Centrica abandons North Sea gas storage plans, blaming government

British Gas owner's decision could cost it £240m and follows move by energy minister to block subsidy to finance project

Centrica on Monday blamed the government as it abandoned plans to build two gas storage facilities that would have created hundreds of jobs and increased the security of energy supplies in the UK.

With the owner of British Gas expected to increase prices to consumers in the coming days, the company said it would not build a gas storage plant at Baird, in the North Sea, and put on hold "indefinitely" a project at Claythorpe in East Yorkshire.

The decision will cost Centrica £240m, which will be taken as an exceptional cost in its 2013 results, and was made after energy minister Michael Fallon concluded this month that subsidies would not be offered to encourage companies to build more gas storage.

Centrica said the move left the UK with the capacity to store 21 days of gas supplies, in stark contrast to countries in continental Europe, where France and Germany, for instance, have 122 days and 99 days respectively.

The company owns the biggest storage facility, Rough, capable on its own of holding 15 days' supply of gas. Baird, if it had gone ahead, would have added a further 13.5 days and potentially created hundreds of jobs building the site and more permanent ones after it was completed.

The UK has become increasingly reliant on gas imports in recent years and the lack of gas storage was highlighted this year when it emerged the country had come within hours of running out.

In May Rob Hastings, director of energy and infrastructure at the Crown Estate, which owns gas storage under the sea bed, admitted the UK had at one point in March just six hours of supply left in storage.

Hastings told the Financial Times: "We really only had six hours' worth of gas left in storage as a buffer." It followed the record low temperatures in March, which bolstered demand for heating at time when a pipeline was also damaged. Energy suppliers were later criticised for holding back supplies during this critical period.

The Department of Energy and Climate Change (Decc) insisted it had no concerns about storage facilities as stored gas was never used on its own but only in addition to other sources of supply – notably the North Sea, which still contributes 50% of supply, as well as pipelines and terminals.

"We get gas from a diverse range of sources, with around half from UK gas fields, a third from Norwegian and EU pipeline imports, a fifth from LNG (liquefied natural gas) imports from global markets and 7% from gas storage (in 2012)," a spokesperson for Decc said.

"The UK has the capacity to deliver twice the amount of gas required on a normal winter's day, and has coped well with recent extreme winter conditions. Gas storage, while important, only provides a small proportion of UK total supply," a spokesperson said.

Fallon argued this month that by not subsidising the cost of gas storage facilities the government would save customers £750m over a decade. The government did not just look at whether to provide subsidies but also considered forcing gas companies to secure a certain amount of supply or to hold more gas in storage.

Centrica, which has pulled out of building nuclear plants in the UK, cited "weak economics" for withdrawing from the gas storage facilities.

This relates to the narrowing difference between the price of gas in the winter and the summer, which had previously allowed companies to rely on selling gas more expensively in the winter than it was bought in the summer.

Centrica had warned in July that it might need government support for the projects because of the market conditions.

Decc pointed to two more storage facilities under construction in Cheshire, at Stublach and Hill Top Farm, as adding to storage next year and said two storage facilities were opened at Aldbrough, Yorkshire, in November 2012, and Holford, Cheshire, in February 2013.

Article Source : http://www.guardian.co.uk

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Economic recovery hopes boosted by drop in failing firms

40% fall in companies in financial distress raises in second quarter, according to restructuring specialist Begbies Traynor

The number of companies in financial distress dropped sharply in the second quarter, in the latest sign of improvement in the wider economy.

Businesses in a "critical" condition fell 39% to 3,001 between April and June compared with the same period a year earlier, according to a report by restructuring specialist Begbies Traynor.

Julie Palmer, a partner at Begbies, said it was the "first real sign that the UK economy has turned a corner towards a sustained recovery".

She warned however the worst may yet be to come for so-called zombie businesses, which are smaller companies that have survived there cession but are chronically underfunded and do not have sufficient cash to take advantage of a recovery.

"We have real fears that many small and medium-sized enterprises will have serious financial difficulties at the time they least expect - during a recovery.

Construction industry saw a big drop in companies in financial distress. "Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to over trade," Palmer said.

The Begbies red flag report, which monitors early signs of financial distress among companies, said that businesses in critical distress also fell 9% in the second quarter compared with the first.

It added that distress levels fell most sharply in the construction, professional services, and financial services sectors, while manufacturing also improved on the back of increased demand both at home at abroad.

Separate data has supported the picture of a strengthening UK services sector, but manufacturing has performed below economists' expectations.

However, official figures to be published on 25 July are still expected to show that economic growth accelerated in the second quarter to about 0.6% from 0.3% in the first quarter.

Begbies Traynor said that businesses depending on discretionary consumer spending were among those to see some of the biggest rises in critical financial distress levels, including hotels, bars and restaurants.

"The consumer-facing industries continue to struggle as shoppers maintain tight control over their purse strings at a time when disposable income has remained under pressure," Palmer said.

Article Source : http://www.guardian.co.uk

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Was jittery Thursday a foretaste of another global economic crash?

The sharp slide in share prices was either a blip in the road to recovery or a sign that the unwinding of quantitative easing will lead to disaster. Our writers argue it out

Central banks may be pumping billions of dollars into the world's financial markets through quantitative easing, but by artificially inflating the prices of stocks and bonds they're just storing up an almighty crash for the future.

That's the argument of City bears, who warn that while last week's slide may be reversed in the days ahead, the sharp fall in share prices that spread from Tokyo to Wall Street and London was a foretaste of the reckoning that will inevitably come, once QE starts to be unwound. "This is a liquidity-fuelled rally in stock prices. It's clear that the world economy has not been performing as well as stock prices say it has," said Neil Mellor of BNY Mellon.

