Icis gas market expert Ben Wetherall said that Brent crude prices below $40/barrel could play a major factor in “exerting strong downward pressure” on the future cost of wholesale gas. But while this will make gas imports cheaper, the lower price could hasten the decline of North Sea gas production and increase the UK’s import dependency.
Brent crude prices fell to 11-year lows on Monday at $37.38 a barrel, over 13 per cent below trading levels seen before Opec’s 4 December meeting in which the cartel agreed to maintain production levels despite the growing global glut.
For utilities with upstream oil and gas activities the weaker market environment has already hit profits. But Wetherall said that all gas suppliers could feel the impact of a growing gas import dependency if falling prices make it more difficult for North Sea developers to maintain production levels.
“Despite the weak fundamentals and prospect of cheaper imports, one potential impact of a sub-$40/bbl environment will be to make it even more difficult for suppliers to maintain current production levels in the North Sea and this may ultimately hasten the UK’s growing gas import dependency,” Wetherall said.
“The weaker oil price environment has been a major factor in exerting strong downward pressure on UK and global wholesale gas prices throughout 2015. The UK price of gas to be delivered in 2016 has fallen by 30 per cent since the beginning of the year, and closed at its lowest point earlier on Friday,” he added.
Gas prices are also set to come under pressure as exports from Australia and the US are due to surge, causing a similar glut in gas supply. As a result gas for delivery in 2017 may be “only marginally higher” than prices for next year, Wetherall said.