David Prosser's Outlook: Gas storage: the energy policy we somehow just forgot to bother with

The boring old building society wins the day; A hedge fund boss with a truly long-term view

Friday 22 August 2008 00:00

What folly it must have seemed to us Britons back in the Eighties and Nineties when our continental friends were spending so much taxpayers' money building gas storage facilities. Basking in our own seemingly never-ending supplies of North Sea gas, we didn't bother with this rather tedious sort of investment.

Just a few years later, we're now paying the price as our own gas supplies dwindle. The UK will import 40 per cent of its gas this year, up from 27 per cent last year – and by 2020, all our supplies will come from overseas, via pipelines or delivered on ships as liquefied natural gas.

Even if we had built better storage facilities, we would still be increasingly exposed to the price of gas on global markets, as we compete with other resource-short nations for the world's supplies. But more investment in storage would have given us much greater protection from short-term price volatility.

To put the problem in context, Britain has enough storage capacity to stockpile gas for just 13 days. That compares with 99 days in France and 122 days in Germany. The result is that any difficulties in the supply chain that last for more than a few days have a disproportionate effect on this country.

When, for example, the Norwegian giant Statoil was, on Tuesday afternoon, forced to close one of its key North Sea fields after discovering a pipe leakage, it warned that its total gas production could be down by about 5 per cent until next spring. That resulted in an immediate 15 per cent increase in wholesale prices in this country. And by last night the price of gas for delivery this winter had hit a record high, because we have so little gas stored with which to ride out this type of supply disruption.

Just to be clear, by the way, those increases in wholesale gas prices came after E.ON and Scottish & Southern Energy had decided on the whacking price rises also announced yesterday. The latest spike on the wholesale market means Britons are now almost certain to face another round of inflation-busting energy bill increases this winter.

Short-termism has informed every aspect of our energy policy. There was outrage in some parts of the British media two weeks ago when it emerged that EDF, the French energy company, was being limited to a 5 per cent increase on gas bills in its home country by the government there. The cap was imposed just a few weeks after EDF had announced increases in British gas bills of more than four times this rate.

There was, however, a good reason for the discrepancy, and it had nothing to do with British homes subsidising their French counterparts. Having invested billions of euros (well, francs, actually) building nuclear and hydro power stations, France generates only a tenth of its power from fossil fuels. In the UK, the figure is more like nine-tenths.

This is not to say that nuclear power is the answer to our energy crisis (construction of the plants, after all, has a mammoth carbon footprint, never mind the issue of how we dispose of the waste). But the point is that the French looked into the long term, saw the problems looming and did something about them. In Britain, on the other hand, we still haven't worked out who is going to build and operate the next generation of nuclear power plants to which the Government is, now, finally committed.

Nor are we paying more than lip service to renewable energy. The Liberal Democrat leader Nick Clegg's proposals to make Britain energy independent by 2050 using renewables, revealed in this newspaper yesterday, is already facing sneering attacks from rival parties. Such is the short-term nature of politicians engaged in the daily knockabout – but let's just hope they're putting the pennies by for an old age of fuel poverty.

The boring old building society wins the day

If you're a shareholder in a big British bank, maybe it's time to send your directors to Coventry. A bit of isolation is the least they deserve after all those disastrous sub-prime losses – and they might learn a thing or two while they're in the west Midlands.

There they'll find one of Britain's more unassuming financial services institutions, which yesterday posted an 8 per cent increase in its first-half profits. Step forward Coventry Building Society, whose results presentation should be compulsory reading for bank bosses wondering how to ride out these difficult times.

Coventry's exposure to toxic mortgage-backed securities is precisely zero. Instead, it has spent the past few years concentrating on exactly what a building society should be doing – lending money to customers it judges a safe bet (its average loan to value in the first half was just 57 per cent) and offering decent savings rates.

Having eschewed securitisation and all those other fashions of recent times, the society began 2008 in rude health, despite the credit crisis. As a result, its share of the mortgage market is currently running at three times its traditional level, assets are up by 9 per cent and its profits during the first half of the year came in at a touch above £35m.

Just over a decade ago, the biggest building societies of the day – Alliance & Leicester, Halifax, Bradford & Bingley and Northern Rock – all decided within the space of a year or two that their future was in the far sexier growth opportunities that conversion to banking status offered. Egged on by carpetbagging customers, they ignored the complaints of many long-standing savers and borrowers who said they were perfectly happy with the not-so-racy business model of the building society sector.

So who is having the last laugh? Halifax, arguably the only demutualisation success, has this year had to go cap-in-hand to shareholders in an embarrassing rights issue. A&L, meanwhile, is being rescued by Santander of Spain, while B&B is floundering. And then there's Northern Rock – having had a windfall with a distribution of free shares back in 1997, its former members have now lost the lot. So much for the carpetbaggers.

The remaining building societies, meanwhile, may have gone through years in which they wondered whether they were being left behind, but their prudence has won the day in the end. Nationwide, Britannia, Yorkshire, Coventry and Chelsea, the five biggest societies, are all now in much stronger positions than their erstwhile colleagues. Of course, their members haven't enjoyed the same excitement as bank investors, but somehow I doubt they feel they've missed out.

A hedge fund boss with a truly long-term view

And people say those nasty old hedge funds spend all their time making short-term profits at the expense of investors in it for the long haul. Not Philip Richards, the man in charge at RAB Special Situations.

This is the fund, you remember, that has taken such a bath betting Northern Rock would not be nationalised or sold off on the cheap. And it's all been downhill since then – the fund's assets are down 29 per cent on the year so far and the shares have halved. July was "very negative", Mr Richards admits – he also thinks the Rock loss was "very regrettable" (though m'learned friends are still considering Mr Richards' lawsuit against the Government).

Nevertheless, RAB Capital urges investors to keep the faith – things will come good in the end. "We actually believe in a 20-year super-cycle for commodities," Mr Richards explains, which is why so much of Special Situations is now invested in smaller companies exposed to this sector.

No doubt he's right – let's just hope the shorters don't get stuck inin the meantime.

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