Ageing storage sites make British gas market more prone to price spikes

By Oleg Vukmanovic and Susanna Twidale

MILAN/LONDON (Reuters) – Britain faces a growing risk of spikes in wholesale gas prices as ageing storage facilities mean increased maintenance and greater reliance on imports to meet spot demand.

The main storage site, Centrica’s Rough, is over 30 years old, and its closure last month for at least 42 days to inspect the integrity of wells has underscored the vulnerability of the country’s storage capacity.

The announcement of the outage pushed up winter gas prices 8 percent, and raised concerns about refilling the site in time for this winter as well as its long-term future.

“The facility is showing signs of wear and tear and we have seen a decrease in the operational reliability of Rough over the last couple of years. It is hard to expect that it will get better,” said Energy Aspects analyst Trevor Sikorksi.

Other British sites are also struggling to cover their costs of capital as falling profitability stalls new investment and forces operators to idle capacity, such as SSE did last year at its Hornsea site.

“The least efficient storage sites are losing money – there will be an incentive on them to close at some point in the future without government support,” Poyry Management Consulting director Andrew Morris said.

“Politically, the country has to decide if it can accept regular price spikes.” There are no new gas storage sites being built and the government has ruled out subsidising development of new plants.

Storage operators rely on large swings between summer and winter gas prices to turn a profit and drum up demand for their services, but prices have flattened as Britain’s access to year-round supply has improved.

Gas links with Europe and imports from Norway, as well as liquefied natural gas (LNG) shipments via three import terminals, have eroded the traditional winter risk premium.

British consumers, however, will have to pay more for their gas supply from Europe through two existing gas links, because wholesale prices at the UK trading hub, National Balancing Point, will need to rise to attract continental supplies at times when supplies are tight.

“While Rough’s outage doesn’t mean we can’t bring gas in, it does raise the risk of price spikes to attract gas from Europe,” Morris said.

Compared with Europe’s 110 billion cubic metres (Bcm) of stored capacity, Britain currently has about 5 Bcm.

The pound’s sharp drop against the euro after Britain’s June 23 vote to leave the European Union has only made continental imports dearer, gas traders say, levying a higher cost on Britain’s growing import reliance.

Some 40 percent of Britain’s gas consumption comes from home heating, making it highly sensitive to cold weather.

A spokesman at the Department of Energy and Climate Change said Rough’s current closure won’t affect Britain’s ability to source gas supply, and the National Grid, in its winter outlook report published on Friday, said Britain will have enough capacity to meet demand even if Rough is not fully filled this year.

Centrica , which operates Rough, reduced Rough’s capacity last year amid safety concerns and has a 40 million pound ($52 mln) maintenance programme this year and a similar investment for next year at Rough.

“The ability to buy LNG from the U.S. (and other places) probably means that (Britain) will be able to manage through a normal winter, but the markets could get a bit jumpy if it is a cold winter and we have no Rough,” Energy Aspects’ Sikorksi said.

(Reporting by Oleg Vukmanovic in Milan and Susanna Twidale in London Editing by Susan Fenton)

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