Traders brace for first winter without UK's big gas store

By Anna Shiryaevskaya on 5/19/2017

LONDON (Bloomberg) -- 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 Plc’s 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%.”

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% 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 V.P. 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 1.9 Tcf of demand since 2013, said Teddy Kott, head of energy market analysis at EDF Trading Ltd. That’s about 12% 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% 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 Inc.

While Britain had relatively little storage even with Rough, with maximum capacity of just 7% of total annual demand versus about 30% 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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