Pessimists cite several reasons to be nervous about whether the rally that took share prices in the US to record highs before the blip can be sustained.

The first is China: a weak reading on the purchasing managers' index survey for the country – a barometer of its manufacturing sector – was one of the factors that fed Thursday's decline.

Growth in the world's second-largest economy has long been expected to slow from the double-digit pace that was the norm before the world recession of 2008-09. But there are serious concerns about the health of China's banks, which are thought to be sitting on a growing pile of bad loans. "It's clear that a lot of banks are in an awful lot of trouble," said Mellor.

Demand from China is critical for a number of major economies, including Japan, for which China is a huge export market, and Australia, which is heavily reliant on its natural resources. Any sign that the Chinese economy was slowing sharply, or worse still, facing a financial meltdown, would have knock-on effects right across the world's financial markets.

A second reason to worry is the eurozone. While the mood has been quieter since the Cyprus bailout was agreed in March and a rate cut from the European Central Bank boosted confidence, the crisis is far from over.

The eurozone economy remains deep in recession, and there is a long list of countries, from Slovenia to Spain, with unresolved problems that could spiral rapidly into a major crisis.

Third, Japan: markets have been supercharged in recent weeks by the radical policy of "Abenomics", named after new prime minister Shinzo Abe, which involves deregulation and a boost to public spending as well as the "shock and awe" quantitative easing announced last month.

Even if the policy works well, however, it is unlikely to be the overwhelming success that would be required to validate the 25% jump in share prices seen since the end of last year.

The final reason to be nervous is a more general one: as central bankers themselves have warned, extended periods of cheap money tend to create market distortions, as investors take the money and use it to fish around for better returns, in a "search for yield".

In the bond markets, for example, countries that would usually find it impossible to attract foreign lenders are finding investors falling over themselves to buy their bonds. Rwanda's $400m (£265m) bond issue in April was more than seven times oversubscribed, while middle-income countries such as Turkey, Mexico and Brazil have seen their borrowing costs slide. That's great news for the governments in question, but smacks of what Fed chairman Ben Bernanke recently referred to as "excessive risk-taking".

Whatever the outlook, "jittery Thursday", as analysts at City consultancy Fathom called it, underlined the fact that investors should brace themselves for a period of increased volatility.

"This bout of market jitters has laid bare the twin distortions imposed by a combination of near-zero interest rates and unconventional monetary policy, namely an excess sensitivity to small changes in the data and an unhealthy addiction to doveish central banks," they said.

People who buy shares are by nature optimistic. They make a profit when the stock market goes up, so they want it to go up forever.

Until last summer – after two years of crisis in the eurozone about the single currency – European investors were wary about the prospects for the global economy. The 2008 banking crash had been a disaster, as shares lost almost half their value on the big European exchanges. Then governments soaked up bank debt and themselves grew vulnerable.

But then European Central Bank chief Mario Draghi said he'd do "whatever it takes" to save the euro. That pledge, plus the renewed money-printing from the US Federal Reserve and the Bank of England, was a message that delighted investors. Since June 2012, the German Dax index has soared from around 6000 to almost 8400, before dropping back a little last week. The same story is told by the other major European exchanges, including the FTSE 100, which jumped from 5260 to a peak of 6723 earlier this week – a 28% gain in less than a year.

Japanese stocks fell sharply last week after an unexpected drop in a Chinese business confidence index

 Some economists argue that stock exchanges are riding for a fall. They say fundamental building blocks of growth are missing. In the major economies, investment remains low and consumer confidence is lacklustre, especially while high unemployment is rising and wages are frozen in real terms.

However, there are three good reasons why stock markets, a few blips aside, will continue to grow for some time: central banks are scared; there is lots of money waiting to be invested; and returns on all other assets are low.

Many analysts blamed the sharp falls in stock market values last week on a hamfisted performance by Federal Reserve chairman Ben Bernanke, who initially gave little hint that the Fed's QE measures might be scaled down only to say later that several members of his committee thought the time might be ripe in the next few months.

The Fed has injected more than $3tn of freshly minted money into financial markets and is supposed to be increasing the total by $85bn a month until unemployment comes down to 6.5%. It is 7.5% at the moment. The hint that Fed funds would stop early sent markets into a spin, but it was not new. Bernanke had said the same in January.

And the Fed must stay the course because households and businesses across the US and Europe are still paying back debt from the boom years. Only central bank funds are keeping economies afloat. The Bank of England remains steadfast and the Bank of Japan is ramping up its QE programme. Bernanke will stick with his original plan.

Stock markets are also being buoyed by the huge reserve of funds sitting in the Middle East, in Asia, and in western pension funds. Fund managers want to bet the trillions they are keeping on the sidelines on the stock market, should it feel safe. Central banks will continue to make it feel safe.

The third driver comes from the low returns elsewhere. Sovereign wealth funds and pension funds have used large amounts of their spare money as loans to governments and big companies. But buying bonds earns them only a small return. Lending to the German government is such a privilege that investors lose money on the deal.

Strapped to these three rockets, the market can still soar. Of course, Spain could yet go bust or China grind to a halt. There could be a natural disaster, an act of terrorism or war. History tells us a bust is waiting down the track, but while the world economy recovers and governments and central banks maintain their pledge to keep printing money, we should expect prices to rise.

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Article source : http://www.guardian.co.uk