Beast from the East highlights fragility of UK gas market

12 March 2018
12 March 2018, Week 09, Issue 440

The weather event that hit the UK last week illustrated the risks facing the domestic gas market and added impetus to the debate about developing the country’s shale gas reserves

WHAT: The highest prices for within-day gas delivery were recorded on March 1 and 2. 

WHY: Demand levels that were 35% above normal, limited storage and LNG availability and supply disruption caused prices to spike.

WHAT NEXT: The UK will continue to import more gas unless it scales up domestic shale development. 

The extreme weather that rolled across Europe last week severely tested the UK’s natural gas supply system.

The cold snap, called ‘the Beast from the East’ in reference to the freezing air that blew in from Siberia, temporarily led to record prices, and sparked longer-term concerns over a growing reliance on imports and a lack of storage.  

Day-ahead gas prices at the UK’s National Balancing Point (NBP) closed at a record GBP2.075 (US$2.88)  per therm on March 1 – the equivalent of over US$30 per mmBtu, and up over GBP1.00 (US$1.39) on the day before. The highest price for within-day gas delivery reached GBP3.50 (US$4.86) per therm on March 1 and 2 – an all-time record for the NBP.

Market mayhem

On each of the days that experienced severe cold, the UK system opened short of gas, primarily because of very high levels of demand – which turned out around 400 mcm per day, or 35% above normal – but also because of limited storage and LNG availability. Supply disruption in flows of gas from Norway and the UK Continental Shelf (UKCS) also played a part.

In Northwest Europe, low end-winter storage levels, limited LNG stocks and restricted Groningen output also caused Dutch Title Transfer Facility (TTF) prices to spike, resulting in a narrowing of the TTF-NBP spread as the cold snap set in, which caused a fall in Interconnector UK (IUK) and Balgzand Bacton Line (BBL) exports to the UK – although some flows did continue.

From March 1 the spread widened again as it became apparent milder weather was on the way. By March 2, BBL and IUK flows rose to 35 mcm per day and 52 mcm per day respectively, which was just enough to balance the UK system with the help of remaining LNG stocks (including Dragon LNG at 22 mcm per day), before they ran dry. 

One outage affected the Kollsnes processor in Norway, which reduced flow to Continental Europe and through the Langeled pipeline that normally supplies the biggest proportion of UK imports, at around 75 mcm per day. There was also an outage on the Entry SEGAL pipeline from Norway, which constrained flows by about 18 mcm per day into Scotland’s St Fergus terminal. 

Undersupply peaks

Undersupply in the UK peaked on March 1, when the system opened 51 mcm short. In response, the National Grid issued a gas supply warning, leading some big industrial users to reduce demand but helping ensure supply was maintained to residential users.

The supply warning was withdrawn the next day because the market opened balanced, but the shortfall later widened to again 12.4 mcm, triggering fresh concerns over supply and pushing within-day prices briefly back to GBP3.50 (US$4.86) per therm.

Shippers also relied on LNG send-out and withdrawals from storage sites, but by the end of March 2 these supplies were effectively exhausted. If the cold spell had lasted any longer, supply from these sites could not have been relied upon for several days, although five LNG cargoes are arriving in the UK this week and next, replenishing stocks at Dragon, South Hook and Isle of Grain.

Up until last week, high Asian prices had kept UK and European LNG deliveries to a minimum. Since then Asian prices have softened, and firmer European prices are attracting cargoes west.  

One of the deliveries this week is of Russian LNG from Yamal in Siberia, highlighting Europe’s continued reliance on Russian energy in times of crisis as the continent recovers from a cold snap. The LNG will be delivered by Royal Dutch Shell to the UK and then regasified at the Milford Haven LNG terminal and pumped into the British network. The UK’s first delivery of LNG from Yamal arrived in December, after an outage on the Forties pipeline.

Declining self-reliance

Last week’s supply scare and a growing reliance on Russia and other importers as North Sea production falls could be reduced by a more determined approach to developing the UK’s shale gas resources, according to the UK’s Oil and Gas Authority (OGA).

The cold snap clearly illustrated a growing dependence on imports, including from Russia and its gas export arm, Gazprom. In the past it has sought to retain its share of the European gas market by funding anti-fracking campaigns in the media. 

The CEO of industry body UK Onshore Oil and Gas, Ken Cronin, recently noted that the UK’s dependence on imports would rise sharply and that fracking would boost energy security. “The UK is worryingly dependent on gas imports and this is forecast to increase to 80% by 2035,” he said. “The need to ensure we have our own home-grown source of gas rather than pursuing this continued over-reliance on imports has today become very evident.”

The added volatility from last week’s squeeze, as well as other spells earlier in the winter and last autumn, could raise the risk premium for underlying gas prices, which could encourage investment in shale. 

One company with ambitions to scale up its unconventional gas development in the UK is Ineos, which agreed to reduce its consumption by 20% at its Runcorn plant in the UK during the supply squeeze on March 1. The company said such action was unsustainable, though, and said there was an “urgent need for increased domestic supplies of gas.”

It went on to say: “These supplies can be provided by shale and yet multiple projects are being held up at the planning and surveying stage …  The resources beneath our feet can be used to create jobs, heat our homes and go a long way toward self-sufficiency.”

Taming the beast

One trader told NewsBase Intelligence (NBI) that increased output from Russia’s Yamal peninsula may even have “saved the day” last week by ensuring the UK system remained able to meet demand.

The UK government will be wary of becoming more reliant on Russia for vital energy supplies as relations between the countries become frostier. Indeed, with allegations of Moscow’s involvement in the poisoning of a former double agent in England this week, there is an argument to be made that the real Beast from the East is Vladimir Putin’s Russia. 

There are clear risks to the UK gas market as domestic output declines, storage capacity is diminished and imports from friendlier neighbours such as the Netherlands are curtailed as output from the Groningen field is wound down. 

The case for a rapid scale-up in domestic shale development becomes stronger by the day.

Edited by

Ryan Stevenson

Managing Editor

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