After almost a year of nearly non-stop testing, maintenance and outages, Centrica finally decided to cut its losses and last week announced the closure of its Rough gas storage facility, saying it had become unsafe and uneconomic to run.
Consisting of a partially depleted gas field off the coast of Yorkshire, two repurposed drilling rigs and a gas processing plant at Easington, Rough is Britain’s largest gas storage site, accounting for around 70 per cent of the country’s total storage capacity.
News of its closure therefore raised fresh questions about the security of national gas supplies, given the UK’s dwindling domestic production and increasing reliance on imports.
That said, the immediate impact on the gas market was muted. “Looking at the closing prices nothing seems to have changed all that much,” says EnAppSys senior analyst Rob Lalor. “The gas price was coming down before the announcement but now it’s just back to where it was a few days before.”
There are several reasons for this. Firstly, Rough has already been partly missing from the market for some time. Only 20 of the site’s 30 wells were open for withdrawals over the past winter and all have been entirely closed to injections since July 2016.
Its absence wasn’t felt strongly. “Last winter what we saw was that medium-range storage basically took over the role of Rough,” explains Lalor. “They all filled up before the winter and then to be honest they ran through the winter with an excess of storage more than anything else.”
Ben Wetherall, head of gas at price reporting firm ICIS, said market participants had also priced in the closure to an extent: “I think most market participants were already of the opinion that Centrica we’re going to mothball the facility. That was just given the number of problems it’s had over the last few years.”
What’s more, there is still a large volume of so-called cushion gas stored at Rough, which was needed for its operation. Now that’s no longer the case, the gas can be withdrawn and released to market, keeping Britain well supplied over the next couple years.
But what about the longer term?
Lalor and Wetherall agree that the closure is very unlikely to lead a “massive disaster” where homes or power stations go without fuel. However, it will mean more volatile prices as the UK becomes increasingly dependent on imports during winters – in other words, higher prices if something goes wrong.
The market may have been fairly stable over the past winter, but without any long-range, seasonal storage the country will be much more susceptible to major supply shocks.
Wetherall says past outages at Rough prove this point. “As there’s been increasing draw downs and curtailments on Rough withdrawals and injections, so that volatility has increased in the UK market.”
This begs the question of whether the government should intervene to ensure Britain retains some long-range storage.
There are some reasons to believe the UK can do without. The gas market has been “relatively flat” over the last three to four years. “It’s been unprecedented in terms of the lack of volatility since 2013,” says Wetherall.
More generally, he says the UK market is pretty robust: “A significant amount of UK demand comes from the UK continental shelf, even though that’s declining; it’s got ample LNG import infrastructure; it’s got significant import infrastructure from Norway.”
Despite having comparatively little storage, he insists the UK is in a “very good” position compared to many continental neighbours.
Diversity of supply
Richard Howard, head of environment and energy at Policy Exchange, agrees that Britain could be worse off: “The UK still does have a very liquid gas market and we have gas coming from lots of different sources including continental gas and LNG. So we do have security in the sense that we have diversity of supply.”
But even so, Howard believes government intervention is worth examining.
In 2013, the government commissioned a study from Red Point and Baringa to look at the case for intervention to support long-range storage. The study concluded there wasn’t a need for further facilities – beyond Rough.
“I guess there’s a case now, with Rough out of the picture, to relook at that,” says Howard. “Does it warrant intervention to have that insurance policy of a large gas storage facility? I don’t know the answer but it’s certainly worth investigating.”
He adds one thing which the government will need to consider is the effect of Brexit on the security of the UK’s gas supplies.
“One of the arguments has always been, well the UK has such comparatively little in the way of gas storage but other European countries have a lot of gas storage so we might be okay…
“In the post-Brexit world, it’s worth asking whether that remains the same or whether it changes, and I think the answer to that is very unclear.”
The Energy and Utilities Alliance represents, among others, gas storage operators. Its chief executive Mike Foster is also keen for the government to reexamine the case for intervention: “In the past we have had the luxury of North Sea gas that has acted, in effect, as a giant storage facility,” says Foster.
“Now that we import so much more of our gas that luxury is not there…I’m not sure that the government have necessarily taken that into account.”
It’s not just about whether can get our gas from somewhere else, Foster clarifies. “Yes, we can. Would we pay more for it? Absolutely, yes we would.”
Foster says at a cost of around £50 million annually – around £2 per household per year – subsidising Rough to carry on operating would be a relatively cheap insurance policy against price shocks.
Whether we do need the insurance policy of long-term storage – be it Rough or some new facility – is not obvious, not least because of the huge range of hard to predict factors affecting the calculation. What is clearer, is that the closure of Rough without a replacement would mark the end of an era for the UK gas market. It’s not a milestone government should brush aside without pausing for a moment to take stock of the situation.