Are supply issues causing concern for gas prices this winter?

Are supply issues causing concern for gas prices this winter?

The winter sees gas demand at its highest, and historically, the UK has been reliant upon a number of sources for imports to meet this increased consumption each year. However, uncertainty over whether supplies will be able to fully respond to the higher demand are causing concerns ahead of the winter, resulting in higher gas contracts for consumers.

The Groningen natural gas field had been a main source in providing flexibility to North West European gas systems with average daily production doubling from 100mcm to 200mcm during the high demand winter period. However, a series of large seismic events resulted in regulatory intervention. Supply was capped with maximum annual production quotas introduced.

Gas price concern - Groningen

These quotas mean Groningen output will be unable to ramp up during winter times as it has in the past, with production reduced from peaks of 54 billion cubic meters (bcm) in 2013 to less than half that – 24bcm – in 2017. Over this time the gas production has been managed to a reduced output.

Declining output

For the coming winter, production at the Groningen gas field is already lower than originally predicted, falling to an output between only 19 and 20bcm in the year ending October 2018. This is below the original cap set at 21.6bcm and is down further from what was produced last year.

Groningen production

Groningen gas production is expected to continue its decline, leading to the eventual complete closure of the field by 2030. This will increase the UK’s reliance on other gas sources to maintain a flexible supply. The implications of this have helped support the increase of wholesale gas prices for the country over the last 12 months.

Liquefied natural gas (LNG)

LNG imports provide another source of flexibility for the UK. However, currently the UK is facing a reduced supply, having less scheduled tankers this year compared to last.

Monthly LNG

LNG imports to the UK have been on a steady downward trend since the end of 2015. Total LNG imported in the first half of 2018 was down 33% compared to the same time in 2017. This is in part due to high Asian prices that are enticing cargoes away from Europe.

Oil impact

The rising cost of gas prices this winter can also be tied to the current trends in oil. Almost two thirds of Europe’s natural gas supplies are still linked to oil prices, paid for by contracts that are linked to the price of oil. Suppliers have traditionally sold through long-term deals related to oil prices which are currently close to three-year highs. Utility companies are making moves toward prices that are based on openly traded gas hubs, such as those in Britain and the Netherlands, however this is still not standard. LNG imports into the UK still price on oil indexing.

What does all this mean for you?

The UK’s dependence on imports and the flexibility they provide is enhanced now that the UK can no longer rely on a large-scale storage facility. The closure of the Rough facility in 2017 has left the country with limited storage capacity.

Concerns over supply flexibility, combined with the UK’s ability to respond to periods of high demand, are supportive to gas prices for the upcoming winter. The Winter 18 gas contract is hovering around 65p/th, up around 40% compared to this time last year.

These concerns have the potential to further raise prices for UK businesses and households as the winter season approaches.

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James Shaw

Posted by on Friday, the 6. July at 12.26

James Shaw joined the Market Intelligence team at Utilitywise in 2018 as a Graduate Market Intelligence and Policy Analyst. James has a master’s degree in Energy Engineering with Environmental Management from the University of East Anglia.