Risk rising: concerns mount over possible winter gas price volatility

It has been two years since the UK was subjected to near-record gas market prices following a long, cold winter which all but depleted storage levels. But already a string of supply cuts and even lower levels of available storage reveal further potential price shocks for the market this year.

The UK faces an increased risk of volatility this winter, analysts have warned, as domestic storage facilities will be left later than usual to be filled and will rely more heavily on Russian gas flows as European supply sources falter.

“There is substantially more storage risk in the market than last year,” said a recent report on the UK’s summer outlook from Point Carbon analysts at Thomson Reuters.

The UK government prides itself on the fact that the UK has diversified its sources of winter gas between domestic storage, pipeline imports from the continent and more expensive liquefied natural gas.

But recent gas production cuts in the Netherlands and unusually long maintenance periods in Norway combined with constrained storage at the UK’s main winter holding facility has sparked concern of an increased dependence across Europe on gas imported from Russia.

Indeed, Russian gas imports into Europe are projected to double this year but last week’s announcement from Brussels that the EU will move ahead with a market abuse case against Russia’s Gazprom have left many wondering whether the legal action may enflame an already tense relationship between the EU and its largest supplier of gas, just when the region is most vulnerable to disruption.

Point Carbon analyst Oliver Sanderson told Utility Week that Russian gas flows into Europe in the final quarter of last year were between 170-190 million cubic meters per day but that this year as much as 350-370 mcm/day is needed through the summer and into early winter.

“If these higher Russian volumes do not materialize there is little other supply to draw on at current prices,” Sanderson warned, adding that market prices across Europe would need to soar in order to attract LNG deliveries from the competitive global market.

Although Russian gas flows have already picked up they are lagging by almost 6 per cent despite no disruption.

“Our expectation was for 340 mcm/day as of April rising to 360 mcm/day by the end of September. Flows rose to 310 mcm/day by mid March and are currently around 320 mcm/day,” Sanderson said.

The combination of Russian gas flow disruptions and an early start to colder weather could leave the UK more exposed to price shocks than most markets because its already low storage capacity has been depleted further.

The UK has entered the summer season with the second lowest storage inventories on record and will face a 30 per cent reduction in the amount that it can inject into winter holding facilities at least until October.

Historically the UK relied on its own North Sea gas sources rather than invest in storage, so while many countries have 100 days of gas storage in place the UK relies on just 15.

But this week Centrica confirmed that its Rough gas storage facility, which holds around 70 per cent of the UK’s domestic winter gas, will be reduced by as much as 30 per cent for at least six months while it undertakes testing at the site.

Even with an aggressive program of injection to top up levels used over the past winter Point Carbon estimates that Rough may only reach 2.7 billion cubic metres by the end of September 15 per cent off the analysts’ initial forecast for 3.2 bcm by the end of the season.

At the same time gas production from the UK’s usual sources of gas in Norway and the Netherlands are restricted, meaning the UK will need to rely more heavily on continental gas markets which in turn are more reliant on Russian gas supplies compared to import levels last year.

Recent falls in the price of Brent crude make importing gas from Russia cheaper due to the country’s preferred method of oil-indexation but importers have been delaying the amount they take through their contracts in order to wait for the full effect of weak Brent crude prices to take shape.

But analysts at Thomson Reuters’ Point Carbon warn that if the political tensions between Russian and EU reignite by October the result could be a disruption to much-needed supply, and a steep premium to be paid by European gas users.

Could the UK run out of gas this winter?

For the UK to run out of gas as a result of the increased risk factors taking shape this year is unlikely and improbable. But the real risk is that the UK may be forced to pay a far higher price for its gas, at a time when there is increased pressure on suppliers to keep costs low.

Even at the end of the winter of 2012/13 when the UK’s Rough storage facility was all but depleted the UK was able to attract supply through pipeline imports and LNG. Government was quick to downplay concern, rightly saying that the UK was in no real threat of the pipes running dry.But in order to attract these gas sources while cold weather prevailed over much of Europe the UK gas market saw prices rocket to near-record levels several times during March 2013 with higher residential tariffs following six months later.

This round of retail price increases of course triggered the pledge from Ed Miliband to intervene in the market through a price freeze at the September 2013 Labour party conference, setting the tone for increased political scrutiny ever since. Other regulatory interventions included an investigation by the Energy and Climate Change select committee into the government should subside investment in greater storage capacity.

The idea was deemed a ‘waste of money’ by then-minister Michael Fallon.