Britain's Gas Storage Cuts Heighten Risks for Winter

Britain's available natural gas storage capacity will fall to its lowest level in almost a decade this summer, increasing the system's reliance on supply from the continent and the risk of price spikes next winter.

 

Utility Centrica (CPYYY) on Thursday idled nearly 30 percent of Britain's biggest gas storage site, Rough, for six months to test wells.

 

The site accounts for around 72 percent of Britain's gas storage capacity, National Grid (NGG) data shows, and news of the cut to available storage sparked heavy buying of forward gas contracts, pushing up next winter gas prices.

 

Centrica's cut followed one from rival SSE, which is mothballing a third of the gas withdrawal capacity at Hornsea from May 1.

 

EDF Energy has also restricted output from its Hilltop storage site by half.

 

"The capacity reduction will mainly impact in the winter itself when storage is almost empty and we are in a prolonged cold period," a trader at a European utility said.

 

Since Centrica flagged potential problems last week, traders have factored in the risks to UK supply by buying gas for next-winter delivery, when utilities typically rely on stored reserves to help meet peak demand.

 

"A significant portion of risk premium had been steadily added to winter contracts," one analyst said.

 

The last time Rough suffered such a major setback was February 2006 when a fire on a North Sea platform forced a facility-wide closure until June and a partial shutdown until late that year.

 

This time, traders expect Britain next winter to be more heavily dependent on imports from Belgium and the Netherlands, itself facing shortages, to make-up for reduced stored supply.

 

"However, there are two mitigating factors: there is potential for Rough to top up its stock in October and the continent could provide seasonal flexibility to the UK," Thomson Reuters Point Carbon gas analyst Francois Flament said in a note.

 

National Grid said it was too early to say how cuts to Rough storage capacity would impact supplies next winter.

 

"This reduction in capacity will not be an issue over the coming months, as the country has a diverse range of supplies," a National Grid spokesman said.

 

In fact, reduced storage this summer could create a glut of supply, pushing down prices and necessitating large-scale exports to Europe via a gas link with Belgium.

 

Supply itself should be adequate even in tight periods by drawing on Norway, continental Europe, offshore fields and liquefied natural gas (LNG) import terminals, gas traders said.

 

Britain can import LNG via three terminals served by producers such as Qatar, the UK's biggest provider.

 

"Global LNG supply is on the increase with Australia and Papua New Guinea next to come on line and start exporting. This additional flexible supply source coupled with reduced Asian demand mitigates some of the risk of winter gas shortages due to lack of storage availability," the analyst said.