London - For the first time in more than three decades,
natural gas traders, utilities and producers are preparing for a winter without
the UK’s biggest storage facility.
With Centrica North Sea Rough storage site almost empty after
wells deteriorated, the UK is set to lose a quarter of its daily supply
capacity during the winter as well as its ability to quickly respond to
short-term swings in demand. Britain will import more fuel, which may be costly
and create opportunities for traders and producers, as well as boost business
for smaller storage sites.
The shutdown of Rough, a depleted North Sea field run as a
storage site since 1985, will impact the UK economy through more volatile
energy prices during the peak winter season and increase the reliance on
imports via liquefied natural gas tankers that can take weeks to arrive.
The halt also offers Russia an opportunity to strengthen its
grip on deliveries to Europe, which faces declining local production and
extraction caps at the region’s biggest field at Groningen in the Netherlands.
“It definitely generates more risk in the winter and
increases a bit dependence of Europe on LNG,” Didier Magne, head of European
gas at commodity trader TrailStone UK Ltd., said in an interview. “We know that
Rough is highly unlikely to return, we know that Groningen is going to reduce
production by a further 10 percent.”
Without Rough, more price volatility will benefit trading,
David Isenegger, Centrica’s head of mergers and acquisitions, told an Amsterdam
conference last week. Volatility jumped last year already amid a partial outage
at Rough, which accounts for 70 percent of the UK’s total storage.
In the past, a fully operational Rough provided a buffer
against price swings. Flows from the site during winter “meant that you would have
to lift demand so much more before you saw the real spikiness” in wholesale
rates, Tor Martin Anfinnsen, senior vice president at Norway’s Statoil ASA,
said in an interview. “With that gone, the spikiness in prices might begin at a
lower demand level.”
With plenty of alternative supply, weather will be a
determining factor. Four straight warm winters in Europe shaved almost 55
billion cubic meters (1.9 trillion cubic feet) of demand since 2013, said Teddy
Kott, head of energy market analysis at EDF Trading Ltd. That’s about 12
percent of Europe’s total last year.
No Wave
While additions of LNG capacity globally haven’t yet seen a
wave reach Europe, expectations are that extra supply is on its way. Gas for
winter delivery to the UK has slid 12 percent this year, but demand in other
markets could pull some of the LNG away from Europe.
“The market is very relaxed, we have seen that with prices,
because LNG is expected to come,” Andree Stracke, chief commercial officer at
RWE Supply & Trading, said in an interview. “In a situation where LNG is
not available, then the market will be much tighter.”
Pipeline gas suppliers are also ready to help plug the gap.
Russia shipped record volumes to Europe last year and aims to send even more
this year. Norway, Europe’s second-biggest supplier, has excess pipeline
capacity and can divert gas from the mainland to the UK, Anfinnsen said.
While Centrica’s storage unit posted a 57 million-pound ($74
million) loss last year and Rough became a “financially less attractive asset”
because the summer-winter gas spreads narrowed, Isenegger said the suspension
of the facility is “probably a good opportunity” for other operators focusing
on short-term price swings.
It may not only be UK facilities that benefit from the
absence of Rough. Gas flows to the continent are at their highest level
for this time of year since 2012, indicating that UK traders may be using
continental caverns instead to hold gas they will send back to Britain in the
winter.
European storage sites aren’t filling up as quickly as usual
and may end up starting the heating season at a lower level, which is of “some
concern,” according to Pan Eurasian Enterprises.
Read also: Wärtsilä punts gas-to-power generation
While Britain had relatively little storage even with Rough,
with maximum capacity of just 7 percent of total annual demand versus about 30
percent in Germany, the rest of Europe will have too much until at least 2025,
according to Cedigaz, a Paris-based industry research group.
“We have some storage capacity and we luckily benefited from
what happened to Rough,” Magne said. “There is too much storage in
Europe, in every country you have far more storage than needed. The only
country in Europe that is different is the UK, where you should have storage.”
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