Business World

Wednesday 1 October 2014

Big energy users warned to prepare for Ukraine fallout

Published 11/08/2014 | 02:30

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FEARS OF WAR TRADE: Vladimir Putin

COMPANIES that are heavy energy users are being warned to consider locking in prices as the crisis in Ukraine and a weaker euro threaten to 
increase volatility.

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Households and small business customers are locked into standard gas prices but large industrial users can agree forward contracts with energy providers to fix prices.

"Business users can lock down prices and with the market volatile if they don't, they risk being exposed to high prices down the line," according to John Heffernan, gas and power trader at Bord Gais Energy, said.

Wholesale energy prices fell in July, despite fears of a trade war with Russian President Vladimir Putin's government over the crisis in Ukraine.

The so called "next day" gas prices dropped to the lowest level of the year in early July, before rising again after the downing of a Malaysian airlines flight by Russia-linked rebel groups in Ukraine.

Russia is the major gas supplier to much of continental Europe and the gas travels through pipelines that traverse Ukraine.

"The ongoing tensions between Ukraine and Russia have increased price volatility in the wholesale energy commodity markets," according to Mr Heffernan.

"With winter approaching the continual threat of direct military engagement and 
the possibility of increased sanctions against Russia may increase anxieties which could result in increased wholesale prices," he said.

In euro terms the average "day-ahead" gas price for July was 4pc lower than in June, but prices rose after the attack on the Malaysian airlines flight, as did volatility.

Further deterioration of the geo-political system, combined with a cold winter and potentially with further strengthening of the UK's sterling currency if interest rates are increased there could see whole sale gas prices moving higher, according to Mr Heffernan.

For heavy energy users price hikes can erode margins, in particular for businesses competing with less exposed US rivals. Ireland does not rely directly on Russia for gas supplies, which arrive here almost entirely from the UK.

It means there is no threat to the supply of gas here, regardless of the situation in Ukraine, but prices are vulnerable. On Friday UK contracts for winter gas delivery rose after Ukraine's prime minister said his country may ban transit of fuel to Europe as part of sanctions against Russia.

Irish Independent

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