July 2012 Energy Index - Bord Gáis Energy

UNDERSTANDING

ENERGYBord Gáis Energy Index

July 2012

THE BORD GÁIS ENERGY INDEX RISES 8% IN JULY AS OIL PRICES RECOVER– OIL, GAS, COAL AND ELECTRICITY PRICES ALL INCREASE IN JULY –

OilThe oil element of the Index was up 10% to 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 heightened geopolitical tensions and increased expectations that the governing authorities in the US, Europe and China and the world’s main Central Banks will act to stimulate global economic growth.

During the month there appeared to be an escalation in tensions between the West and Iran as evidenced by the ordering of new economic sanctions against Iran by the US, and an increase in the slim possibility of military engagement or an attempt by Iran to close the Strait of Hormuz. The markets fear is that Iran’s response to declining oil exports 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.

Overall summary:The Bord Gáis Energy Index rose 8% in July, 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 weaknesses. Along with rising fuel commodity prices, the ongoing weakness of the euro played a significant role in the monthly rise in the Index.

As a result, the Bord Gáis Energy Index now stands at 144, an increase of 4% on July 2011.

1 Mth  8% 3 Mth  -6% 12 Mth  4%

1 Mth  10% 3 Mth  -6% 12 Mth  5%

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Bord Gáis Energy Index 12 Month Rolling Average

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Bord Gáis Energy Index (Dec 31st 2009 = 100)

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. A combination 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 from the US to Europe and Asia in July. As a consequence, the markets began to increasingly price in the benefit that oil would receive as it became increasingly apparent that stimulus measures and plans from governments and institutions were required and that these might be delivered. The euro performed poorly against its rivals during the month and lost more ground to the US Dollar and British Pound. This weakness amplified the commodity price rise by nearly 30%, which impacts negatively on euro zone buyers.

Oil Index

*Index adjusted for currency movements.Data Source: ICE

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CoalThe 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 and Ireland currently imports most of its coal from there. Industrial action at certain coal mines and maintenance at Colombia’s main coal exporting terminal has added to the impact of the strike.

Workers from the Colombian private railway company Fenco, which transports coal from Drummond, Prodeco and Colombian Natural Resources to coal ports in northern Colombia, went on strike over disagreements with management 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. However, despite worries over physical supplies in the coming months there is no desperation yet as 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.

ElectricityThe 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% rise in the average monthly wholesale Day-ahead UK gas price in euro terms put upward pressure on the cost of producing electricity. Higher coal prices also contributed to the rising cost of wholesale power. A slightly higher average carbon price over the month also put upward pressure on wholesale power prices.

Beyond commodity monthly price movements, the ever changing power generation dynamics in the month combined to inflate prices also. Wind turbines produced fewer volumes of cheap power; more efficient plants took the opportunity to shut for maintenance amid lower summer demand and in advance of the winter; and the ongoing partial outage of the subsea interconnector between Ireland and the UK deprived the market of its full complement of competitively priced imported power.

Natural gasThe 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 Pound. Ireland purchases its gas on the wholesale markets in the UK and a weakening euro makes those purchases more expensive.

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 Norwegian oil companies would lockout workers on the Norwegian Continental Shelf and potentially shut down Norway’s entire offshore oil and gas output. As Norway accounts for 20% of all gas deliveries to Europe, concerns over gas supplies put upward pressure on prices earlier in the month. Government intervention to prevent the lockout meant prices eased back to trade within the now familiar 54-55p per therm range.

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.

1 Mth  4% 3 Mth  -3% 12 Mth  13%

1 Mth  12% 3 Mth  11% 12 Mth  -11%

1 Mth  2% 3 Mth  -8% 12 Mth  0%

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Natural Gas Index

Coal Index

Electricity Index

*Index adjusted for currency movements.Data Source: Spectron Group

*Index adjusted for currency movements.Data Source: ICE

Data Source: SEMO

FX ratesThe euro continued to weaken in July and fell 3% versus both the US Dollar and the British 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 coal (which trade in US Dollars), and gas (which Ireland buys in British Pounds) are traded in currencies that are gaining versus the euro, making them more expensive for euro zone buyers, ceteris paribus.

Despite a brief reprieve for the euro in June following the euro zone leaders agreeing to instruct their finance ministers to implement a new plan that would involve for the first time the possibility of ‘Europeanising’ national debt, 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 backed plan that the market believes is economically sufficient, politically feasible, implementable, 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, and the performance of the global economy. Unfortunately, oil prices remain high despite what appears to be a weakening global economic situation, and the enormous cost that economies are having to pay for fuels is challenging. During the month, OPEC reported oil export revenues for 2011 of over $1 trillion for the first time due to escalating global oil prices. As an importer of fuels, 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 Japanese buying 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 during 2012 and beyond so the competition for limited LNG deliveries will remain intense. Forward gas prices had been supported in the recent past by the uncertainty of vital LNG supplies to the UK this coming winter. Future weakness in the euro has the potential to amplify price rises or negate price falls for euro zone countries.

For more information please contact: Fleishman-Hillard — Aidan McLaughlin — 085 749 0484 Bord Gáis Energy — Christine Heffernan — 087 050 5555

The 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, 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 in relation 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 Eireann reserves the right at any time to revise, amend, alter or delete the information provided in this report.

1 Mth  -3% 3 Mth  -7% 12 Mth  -15% EURUSD

1 Mth  -3% 3 Mth  -4% 12 Mth  -10% EURGBP

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FX Rates

Electricity 18.40%

Coal3.16%

Gas 13.52%

Oil 64.93%Re-weighting of Bord Gáis Energy indexFollowing the SEAI’s 2009 review of energy consumption in Ireland, released in Q4 2010, there was a 9.3% drop in overall energy consumption. The most notable drop of 1.39% was in oil consumption in the form of gasoline and diesel. This reflects the economic downturn experienced at the time. The share of natural gas and electricity increased by 0.63% and 0.57% respectively. An increase in the use of renewables and peat, at the expense of coal in electricity generation was also observed. As a result the Bord Gáis Energy Index has been reweighted to reflect the latest consumption data. This has had a minimal effect on the overall shape of the Index, but may indicate future trends.