European gas prices have risen recently, adding to the growing debate about the need for the development of more indigenous resources such as shale gas, writes Jeremy Bowden
WHAT: Gas prices have increased in the European market this winter.
WHY: A perfect storm of weather, technical and transition issues have combined to add tightness to the market.
WHAT NEXT: The volatility has highlighted the need for greater energy self-sufficiency
Cold weather, nuclear outages, low wind and a tighter than expected LNG market have all contributed to driving up gas prices across Europe over recent months.
Demand had already been rising – reversing several years of declines – as had the risks of power price volatility, owing to the accelerating transition towards lower-carbon energy systems.
The cold weather has pushed up gas space-heating demand this winter, and, combined with lower than expected LNG availability, has resulted in a substantial drawdown in European gas stocks for the first time in several years.
Gas demand for power generation has also been enhanced by low wind output under what has been a persistent anticyclone that has dominated the weather for several weeks across much of Europe. Problems with French nuclear power plants (NPPs) have also increased reliance on gas over recent weeks, while the UK has seen continued disruption at its main storage site at Rough.
Gas supply has responded well, and overall there has been a 20% increase in the volume of gas transported in Europe in the first 20 days of January, compared with the average for the last three years, according to industry association Gas Infrastructure Europe (GIE).
Even so, prices have been driven higher, especially in southern France. Here it has been particularly cold and anticipated LNG deliveries failed to materialise owing to force majeure limiting local Algerian LNG deliveries at the Fos terminal to just four cargoes in January, its minimum contract commitment.
The southern France gas premium over the north reached record levels, with the day-ahead contract at 33 euros (US$35.47) per MWh, almost 20 euros (US$21.50) above the northern price of 13.35 euros (US$14.35) per MWh on January 17. Congestion on the pipeline linking the two gas hubs prevented overland adjustment, and the situation was made worse by strong demand in Spain and Italy.
The high demand across Europe drew in supply from the North Sea, Norway and Russia. Indeed, Russian flows through the three main export lines reached a very high level in January at above 4,100 GWh per day (387 mcm per day).
Demand for Russian gas had already been rising before the cold winter began, with the volume sold to the European market expanding by nearly 30% for the first nine months of last year – partly because of lower prices, which meant the value of sales increased only modestly by 3%.
Those additional sales now appear to have been made permanent, with many Russian long-term contracts through the three main lines recently believed to have been renegotiated at a higher take-or-pay level, with buyers accepting higher minimum take while Gazprom accepts more hub pricing.
LNG deliveries, on the other hand, have failed to meet expectations so far this winter. Cold weather and high demand in East Asia have drawn fresh US LNG exports there, rather than seeing them come to Europe as had been anticipated – at least until recently. Now that prices have risen sufficiently to be competitive with prices in Asia, more cargoes are forecast to arrive from February onwards.
In the UK, benchmark NBP gas prices have also risen, but the weather has been less severe and supply has remained ample despite ongoing problems at the major Rough storage facility, which resumed operations in December.
In addition, concern over the Brexit outcome, which some claim could affect cross-border trade, combined with a weak pound against the euro, has added to NBP market volatility.
The UK’s winter 2017 contract rose by over 60% to around GBP0.52 (US$0.65) per therm over the past year. At the time of writing, prompt prices were at similar levels – compared with a seven-year low of 22 ppt seen as recently as September.
However, prompt UK winter prices have not risen as much as on the continent, and gas exports from Europe to the UK are currently lower as a result, with the differential that normally favours export to the British market narrowing. Similarly, the normal flows of power from France have mostly reversed, with recent weeks seeing the UK exporting for most of the day, albeit through a damaged interconnector.
The bullish short-term environment comes against a backdrop of a growing risk of higher power prices as Europe’s energy transition gets properly under way – in which fossil-fuelled power plants closures speed up and the markets struggle to fill the gap with intermittent renewables, demand management, storage, back-up and other techniques. Since September last year, markets have seen a period of increased volatility after years of relatively calm trade.
This long-term backdrop is also bullish for gas prices, though ample supply could undermine the upward pressure from higher power prices, which in any case are time-sensitive – unlike gas prices, as gas can be stored relatively cheaply (unlike power).
Nevertheless, a rising proportion of wind in the fuel mix will reduce gas consumption, although it will also make gas’ swing availability ever more important.
In the near term, once the cold weather has passed, the French nuclear outages and low LNG supply are also forecast to ease, which could reverse the gas price gains of recent months. Chevron’s LNG plant in Angola, which had suffered outages, and Australia’s Gorgon, which restricted output from late last year, are already back on stream, and Algeria is also expected to resume deliveries.
BMI Research sees average NBP prices at 44 ppt this year, compared with an average 35 ppt last year, with levels supported over the first half of 2017, as “gas storage constraints and nuclear outages in France combine to increase exposure to demand-side shocks.”
Later in the year prices may then fall back as pipeline and LNG supply catch up, especially if wind output is high. Strong Asian LNG demand is anticipated to ease back, freeing up more cargoes for European buyers as the year progresses. It is anticipated that 2017 will be a record year for global LNG growth and some forecasters are predicting LNG imports into northwest Europe could be double last year’s levels.
While there have been some localised gas and power shortages, overall most of Europe is coping well with the cold, despite an almost perfect storm of technical and transition issues that combined to add further tightness to the market.
Milder weather appears to be on the way and supply sufficiency had never really been in question, despite a rising reliance on imports, as Dutch and UK supplies decline.
In an increasingly uncertain world, the importance of energy self-sufficiency is growing. This winter has highlighted how indispensable gas is to energy supply security, which makes the reasons to look again at European shale gas development even more compelling.