The “Beast for the East” is set to return this weekend, as cold air from Russia makes its way across Europe, covering Britain with snow for the second time in a month.
On its last visit, the Siberian weather brought turbulence for the gas market, as high demand and a flurry of supply disruptions pushed prices to levels not seen in decades.
The first spike came on the morning of Wednesday 28 February, as the wintery conditions led to an outage at the Kollsnes gas processing plant in Norway. The within-day National Balancing Point (NBP) price was driven to 190p per therm – the highest level in 12 years.
Wednesday also saw unplanned outages at the BBL interconnector with Belgium and at the Bacton and North Morecambe gas terminals. Nevertheless, the price slid to 100p/therm over the course of the afternoon.
Then, in the early hours of Thursday morning, National Grid sent out a gas deficit warning, imploring traders to buy more gas. Minutes beforehand, the South Hook LNG terminal had become the latest facility to suffer an outage.
“Forecast supply and forecast demand did not match in the slightest,” explains Tom Marzec-Manser, head of European gas at price reporting firm ICIS. Daily consumption was forecast at roughly 400 million cubic metres (mcm), “about a third more than you would expect on an early March day.” National Grid was predicting a shortfall of around 40mcm.
As Briton’s struggled into work on the Thursday morning (or stayed home and turned up the heating), the within-day price shot back up to 200p per therm, and by the afternoon had reached a peak of 350p per therm. “These were the highest brokered trades we’d seen at ICIS dating back to 1997,” says Marzec-Manser.
The high prices drew in imports and encouraged withdrawals from storage. The shortfall was soon filled, although the gas deficit warning remained in place until the following morning.
Some believe the price spikes have exposed Britain’s vulnerability to supply shocks due to dwindling North Sea production and the recent closure of the country’s only long-range gas storage facility at Rough.
The partially depleted gas field off the coast of Yorkshire had a storage capacity 3.3 billion cubic metres (bcm), accounting for around 70 per cent of the UK total. In January, Centrica ceased storage operations at the site and began withdrawing the remaining recoverable gas. The UK has been left with just 1.3 bcm of storage capacity.
Marzec-Manser says: “Rough was capable in its prime of delivering 42 million cubic metres per day, so that would have been almost 10 per cent of Thursday’s consumption. It clearly would have been useful to have it around. There’s no denying that.”
As Centrica was still drawing down the “cushion gas” at Rough, previously used to maintain pressure and enable its use for storage, it should have been around to help. However, it too suffered an outage as a result of the cold weather.
But, Marzec-Manser is unperturbed by the loss of Rough. He says the system has demonstrated it can cope in the face of challenging circumstances by stepping up imports from Europe via interconnectors and from the global market in the form of liquefied natural gas (LNG).
Britain has two gas interconnectors within mainland Europe – the IUK and BBL pipelines – linking the Bacton gas terminal in Norfolk with Belgium and the Netherlands.
“We’ve seen more gas go through these pipes than we have done in many years,” says Marzec-Manser. “They’ve become much more commercially useful than had been with the closure of Rough.
“In essence, Rough’s absence isn’t really an absence because we’ve just moved Rough to virtual storage on the continent and we just move that gas in and out of the continent using those two pipelines”.
The UK currently has three LNG terminals – South Hook, Dragon and Isle of Grain. Trafigura is set to reopen the mothballed Teesside terminal this year and the new Port Meridian terminal is due to open in 2019.
Marzec-Manser believes Britain will also be able to rely on LNG imports to fill shortfalls when they emerge: “In the coming years we are seeing an abundance of gas, particularly in the form of liquefied natural gas, coming on stream.
“The way that much of that gas is being marketed allows for quick rerouting of volumes responding to short term price spikes such as we’ve seen.”
He continues: “If there are short term price spikes which make diversion of LNG shipments worthwhile; if we’re not the premium market before and we do become the premium market; because of the spike then we will receive additional cargos… Britain is not about to run out of gas.”
Mike Mahoney, head of wholesale at consultancy Cornwall Insights, shares his faith in the system, saying it coped “remarkably well, particularly with the number of problems with infrastructure that coincided with the really cold weather… I think that overall the system showed quite a bit of resilience.”
He says the global gas market is “well supplied”, whilst in Europe “prices are stable and quite low”. Gas demand has also been falling in recent years due to improvements in energy efficiency.
EnAppSys commercial director Oliver Burdett is less convinced, describing the UK’s reliance on foreign imports as “precarious”.
Whilst he agrees that the system functioned well during the cold weather, he says people have become “complacent”.
“Yes, it was short-lived and yes, it could be short-lived once more; you might not get another cold winter for a number of years,” he remarks.
But, he adds: “I think the caveat to that is you can only fit so much gas down a pipeline. You might have huge reserves in Europe, gas storage reserves, which they do… but you can’t necessarily get all that into the UK when you really need it.”
Burdett continues: “With no Rough now, if there was a longer-term problem with the interconnector you would have really seen big issues.”
He says there is similarly no guarantee that LNG shipments will be available when Britain is in need.
Writing in a blog, Energy and Climate Intelligence Unit analyst Jonathan Marshall notes that Russia is becoming an “increasingly major player” in the global LNG market.
In December, the first shipment to the UK from the Yamal plant arrived at the Isle of Grain terminal. Britain recently received the third shipment of Russian LNG since the new year “at the same time as relations with the Kremlin are turning worryingly sour”.
According to Burdett, there are several ways in which the UK could boost security of supply; it could increase domestic production by extracting shale gas through fracking or reduce demand by improving energy efficiency and electrifying heat.
However, the former is unpopular with the public, whilst progress on the latter will be slow.
He believes the easiest solution would be to increase gas storage capacity, “because the UK already has one of the lowest percentages of gas storage versus demand, and that’s obviously particularly perturbing when you are an island and the end of the line”.
The closure of Rough has led to increasing spreads between gas prices for the winter and summer, but it’s unclear whether this by itself will be enough to make new storage commercially viable.
Burdett says, with Rough ageing and plagued by well integrity problems, it would have been “daft” for the government to provide support for it to stay open. By contrast, he says subsidies for new gas storage capacity “could well make sense”.
The “Beast from the East 2.0” is unlikely to put as much pressure on the gas system as before, but it’s only a matter of time before Britain finds itself in a similar situation. “That’s a guarantee,” says Burdett. “It might take a number of years before it does, but it will happen again.”
The question is whether the insurance of extra storage would be worth the cost of the premium? As the UK becomes increasingly dependent on gas for power as well as heat, there could be major consequences for making the wrong call.