Gasonomics – The Economics of the Welsh Gas Industry

Milford Haven is the largest port in Wales, the third largest in UK in tonnage, and one of the largest in terms of value. The port was originally a fishing centre, and despite having an Irish ferry service and occasional cruise ships, the overwhelming bulk of its trade is now in oil & gas.  The live shipping map above shows 5 tankers (the red diamonds) in port on 31st January and the port handles 20-25% of all natural gas imports into UK.

The International Gas Industry

There are two gas terminals in Milford Haven:

  • The South Hook LNG terminal is the largest LNG terminal in Europe, and is operated by the South Hook Gas Company which is owned by the Qatargas 2 venture comprising Qatar Petroleum, Exxon Mobil (USA) and Total (France)
  • The smaller Dragon LNG terminal is jointly owned by Shell (UK/NL) and Petronas (Malaysia).

Gas is supplied in the form of Liquified Natural Gas (LNG) under long term supply agreements which maintain a steady shipment of gas at a relatively low fixed price, but can also be supplemented by buying LNG cargoes on the open market, which has a more volatile price.   South Hook is generally supplied from Qatar, while Dragon is supplied from a number of sources including Qatar, Russia, US and elsewhere.

Mains gas transmission pipelines across South Wales

In both cases, liquid LNG is first offloaded into storage tanks, and then ‘regassified’ before being fed into the UK gas transmission network operated by National Grid. This operates a main transmission pipeline across south Wales which feeds into the UK network near Ross-on-Wye.  National Grid then provides gas to local distribution networks, which in Wales are operated by Wales & West Utilities, and gas is eventually sold on to the consumer. The original pipeline from Ross to Clydach was intended to feed South Wales from the UK gas network, but this is now fed from Milford Haven, and the gas flow at Ross has been reversed.

The Value of Gas

Gas is very confusing because its purchase price is fixed in USD per Million BTU (British Thermal Units);  shipped by the tonne; transported (by pipeline) in SCF (Standard Cubic Feet); and sold in GBP per KWh (kilowatt hours). I have provided a detailed explanation at the end of this article, but in summary:

  • 1 tonne of LNG has a delivered cargo value of around £208 at current exchange rates.
  • The same tonne of LNG once it has been processed back into gas, transported and distributed to our homes has a selling price of around £435.
  • A typical LNG tanker contains a cargo initially worth around £21.1 million which is eventually sold for £44 million.
  • Assuming projected deliveries of 50 cargoes per year the import value of LNG passing through Milford Haven will be around £1.1 billion per year with a consumer sales value of £2.2 billion but this could increase by a factor of 4.

Gas is clearly a very valuable business!

Who Benefits From Gas?

Gas moves through a value chain when it is offloaded, stored, regassified, transported (via trunk network) and distributed (via local networks). Much of the £1100 million a year increase in value described above is value which is added in Wales and which should be reflected in GNP/GVA and taxed accordingly.


According to Company Accounts for 2017, South Hook LNG processed 3.5 million tonnes of LNG – its worst performing year and representing only 22% of the plants capacity. This created a revenue of £50 million, with profit before tax of £118 million, and tax payable of £22 million.  Yes – that is correct – the reported profit was more than the revenue….which smells funny….

This is because 3.5 million tonnes of LNG is worth around £1.2 billion not £50 million! The revenue generated (attributed to Wales) and taxes payable (in Wales) are only related to the processing costs and not the value of the gas processed – with the accountants clearly moving some money around so as to ‘maximise tax efficiency’. The full value of the gas is reflected only in the trading accounts of the owners of South Hook LNG, which is why the VAT payable on the imported cargoes (£240 million !!!) is recorded in London not Wales.

Similarly, all of the costs associated  with  transmitting gas through the National Grid distribution network is attributed to their headquarters in Warwickshire, England. There is a significant value associated with using the trunk pipeline across Wales, which should generate VAT and corporation tax but none of this is attributed to the Welsh economy.

Meanwhile in North Wales

The Point of Ayr Gas Terminal receives and processes up to 300 million SCF/day of gas from Liverpool Bay. This is worth £2.5 million/day or around £0.85 billion per year.  While the gas comes from English fields (unlike the oil which is Welsh!) the value added to the raw gas from processing, transporting, and use in power generation all occurs in Wales.  However, the registered office of the owners Liverpool Bay Operating Company – a subsidiary of Italian company ENI) are in London, and this is where the VAT & Corporation Tax are attributed to – not Wales.

