This winter, the issue is particularly acute as Britain will enter the season with its lowest ever volumes of stored gas, after the Rough storage facility was closed permanently on 20 June 2017.
On 1 October 2016 the Rough storage facility held 14TWh of gas. In the previous year over 30TWh was in store, enough to power 2.5 million homes for an entire year. At the time of its closure in 2017, however, the site held just 1TWh, as a series of maintenance problems restricted the ability to inject gas up to that point. This is over 90% lower than that available last year, which was already heavily depleted by maintenance work which had left the site unable to inject gas for the last 3-4 months of the summer season.
Increased reliance on gas imports
The very low volume of gas in reserve will make the UK more dependent on imports this year. Imports from Europe over the Interconnector, pipeline gas from Norway and LNG tanker deliveries could all provide additional gas to meet demand. However, the UK will be competing on price with other destinations for that supply. This is likely to push prices higher than the cost of using its own reserves, had there been any available.
The UK has medium-range storage (MRS) facilities which, while having a lower level of overall storage capacity, operate with a quicker utilisation and injection than the Rough storage facility. Injections into MRS have stalled since the start of July as a result of heavy maintenance work in Norway and the UK Continental Shelf. This maintenance has reduced the availability of excess gas to be injected into MRS.
At present there is just 9TWh of gas in MRS, 30% lower than this time last year. However, with a total capacity of around 13TWh, MRS is unable to fill the gap left by the absence of Rough storage capacity, which was around three-times larger during its peak operation.
Can we access the remaining gas?
Centrica confirmed in August that it has applied to the Oil and Gas Authority for approval to withdraw 850mcm of cushion gas from Rough. This equates to just over 9TWh of gas, around 17% of the estimated recoverable cushion gas (54TWh). Added to the 1TWh of gas already in store, accessible gas reserves would be just over 10TWh at the start of October (still 25% lower than in 2016). In comparison, prior to the maintenance problems, the Rough storage facility started the winter season with between 30 and 40TWh of gas available. Peak sendout per day at that time was around 430GWh.
This winter, with just 10TWh in store, a similar withdrawal rate would empty the site in just 23 days. The maximum withdrawal rate will likely be restricted given the recent maintenance work. In order for the reserves to last the winter, daily sendout would need to be just 56GWh, emptying the reserves by the end of March 2018. This low level of sendout will be of little assistance to overall supply through the winter.
Global gas demand
LNG tankers will be available to boost supply. However, the UK will be competing in a global market for the deliveries. Very strong gas demand from China, looking to reduce its use of coal, and Japan, still without most of its nuclear fleet following the Fukushima accident in 2011, have kept Asian LNG prices high. With Asian prices at a premium over the UK market this encourages floating, non-contracted cargoes to head east rather than to Europe.
There is also uncertainty surrounding Qatar – the world’s largest provider of LNG – following a souring of relations between the nation and its neighbouring states. Saudi Arabia and other Gulf states severed diplomatic ties with Qatar in June 2017, raising concerns over possible disruption to LNG exports from the region. Large Q-Max LNG tankers have been forced to sail around South Africa rather than through the Suez Canal to reach Europe, adding two weeks to delivery times. As a result, LNG supplies for this winter could be less dependable than previously anticipated.
European gas storage reserves, however, remain uninhibited and could provide an additional source of gas supply for the UK going forward. During the current summer season, the UK has been exporting very high volumes of gas to Belgium over the Interconnector. In July, flows to Europe reached an all-time high at over 60mcm per day. This extra supply to Europe has helped total storage reserves in the Continent to reach 900GWh. However, this is 10% below the level of inventory that was in store at the same point last year. Re-importing this European gas during the winter season is an important supply option for the UK.
Increased dependence on Europe
Going forward, without its own long-range storage facility, the UK will be more dependent on Continental storage stocks. Imports via the Interconnector – which can provide over 60mcm per day – can provide the supply flexibility lost by the closure of the Rough storage site. However, competition for the gas across Europe means UK prices must be attractive for shippers to import from the Continent. Importing gas from Europe also means currency exchange rates play an important role, particularly in the wake of current Brexit negotiations.
The reduced supply flexibility from storage and an increased dependence on external sources of gas, such as Norwegian imports or LNG tankers, have helped to raise gas prices. The Winter ‘17 gas contract has risen around 8% since the start of August, reaching highs of 48p/therm, the highest level since February. Contracts delivering in the next two winters have also risen. With minimal use of cushion gas and no indication of a replacement facility at this stage, the market is anticipating similar restricted supplies in the coming years.
A reduction in indigenous or stored supply does not mean the gas system will be permanently undersupplied. Sufficient gas will be available to cover even the coldest of winter periods. It is a matter of where the gas comes from and how much the UK has to pay.