While gas prices are at an all-time low, businesses may be wise to consider the potential impact of other market trends.
According to the Department of Energy & Climate Change, the overall demand for natural gas in the UK increased by 5% between the first quarter of 2015 and the same period in 2016. This includes a wide variety of businesses and public sector organisations using gas for everything from heating buildings and cooking to powering energy plants and chemical processes. But while consumption is up, in April 2016 the ICIS Power Index announced that wholesale gas prices were at a 10 year low. For any business currently considering switching supplier, renewing their fixed gas contract or on flexible price terms, the approaching winter may seem uncharacteristically calm in energy buying terms. However it is worth taking a closer look at what’s been happening in the domestic gas supply market to consider what impact this might have on them.
For several months now events have been unfolding at the UK’s largest natural gas storage site, the Rough field 18 miles off the East Yorkshire coast. Gas stored at Rough is used to meet around 10% of the UK’s winter peak demand. In June 2016 it was reported that an issue was found with one of its wells following testing works, and although this was later resolved, the robustness of other wells was reported as uncertain. Tests continued until March/April 2017, meaning that no gas could be injected or withdrawn in the meantime. While it’s been announced that 20 wells are due to be available for withdrawal operations by 1st November, the fact remains that no gas can be injected for some time to come.
An accurate picture of Rough’s partial closure remains to be seen, but the media has been quick to point out how this could potentially affect gas supply and prices. It’s been reported that the UK will need to import 1.75 billion cubic metres (bcm) of additional gas this winter, most probably sourced from Norway or elsewhere in mainland Europe. This increased reliance on supply from outside the UK could mean competing with demand from the rest of Europe, in turn leading to a price premium. Sources have also likened the situation to early 2013, which saw gas prices swing to a high due to a combination of the temporary closure of a main import pipeline and a cold winter.
If higher price premiums did become an impact of the Rough situation, business users would be wise to consider the potential implications, especially if they are buying gas on a flexible contract or planning to renew a fixed contract.
The long-term future of Rough seems somewhat uncertain too. It was announced recently that its 47/8A platform, which operates four out of approximately 30 wells, will be removed permanently. It could be perceived that a change in balance between domestically stored and imported gas is on the cards but Rough’s operator Centrica Storage has given reassurance that this would have ‘minimal impact’, claiming that it has made preparations accordingly.
The implications of the situation at Rough are simply unknown at this stage. However, it always pays to keep track of market trends that could possibly impact decisions on gas purchases or indeed the type of contract chosen. Admittedly, a natural gas storage facility off the East Yorkshire coast might not be in the everyday thoughts of a small fish and chip shop owner or even a manufacturer using a high proportion of gas. But business owners can benefit from keeping abreast of market issues like this, in order to weigh up the pros and cons of future energy procurement decisions.
By Phil Ivers, head of customer optimisation, Gazprom Energy