Analysis: Gas storage doesn’t stack up

With wholesale gas prices languishing in the doldrums, there is unlikely to be new large-scale gas storage unless the government has a change of heart on subsidies, says Nigel Hawkins.

In recent months, UK fuel storage issues have been in the news. First, the 40-year-old Rough gas storage facility, which overall accounts for around 70 per cent of the UK’s gas storage capacity, has temporarily reduced its gas input levels. Not surprisingly, this decision by Centrica, its owner, has already had an impact on short-term gas prices. After all, the Rough storage facility is vast and – when full – it takes three months to empty it of gas.

Second, BP is expected to sell several of its UK fuel storage facilities as it adjusts to a much reduced oil price, and to the colossal financial impact of the disastrous 2010 Macondo blow-out.

Importantly, the UK’s gas storage capacity – at around 6 per cent of overall demand – is far lower than that of other leading European Union economies. The comparative figures in Germany and France are close to 30 per cent.

However, there are special factors for this perceived anomaly. Above all, the UK is a major extractor of gas from the UK Continental Shelf (UKCS), thereby providing ready access to meet any shortfalls: around 40 per cent of total gas demand is met from the UKCS.

The UK also has far better gas interconnection links to both Belgium and Holland than previously. Furthermore, the ability to import liquefied natural gas (LNG) has become more pronounced. This provides additional flexibility in the event of serious gas shortfalls.

Despite all these apparent safeguards, is the UK seriously exposed to a short-term lack of gas? After all, events do happen. Scenarios such as a lengthy cold snap during winter, a serious accident on a UKCS gas-producing platform, ruptured gas pipes, a damaged interconnector or a terrorist attack on a major import facility, such as Easington, are all possible scenarios.

The implementation of Brexit could also have medium-term tariff implications, which could materially impact gas prices. As such, the government has recognised the need for more gas storage capacity, especially to supplement the long-established Rough facility, which generally injects gas during the summer for use over the winter. It is also keen to promote the building of more medium-range gas storage facilities, which can respond more quickly to fluctuating demand levels.

Nonetheless, a pivotal announcement by the now obsolete Department of Energy and Climate Change in September 2013 sounded the apparent death-knell for many potential gas storage projects. Quite simply, former energy minister Michael Fallon stated: “There is no benefit in further expensive subsidies when the market is working. Gas supplies worldwide are increasing and it is increasingly easy to import additional supplies to the UK if required.”

So, unlike most generation projects, major subsidies for gas storage are apparently off the menu. Nonetheless, there are some projects – albeit of a modest size – that have recently been completed, notably at Stublach and the delayed Hill Top Farm in Cheshire.

Several other, much larger, projects have stalled – and may be parked forever. The long-discussed Deborah project, backed by Italy’s Eni, is a case in point. With a working capacity of 4.6 billion cubic metres (bcm), it would be a substantial investment, but the current economics simply do not stack up.

In any event, major oil companies are currently cutting investment rather than increasing it. The largely depleted Baird gas-field off Norfolk was identified some years ago by Centrica as Rough Mark 2, but it has now been abandoned. Centrica has also put its Caythorpe gas storage project, off East Yorkshire, on the back-burner. In its 2013 accounts, Centrica wrote off a chunky £224 million covering these two failed projects.

Stag Energy’s Gateway project in the Irish Sea, off Barrow-in-Furness, has also stalled – despite considerable work being done, and expense incurred. A similar scenario applies to Halite’s controversial Preesall project in Lancashire.

The common challenge for these failed projects is finance. With substantial public subsidies ruled out, it is very difficult to project a decent long-term return, despite low interest rates.

With gas prices low, the attraction of building expensive storage facilities is less obvious. And, by their very nature, they are unlikely to be called on often. Hence, unless substantial capacity payments are available, it is difficult to see how the numbers can stack up.

This could change if, for example, Rough’s technical problems were more deep-seated or gas prices soared. Some parked projects could be resurrected if the financial environment changed materially – or if there was a government U-turn on subsidies.