RWE is committed to using a broadly based mix of fuels – lignite and hard coal, natural gas, nuclear fuel and biomass. It is also committed to the procurement of fuels being diversified by region and over time. Our assessment is that the supply of fuels over the short and medium term is associated with a comparatively low level of risk. Lignite in particular is not subject to any availability risks over the long term because we source all our lignite supplies from our own opencast mines located near to our power plants.
Forward-looking management of the licencing process involves transparent involvement of politicians, local residents and other stakeholders. This approach forms the platform for our operational activities, combining with continuous improvement in technologies for extracting raw materials and for environmental protection, and a well-developed sense of responsibility for people and the natural environment. The basis created in this way provides a long-term guarantee for acceptance and planning security of our mining and production activities – at opencast mines and for oil and gas production alike. We also regard securing long-term supplies as part of our core functions with other sources of energy.
RWE used to conclude long-term supply contracts linked to prices of crude oil. The aim was to secure the supply of natural gas. However, the price of natural gas freely negotiated on the energy trading exchanges has been uncoupled from crude oil prices in recent years. We are unable to pass the higher procurement prices on to our customers and this has exerted a major negative impact on our net income during recent years. In 2011, we therefore embarked on a process of contract renegotiations.
In 2012, we recorded our first success. At the beginning of October, an arbitration tribunal handed down a ruling in our favour following proceedings involving our Czech subsidiary company RWE Transgas and gas supplier Gazprom. This legal dispute revolved around the issue of whether RWE Transgas was entitled to reduce the minimum purchase quantities defined in the contract with Gazprom under certain conditions. The positive outcome of this proceeding means that we have been able to trigger a risk provision with retrospective effect from 30 September 2012. The tribunal was not involved in ruling on the link between our gas purchases from Gazprom and the oil price. A separate arbitration proceeding is being held on this issue and the process is likely to be completed in 2013 (Pricing and Marketplace).
We are also pursuing a policy of expanding extraction and transport of gas. In February 2012, RWE Dea started production at the Clipper South gas field in the British sector of the North Sea. In October 2012, production came on stream at Devenick. In May 2012, we started drilling wells in the Breagh Field development project. Breagh is one of the biggest natural gas fields remaining in the southern sector of the North Atlantic belonging to the United Kingdom. Production of the first gas from this field is expected in the first half of 2013. Production from these natural gas fields makes a substantial contribution to securing the supply of natural gas for the United Kingdom. RWE Dea has also expanded its activities in the North Sea off the Norwegian coast. RWE Dea continues to be involved in projects for the exploration and production of natural gas and oil in North Africa, on the Caspian Sea and in the Caribbean.
Alongside production, transmission also plays an important role in securing the supply of natural gas. NET4GAS is our independent Czech gas grid operator and it opened the 166 km GAZELLE pipeline in January 2013. This pipeline will carry gas across the Czech Republic. It will connect the OPAL pipeline to the Nord Stream pipeline in the Baltic Sea, which started operating at the end of 2011, and the MEGAL pipeline grid. This will supply Southern Germany and Western Europe with natural gas. It will also supply the Czech Republic and Slovakia with gas. Security of supply in large parts of Europe will be increased as a result. Liquidity in the markets will be improved at the same time.
RWE is increasing the generation of electricity from biomass. The CO2 footprint is more favourable than is the case with conventional fuels. In 2011, RWE Innogy brought a wood pellet plant on stream in Georgia (USA) with an annual capacity of 750,000 metric tons of wood pellets produced sustainably Supply Chain). In 2012, we used a total of 3.3 metric tons of solid biomass, of which more than 600,000 mt came from our wool-pellet production plant in Georgia.