset value. In the short 0.60 term, the markets have assessed the printing 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 of new US Dollars as bad for the currency.1 Mth 2% 3 Mth 2% 12 Mth -4% EURUSD In contrast, the ECB’s Outright Monetary Transactions Programme, a sterilised bond-1 Mth 0% 3 Mth -1% 12 Mth -7% EURGBP buying programme, was seen as positive as it would not increase money supply and is seen as another step toward European financial stability. Indeed, the Fed’s move may also improve global risk appetite which the market believes is positive for the euro. The positive sentiment toward the euro was also enhanced by the German High Court decision to approve the creation of the €500 billion ESM fund.Market OutlookThe outlook for oil prices, the dominant factor in the Bord Gáis Energy Index, remains very uncertain. Oil supply anxieties which have doggedthe market all year did ease somewhat in September. Last month anxieties receded a little on what the International Energy Agency describedas a reasonably well supplied market against a subdued short-term demand growth outlook. On top of sluggish economic growth, historicallyelevated oil prices and global improvements in efficiencies are expected to weigh on demand. Positive soundings on expected production inthe short term from the North Sea and the Gulf of Mexico and the medium term from South Sudan, UAE, Iraq and Libya helped to improve themarket’s mood during the month. Continued rumours of a release of oil from strategic reserves may also weigh on prices in the short term asoil supply growth helps to ease the anxiety experienced by traders in 2012.However, geopolitical dangers are ever present as evidenced at the recent UN General Assembly. In a speech, Israel’s prime minister said timewas running out to stop Tehran from having enough enriched uranium to build a nuclear bomb. This speech has heightened fears that militaryaction may have to be taken by the West in the months ahead to address Iran’s disputed nuclear programme. Meanwhile, it is now evidentthat the sanctions imposed on Iran are putting the economy under incredible strain given reports stating that inflation is running at 24%,unemployment is rising and the Iranian rial has lost 80% of its value since the end of 2011. Extreme pressure on the regime means that it couldact aggressively and potentially disrupt future oil supplies from the Middle East.Re-weighting of Bord Gáis Energy index Oil 64.93%Following the SEAI’s 2009 review of energy consumption in Ireland, releasedin Q4 2010, there was a 9.3% drop in overall energy consumption. The mostnotable drop of 1.39% was in oil consumption in the form of gasoline and diesel. GasThis reflects the economic downturn experienced at the time. The share of natural 13.52%gas and electricity increased by 0.63% and 0.57% respectively. An increase in theuse of renewables and peat, at the expense of coal in electricity generation wasalso observed. As a result the Bord Gáis Energy Index has been reweighted to Electricity Coalreflect the latest consumption data. This has had a minimal effect on the overall 3.16%shape of the Index, but may indicate future trends. 18.40%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 be correct, current,accurate or complete. While every effort is made in preparing material for publication no responsibility is accepted by or on behalf of Bord Gáis Eireann,the SEMO, ICE Futures Europe, the Sustainable Energy Authority of Ireland or Spectron Group Limited (together, the “Parties”) for any errors, omissionsor misleading statements within this report. No representation or warranty, express or implied, is made or liability accepted by any of the Parties or any oftheir respective directors, employees or agents in relation to the accuracy or completeness of the information contained in this report. Each of the Partiesand their respective directors, employees or agents does not and will not accept any liability in relation to the information contained in this report. BordGáis Eireann reserves the right at any time to revise, amend, alter or delete the information provided in this report.