Insights: Rough unavailable -where do we send excess gas?

Insights: Rough unavailable -where do we send excess gas?

In the absence of Rough storage injections, the UK gas market is expected to depend heavily on interconnection with Europe to absorb excess gas supply this summer. With high levels of LNG deliveries expected to continue through April, this could lead to volatility in short-term gas contracts.

Excess gas supplies mean UK gas prices will react to the system balancing through potential export demand from Europe rather than its own storage system.

The UK has started this summer season with a well-supplied system. Norwegian exports have so far not fallen as much as expected while five LNG tankers have been confirmed for April arrival, following nine deliveries in March. At the same time, domestic gas consumption continues to fall with milder summer temperatures. Gas for power generation is also down due to weaker power demand.

Excess gas – Rough?

Excess gas supply would historically be injected into storage facilities, predominantly the UK’s long-range site at Rough. This would enable the country to build up a reserve of flexible supply, to be used during the subsequent winter when demand will be higher.

Excess gas 1
Maintenance at the Rough site is preventing injections until at least July, removing 22mcm of demand from the UK system compared to previous years. Even if Rough injections were to return in July, the injection pace will be reduced from last year. Current testing has already identified six of the site’s 24 wells which will not be able to return to service. With less wells available the rate of injections will be reduced.

Europe

The use of the Interconnector is linked to the movement in prices caused by the current supply situation. Furthermore, gas shipped directly from the North Sea into Bacton and exported over the Interconnector avoids an import charge into the UK. The excess gas supply, as a result of this, has helped to weaken Day-ahead gas prices. This narrowed the UK’s price premium over Continental Europe and encouraged buyers from the Continent to ship gas from the UK, predominantly to build up their own storage reserves.

European gas storage reserves are currently 25% full, 20% lower than this time last year. Injections of over 650TWh (around 60 bcm) are required over the summer period in order to rebuild stocks to their 2016 peak. The strong injection demand is supporting European prices and encouraging exports over the Interconnector. IUK flows to Belgium in the first week of April have averaged nearly 40mcm, with daily exports reaching their highest level in more than six months. At present, gas prices for May are at a discount to those on the Continent, providing further encouragement for continued export demand.

Excess gas 2
Meanwhile, medium-range storage sites are currently over 50% full and have space for around 500mcm of supply. Injections into medium range so far in April have already added 100mcm in just five days, which if continued would lead to sites reaching capacity by May. This will limit the ability of these sites to absorb any excess gas during the summer.

Summer price fluctuations

This situation could be compounded by a large number of LNG tanker arrivals. At the end of last summer, UK gas prices fell sharply due to strong LNG deliveries and a lack of storage injections. Interconnector exports are limited to 50mcm per day, and at that time European storage stocks were close to capacity reducing the outlet for the extra gas.

A similar scenario could be seen in the UK over the coming months, particularly with the Norwegian and UK maintenance schedule appearing lighter than previous years. This could exacerbate the situation even further. This will increase dependence on the flexibility on the Interconnector to export the gas elsewhere. This could lead to price fluctuations over the summer months.

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Ross Moffat

Posted by on Friday, the 7. April at 12.11

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.