UK warned it faces ‘security premium’ for long-term gas supplies

Britain could end up locked in expensive long-term energy deals under proposed arrangements to secure gas from countries including Norway and Qatar, Treasury officials have privately warned.

Senior government figures told the Financial Times that the UK would have to pay a “security premium” to foreign states in return for boosting the country’s future energy security, alongside other measures to increase domestic production.

Liz Truss, prime minister, confirmed on Tuesday that the UK government is seeking potential gas imports from various countries amid a global price spike caused by Russia’s invasion of Ukraine and cuts to supplies to Europe.

Truss last month authorised an unprecedented £150bn intervention to cap the cost of power for households and businesses to prevent a catastrophic winter as prices soared.

About half of the gas used in the UK comes from abroad, with Norway accounting for two-thirds of imports last year.

Long-term gas supply contracts can typically run from 10 to 25 years, meaning the UK could end up paying elevated prices for years to come — even if the wholesale price were to drop in the future.

Such deals are likely to be cheaper than supplies today but higher than the average price over the past decade.

While Kwasi Kwarteng, chancellor, supports the drive to establish long-term supplies, some Treasury officials have warned that it could prove expensive given market volatility.

The current price of gas in the UK is roughly seven times the level it averaged last decade.

Asked by Sky News if she wanted to lock the country into expensive multiyear deals, Truss replied that it was important to maintain energy security.

“We are looking at long-term energy contracts with other countries because, as well as making sure we’ve got a good price, energy security is vitally important,” she said. “And we never want to be in a position again where we’re dependent on authoritarian regimes for our energy. That’s why we’re in the situation we are now.”

The business department has previously announced a new “energy supply task force” has begun negotiations with gas suppliers to agree long-term contracts.

The task force is being run by Maddy McTernan, a civil servant who previously ran a similar operation for Britain’s Covid-19 vaccine push.

The UK opened negotiations with Qatar for the Gulf state to become “supplier of last resort” almost a year ago in November 2021.

The world’s largest exporter of LNG, Qatar prefers locking clients into long-running fixed contracts and sells most of its gas to state-affiliated companies in Asia.

Negotiations with western buyers are complicated as most energy companies are in the private sector, making it more challenging to secure long-term deals.

Meanwhile, the government is also in detailed negotiations with Equinor, the Norwegian state-owned energy company. Truss insisted that the UK would seek “value for money” in the talks.

“What’s happened in the past is we’ve ended up being dependent on the global spot price. We’ve seen the effect of that. We’ve seen the fact that people will face bills of £6,000 and I never want Britain to be in that position again,” she told Sky.

Long-term deals can insulate countries to a degree from swings in the international spot price of gas and can provide greater security of supply as they cannot be bid away by other buyers.

The UK faces increased competition for Norwegian gas this winter with only a portion of supplies fixed under long-term deals and companies in Germany, Poland and France also trying to secure additional supplies.

In June, British Gas owner Centrica signed an additional long-term supply deal with Equinor.