Why Britain Has to Be Really Nice to Norway and Russia

Already buffeted by political chaos at home and abroad, the U.K. gas market must now operate without its biggest stabilizing force: the giant Rough gas storage facility under the North Sea.

The planned permanent shutdown of the Centrica Plc site, able to meet 10 percent of peak demand in winter, means Britain is becoming even more reliant on imports of liquefied natural gas or pipeline fuel from Russia and Norway. That sets up the possibility that traders would have to outbid Japan, the world’s biggest LNG buyer, and others to keep millions of homes warm.

Political uncertainty is making the supply game even riskier, with rules for international gas pipelines clouded in mystery as the U.K. negotiates an exit from the European Union. And the diplomatic crisis this month involving Qatar, the nation’s largest LNG supplier, caused gas prices in Britain to jump the most since January as two tankers were diverted.

“It takes two weeks for a cargo of LNG to arrive from Qatar, which is not a politically stable place right now,” Graham Freedman, principal analyst for European gas and power at Wood Mackenzie Ltd. in London, said by phone.“That does raise the political implications quite a lot, along with Brexit. So it’s a perfect storm in terms of security of supply for the U.K.”

Last winter as much as 94 percent of the country’s gas came from sources other than storage. More than half of that was imports, mainly through pipelines from Norway. Statoil ASA, Norway’s state-owned producer, has repeatedly said it doesn’t plan to significantly boost exports, but can divert more fuel to Britain if needed.

The U.K.’s LNG imports may increase by 39 percent next year as new plants will come online, according to Energy Aspects Ltd. Its May forecast already took into account the expectation that Rough wouldn’t return to service.

Read more about Centrica’s decision to shut Rough here

Yet predictions of a wave of LNG coming to Europe have previously proven to be premature. Supply was expected to build up last year but demand in Asia, the Middle East and Latin America raised prices in those areas and diverted cargoes.

Japan Prices

Japan paid more than $16 per million British thermal units for LNG in 2012 through 2014, a premium of more than 60 percent to U.K. prices. The share of LNG as a percentage of total winter gas supply in the U.K. actually fell more than 50 percent over the past two winters, to 4 percent of the total, according to National Grid Plc data.

To gain a sliver of the supply, the U.K. would have to start competing on price, according to Deepa Venkateswaran, a senior analyst at Sanford C. Bernstein Ltd.

The closure of Rough would put “greater upward pressure on gas prices to divert LNG cargoes to the U.K.” during a cold snap, she said.

LNG cargoes also take time to arrive, which can hurt during severe cold snaps. Earlier this month, two cargoes to the U.K. were suddenly diverted to a longer route around Africa, nearly doubling the journey time. Qatar Petroleum said it’s business as usual.

If all imports were to suddenly stop, the U.K. would only have access to 10 days worth of natural gas, compared with 24 days when the Rough was operating. By comparison, Germany and France each have more than 100 days of fuel stored, according to Wood Mackenzie.

“This leaves U.K. pretty exposed,” Freedman said.

U.K. domestic production accounted for nearly 40 percent of winter gas supply in Britain last winter, according to the National Grid. Output has been falling since 2000 because fields in the continental shelf are being depleted, also increasing the need for foreign supply.

In previous years, the U.K. has also relied on Europe’s largest gas field, Groningen, located in the Netherlands to meet shortages. Output from that field has been slashed because production is causing earthquakes that are endangering nearby residents.

Russian gas will likely play a role to fill in any gaps, with the country already meeting a third of Europe’s consumption of the fuel. While the U.K. doesn’t import gas from Russia directly but via pipelines from the continent, Moscow-based Gazprom PJSC said its supplies to Britain soared 61 percent last year.

That fuel can travel to the U.K. through interconnecting pipelines from Belgium and the Netherlands. It’s unclear whether any rules around energy trade between the U.K. and those countries will change due to Brexit negotiations.

“While we are still in the EU, others have an obligation to share available supply with us in the event of a crisis,” said Jonathan Stern, chairman and senior research fellow at Natural Gas Research Programme at the Oxford Institute for Energy Studies. “Longer term, post-Brexit who knows?”

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us