No danger of UK gas shortages says report
Two months on from Russia's annexation of Crimea, Europe's largest energy exporter is showing no signs it intends to cut gas supplies to the continent
The UK, in particular, has healthy stock levels. However, sustained weak demand and high gas reserves will cause 'significant imbalances' between the UK's gas supply and demand between the end of May and July, according to a new report by Thomson Reuters: Point Carbon's UK Natural Gas Seasonal Outlook for summer 2014.
On 31 March, the UK's gas stocks stood at 2.4 billion cubic metres (cm), around 50% of capacity and 10 times higher than year-earlier levels, the report said. The Centrica-owned Rough storage facility will be 95% full by early September, with levels not expected to fall until the fourth quarter as demand begins to rise before winter supply contracts kick in.
Last winter's mild weather coupled with weak demand have helped the UK to boost its gas storage levels which have caused wholesale gas prices to tumble. Spot prices for UK gas fell to a three-year low of 43.80 pence per therm (p/th) on 16 May. This down from around 64 p/th at the beginning of May 2013. This price, which is the lowest since September 2011, was the result of ample supply and weak demand weighing on prices.
The report says the UK's high gas stock levels are being supported by a contango market structure - where future prices are higher than ones for prompt delivery. This provides financial incentives to place gas into storage rather than trying to sell it on as quickly as possible.
As well as weak gas consumption, there were also relatively few disruptions to the UK's domestic gas production in the period between September 2013 and March 2014.
UK Continental Shelf (UKCS) gas production is expected to remain stable this summer, at around 81 million cubic metres per day (cm/d). Last year, UK gas output was slightly lower, at around 80m cm/d.
Although the report does not forecast any significant ramp-up in UKCS gas production this summer, it expects a slowing of the year-on-year output declines noted so far this decade.
Volumes of liquefied natural gas (LNG) flows to the UK are expected to drop sharply, from a May and June peak of 38m cm/d to 12m cm/d in September, as increased demand for gas in Asia draws volumes away from Europe. However this fall in UK LNG supply it is not expected to have a significant impact on prices because demand is so low, the report said.
UK gas demand is expected to remain depressed as cheaper energy sources, such as coal, will continue to compete with the cleaner-burning fuel, keeping prices low.
Total UK residential and commercial sector gas consumption fell to a 10-year low of 33.3 billion cm between October 2013 and March 2014, the report said, an average of 183m cm/d. This is 6bn cm, or 32m cm/d, below the 10-year average, it said.
Gas-fired power generation will continue to be limited by cheap coal and increasing wind power capacity, cutting year-on-year consumption from already-low levels. Gas use for power generation was 35m cm/d in summer 2013, down by 50% from summer 2010 levels. This summer demand for gas in power generation is expected to fall further. "Despite some bullish elements toward the end of the summer, such as supply maintenance and less LNG, bearish factors are set to dominate market sentiment," Oliver Sanderson, a research analyst at Thomson Reuters Point Carbon, said. "(This will be) keeping UK gas prices substantially below last year's level throughout the summer, also diluting the risk coming from political turmoil in Ukraine."
Meanwhile a separate report, published by the Global Sustainability Institute, claims the UK is 'dangerously close' to running out of gas. The report, however, fails to take into account estimates made of the UK's fossil fuel base since 2010, including estimates of the country's unconventional resource potential.
A spokesperson from the UK Department of Energy and Climate Change (DECC) dismissed the report, saying: "The premise of this report is nonsense".
The Country Resource Maps report claims that at current consumption levels, the UK has just 5.2 years of oil left, 4.5 years of coal and three years of natural gas supplies. Cedigaz, however, estimates that UK gas reserves are around 200bn cm. UK consumption in 2012 was 78.3bn cm.
Aled Jones, director of the Global Sustainability Institute at Anglia Ruskin University, told Petroleum Economist that the point of the report was to highlight the UK's depleting fossil fuel resources and draw attention to its increasing reliance on imported energy. UK fossil fuel production reached record lows last year, causing energy imports to reach their highest levels in three decades.
Total energy output in 2013 was 114 million tonnes of oil equivalent - a fall of 7% on the previous year. A record low in onshore coal production and the long-term decline of oil and gas output from the UK Continental Shelf were behind the drop, the government said.
The DECC spokesperson added: "The UK is one of the most energy secure countries in the world thanks to our own reserves, our diverse sources of imported energy and our focus on increasing clean, homegrown energy in the UK - which includes nuclear, renewables and carbon capture and storage."