Wales Tax Base

Every published report on the Welsh economy says that we are a basket case and that we receive far more in ‘handouts’ from the UK government than we receive. But it is clear from the above examples that even when we have a flourishing local business, the true benefit to the Welsh economy is hidden.

If we are ever to achieve independence it is imperative that we start reporting our economic performance accurately. Every organisation in Wales employing more than say 50 people, or with a turnover of more than say £10 million, should be compelled to have a Registered Office in Wales; to prepare accounts detailing their revenue and profits arising in Wales; and all taxes should be attributed to where the value is added.

Wales does not have a strong economy but it is significantly stronger than the UK Government will admit – because they have a vested interest in maintaining the illusion that we cannot support ourselves.

The Numbers in More Detail (for those who are interested)

The numbers work out as follows:

  • 1 tonne of LNG is equivalent to 53.4 Million BTU
    • The supply price of LNG in the long term supply agreements is confidential, but is around $5 per Million BTU, so 1 tonne of LNG is worth around $267 when it arrives in the tanker, or around £208 at current exchange rates.
    • If bought on the spot market the price fluctuates depending on demand, and is currently around $6 to $7 per Million BTU
  • The same tonne of LNG once it has been processed back into gas, transported and distributed to our homes has an energy equivalent of 15,646 kWh.
    • The consumer price is around 2.8 pence per kWh, so the eventual selling price of 1 tonne of LNG is around £435.
  • A typical LNG tanker (Q-Flex type) has a capacity of 220,000 m3 which is equivalent to 101,200 t
    • So each individual LNG tanker contains a cargo initially worth around £21.1 million which is eventually sold for £44 million.
  • Milford Haven received 126 LNG cargoes in 2011 but only 36 in 2017, representing 12.8 and 3.6 million tonnes of LNG respectively. These deliveries are expected to increase progressively in the coming years as UK production declines and imports increase
    • Assuming projected deliveries of 50 cargoes per year the import value of LNG passing through Milford Haven will be around £1.1 billion per year with a consumer sales value of £2.2 billion but this could increase by a factor of 4.
  • 1 thousand SCF of gas is equivalent to 1.037 MM BTU or 304 kWh.
    • 300 Million SCF is 91 183 kWh which is worth £2,534 989

If anyone finds an error in the above figures please let me know and I will correct accordingly. But I doubt if it will change the underlying picture.

Note: There was an error in the original currency conversion, which is now corrected, but which only exaggerates the amount which Wales is being short-changed.

4 thoughts on “Gasonomics – The Economics of the Welsh Gas Industry

  1. Brilliant Mike. I’m always bleating about the REAL economics of the Welsh economy, but at a very basic level. So i’m always very interested in subjects like this where someone knows their stuff and has investigated something which i’d, personally, have no idea about. So, i’ll store this away with my other bits and pieces for future reference.

    You ask about errors. In the last ‘More Detail’ section you refer to 1 tonne of LNG being worth ‘$267 when it arrives in the tanker, or around £342 at current exchange rates’. The pound is worth around $1.3 dollars so $267 is worth about £220. Am I misreading it ?


  2. John, Thanks for the feedback – and yes you are correct – i got the currency conversion the wrong way round! I will correct the calculations as soon as I get a chance but obviously it makes the economics even more beneficial – to someone but not us!!


  3. Good read, I notice the exchange rate was wrong but I can see you already know about it 👍🏻 an independent Wales can and will flourish one day.

  4. Great post as always by Mike but clearly the situation has changed quite radically in the last 2-3 years. I’ve been looking at the annual DUKES report which gives a breakdown of gas imports coming into Milford Haven; it only runs up to 2020 but the 2021 report will probably be released shortly and should make for interesting reading!

    I was particularly interested in Mike’s comments on VAT as I understood that import VAT on LNG had been abolished by the incoming Conservative government in 2010 – a year after the Terminals started operating. If you go by the DUKES figures that’s hundreds of millions of pounds of lost income – potentially to the Welsh Exchequer.

    Could do with talking to Mike as I’ve been crunching the numbers through Milford Haven and potentially they are politically quite explosive (not literally thank god!) when you consider that the price cap for gas and electric is going to be raised even further this autumn.

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