CERA: UK winter natural gas prices likely lower than 2005

Aug. 7, 2006
UK natural gas prices are likely to be lower than the levels experienced last winter despite declining production, uncertain import capacities, and limited storage, Cambridge Energy Research Associates said.

UK natural gas prices are likely to be lower than the levels experienced last winter despite declining production, uncertain import capacities, and limited storage, Cambridge Energy Research Associates said.

“A fear of shortages, equipment failures, or other unforeseen events and a concern about the quality of supply and demand information are holding the forward price for winter natural gas prices higher than the fundamentals of supply and demand should support,” said Simon Blakey, CERA senior director for European Energy.

His comments came in a report entitled, “A Close-Run Thing: Winter 2006-07 in the UK Gas Market.” Others have suggested the UK might need to import 40% of its gas by 2010 and 90% by 2020 (OGJ, Apr. 17, 2006, p. 58).

Blakey believes infrastructure already under construction will help achieve a balance for the winter gas market at price levels lower than those of 2005-06.

“Under these circumstances, conditions in the UK gas market this winter should be better than those that both the industry and its customers experienced last year,” he forecast.

A split winter

The timing at which various infrastructure elements become operational and their utilization rates will influence the gas price, he said.

UK continental shelf production is likely to decline to around 240 million cu m/day, CERA said, adding that any infrastructure construction delay or underutilization could drive up prices.

“In our view, next winter will be divided into two halves, with the first period-from November to January-representing the critical period with the most uncertainties,” Blakey said.

Although about 119 million cu m/day of new pipeline capacity is targeted for winter service, less than 60% of that is expected to be completed before December, and it is not clear how much gas will be available to fill the new capacity.

“Nevertheless, the most likely configuration of supply would be sufficient to help the British market through the winter more comfortably than last year,” he said.

Investment timing

Currently, the main projected increase in imported gas is from Norway, mainly via the Langeled pipeline that will make landfall in northeast England carrying gas from the giant Ormen-Lange development and from Europe via the existing Zeebrugge-Bacton Interconnector and the Balgzand-Bacton pipeline. Delays from 2001-03 in British-Norwegian government discussions about the southern leg of Langeled pipeline led to the current high UK gas prices going into winter.

“At that time,” said Blakey, “the supply-demand balance was considerably different and was not signaling the kind of urgency that became evident last winter.”

Inability of the governments to agree on the detailed terms of the proposed Framework Treaty added 12 months to the project schedule, setting back commissioning of Langeled to October.

Blakey said an additional 70 million cu m/day of supply capacity-compared with a winter demand of 300-413 million cu m/day-would have prevented last winter’s price spikes.

“There is very little that market players can do in the short term to offset or compensate for such underlying factors that determine the scale, location, and timing of new infrastructure,” he said.

Winter outlook

Infrastructure delays, the absence of storage, or sustained cold weather could lead to prices of up to 200 pence/therm, Blakey said.

“On the other hand, if the pipes and new LNG offshore terminal are operational on time and production is maximized, then there will be a more comfortable supply situation,” he said. “On balance, winter 2006-07 should prove easier in the UK gas market than the winter that the industry and its customers lived through last year.”