The Winter to Come?

Will the UK have enough gas to survive a cold winter?

Last month we took a look at how the UK survived its first tight winter for many years, despite many fears, predictions and the trouble at Rough (the UK ’s largest storage facility). This month we will continue the theme with a glance to the future and what that may, or may not, hold.  

Looking forward to next winter and at the moment you would hard pressed to buy gas for less than 75p/th. Good if you want to sell, but not so good for the buyer. In fact prices are pushing the high 50’s from September 06 onwards, which suggests that this winter has the potential to be harder than last.  

We all know that the weather has a key role to play on our gas demand, last year some experts were forecasting a cold winter 05/06, and sure enough we had a cold spell, not what we were expecting or when for that matter, but it was enough to warn us of what could happen if the UK and Europe suffered a long cold drawn out winter.  

As the UK supplies have gone into decline various infrastructure projects have been planned and implemented to bring gas from other sources to the British Isles . Although late in the day, the response to this gas decline is a positive one, but will there be enough in place for the 2006/07 winter?  

Two very simple, but key questions and starting points for our discussion are: where will our winter gas come from? And do we have enough gas to meet normal demand? 

Supply  

The UKCS, which has been the UK ’s primary source of gas for many years, is now declining by around 30 to 40 mcm/d yearly and is expected to produce around 240mcm/d over the 06/07 winter period. This is based on 90% deliverability so allowing for system hiccups that always seem to occur when you are totally dependant on something. As the UK demand pattern shows, anywhere between 300-400mcm/d will be required over a normal winter period, we need to take an objective look at where the additional gas supply will come from.

Fig 1 2005/2006 seasonal and actual demands. (source National Grid Winter 2006/07 Consultation Document)  

Storage  

Humbly Grove, the first new storage facility in the UK since 2001 became operational during the course of last winter. However, a large number of storage projects are still awaiting planning consents or under construction. The UK Government has now realised that some of these projects have been delayed by unnecessary red tape  which they are now attempting to remove. The expectation is that by 2010 UK gas storage capacity will have doubled. But is this too little too late?  

Although a number of storage projects are in process, Rough is still by far the UK ’s largest storage site, and is likely to remain so. The Rough storage facility has traditionally been able to back up supplies during the tougher winter months with a deliverability of 42mcm/d over 74 days, but following the outage on 16^th February 2006 and other further problems which have now been resolved, there is growing speculation as to whether Rough will be full before it needs to deliver, particularly if there is cold weather during October. Although re-injection is possible when demand is not too high, and this clearly occurred last winter, making Rough very versatile, it is normally expected that Rough is filled during the course of the summer and is full before winter withdrawals have started. Centrica Storage Ltd (CSL) has stated that their focus is to inject sufficient gas to make Rough ready for the winter ahead. In fact at current injection levels Rough should be full by early to mid November.  

Imported Gas  

The Belgian Interconnector has been used for both import and export of gas over the years, but has recently been upgraded so that it can supply greater quantities of gas to the UK . The first upgrade was finished in time for last winter, but failed to deliver the expected quantities of gas that it was capable of. By December 1^st 2006 the next phase should be completed whereby two additional compressors will allow a total capacity of 68mcm/d to flow to the UK . But after the let down of supplies last year, despite high NBP prices, is it prudent to expect maximum flow rates?  

Balgzand Bacton Line (BBL) is a new Dutch Interconnector which is due to be commissioned in December ‘06. With an initial capacity of 30mcm/d plans are already in place to increase that capacity to 42mcm/d in March 2007 with the installation of a third compressor. This construction has been built to assist Gasunie to supply Centrica with 8bcm/annum over the next 10 years. As this is a contracted agreement it suggests that it will be more reliable than the Belgian Interconnector, but will it be commissioned on time to assist the winter contracts? Rumours abound that all is not going well and the pipeline may be delayed until after the winter peak.  

Another new project, a Norwegian pipeline known as Langeled, should be up and running by October 2006. It is expected to bring a maximum of 68mcm/d from the Sleipner platform in the Norwegian North Sea to a new Easington sub-terminal, but the second part of the pipeline which will connect the Ormen Lange field to Sleipner is not expected to be completed until the end of this year, which means that full capacity will not be available until 2007/08. The anticipated capacity for this winter is around 15mcm/d.  

The UK will theoretically be able to expect around 215mcm/d by March 2007 from European imports through the various projects mentioned above and the existing Vesterled pipeline from Norway . But how much of this will be available this winter?  

LNG has now been entering the UK for a year at the Grain site, bringing around 13mcm/d to the NBP. Excelerate Energy has announced that they will deliver 11mcm/d of LNG at Teesside by December 06. But that project has yet to get off the ground. Two other projects, Dragon LNG and South Hook, are still under construction with completion due in time for winter 2007/08.  

So how does it all add up?  

Flows from the UKCS are dropping, but capacity from Europe is increasing. Table 1 compares last winter to this coming winter. Capacity has been played down to be ‘more realistic’ but it should be noted that there is around 50mcm/d of potential upside, particularly through Langeled.  

(Table 1 source National Grid Winter 2006/07 Consultation Document)  

All the imports are based on assumptions that:

1. Europe can spare the gas, i.e. if the weather is very cold in the UK as well as in Europe, will continental gas merchants sell gas to the UK ?
2. LNG is not diverted elsewhere. Although the UK is probably the highest priced market for gas, particularly over the winter period.

We also need to bear in mind that if the Russian-Ukraine dispute has not been settled by the winter season this may have a knock-on effect, however remotely, on the supply of gas in Continental Europe, and hence the availability of gas exports to the UK .  

Last winter there were many cases where power stations and industry scaled back their demand, either because it had cheaper alternatives to gas or because it was actually cheaper to close for a period than to buy expensive gas to make their products. It is the opinion of the writer that this will happen on a somewhat larger scale this winter if the UK is going to meet its gas demands successfully. Our readers are advised to follow the advice of Derek, our cartoonist (AKA marketing manager) and stock up for the winter!  

By Paul Cassar & Nick White