Rough is the UK’s only long-range storage facility and its operation in 2016 has been markedly different to previous years. With withdrawals expected to return by 9 December, we’re looking at how Rough storage may operate – and affect the market – for the rest of this season.
Rough’s operator, Centrica, began testing works on the site’s wells back in March 2015. After identifying a problem with one of the wells tested, all injection and withdrawal operations ceased in June 2016. Then in July, Centrica extended the shutdown of injections until at least March 2017. This left the Rough storage site at around 40% of capacity heading into the winter season. The estimated shortfall in stocks for the season was 1.5bcm – the equivalent to 12 additional LNG tanker deliveries.
In August, Centrica confirmed withdrawal operations could return subject to completing relevant testing. This testing is expected to be completed shortly with withdrawals from the site scheduled to return by 9 December 2016.
Finding a pattern from previous winters
The total amount of gas which the Rough storage site can hold has changed for each of the last three years due to maximum operating levels. Problems began after Centrica increased the maximum operating pressure at the site in 2014/15. Subsequently pressure levels at the site and the maximum available operating limit has been reduced each year.
In previous years, storage withdrawals have been minimal for the early stages of the winter season. For each of the last four years, inventories have been more than 30 TWh at the turn of the year. This was then followed by a three-month period of heavy withdrawals. Sendout then began to slow around April time, stabilising close to 10-15% of capacity.
Only the exceptionally cold winter of 2012/13 prompted stocks to fall below this level. Freezing conditions raised demand to such an extent that Rough was effectively empty during April. This forced it to dip into emergency supply. During this post-Christmas spell there is a base rate of consistent steady withdrawals from the site, with supplies able to increase in line with demand levels, should colder temperatures increase consumption.
However, with Rough entering the winter season with significantly less stored gas than previous years, how the site reacts is unlikely to follow a similar pattern.
An exceptional year
The UK gas system has so far coped with cold snaps pushing up demand levels. The market has utilised interconnection with Europe to import supplies from the Continent, where stored gas inventories are significantly higher than in previous years.
With storage withdrawals due to return in early December 2016, the site, at 40% of capacity, will still be around two and a half months behind previous years in terms of stock availability. In the last few years, stocks at Rough have not fallen to 40% before mid-February. As a result of the significantly reduced available supply, steady withdrawals throughout the remainder of the winter are highly unlikely. Rough is more likely to act commercially, as it would a medium range storage site. The turnaround time of withdrawing from the Rough storage site is longer than the medium range sites already operating.
However, it is still possible for Rough to act in line with demand levels. Gas would be withdrawn only at peak prices during periods of high demand, such as a cold snap. This boost in storage flexibility during periods of high demand would likely be depressive to prices. Balance of Winter gas prices have already fallen around 2% following the news of a restart of withdrawals. Expectations of improved flexibility for the first quarter of 2017 have boosted the supply outlook, providing the UK with another source of gas to meet spells of high demand.
Long-term plans for Rough storage
The maintenance issue that has beset the Rough storage site this year raised concerns over the future of its viability. Having been in operation for 40 years future plans for the site must become a priority. Centrica has already permanently closed its smaller 47/8A platform which connected to six offshore wells, following concerns over age and deterioration.
It is within the interest of the UK government to maintain a strategic long-term storage facility. This is the case, even if the financial appetite for investment is not clear at this time. The storage capability on the Continent and the UK’s links with Belgium, Netherlands and Norway has, this winter at least, negated much of the requirement for a seasonal stored gas facility. Additional global LNG supply is expected from the United States and Australia in the coming years. This could free-up additional Qatari supply to head for Europe, where it once supplied Asia. The lack of flexibility from not having your own storage facility can have significant problems on security of supply. This would also likely have a bullish price impact.
While there is an argument that with new gas supplies and improved interconnection the need for substantial stored gas supplies is waning, the loss of Rough would have a clear impact. It would place a significant strain on the UK’s medium-term storage supplies as well as raise our demand for imports from Europe. A cold snap in Europe would lead to strong competition for available supply with the Continent. With the UK needing to hold a premium over Continental hubs in order to attract the gas across the Channel, this would likely push up prices higher and more quickly than would be the case if the UK had its own long-term storage site.
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