If enacted, that cap would be at just under 50% of total UK regasification capacity and Hadrien Collineau, a senior analyst with WoodMac’s gas team says it might be necessary to take that step given if demand stays subdued through the summer. Currently, demand is regularly testing a floor of just 3 billion cubic metres (bcm) per month.
“The industry and power sectors account for most of the UK’s summer gas demand. And with most lockdown measures continuing throughout May, we expect that demand will come in 18% below its five-year average,” he explained.
UK production still profitable
At the same time, UK gas production has been rising by 3% from 2019 levels given that the risk from low prices at the National Balancing Point (NPB) is “minimal,” he noted, explaining “sustained price levels below US$1.5 per million British thermal units (MMBtu) would be necessary to shut in production.”
Though producers’ profits are squeezed by lower gas prices, any material production shut-ins are unlikely as operators will rather choose to cut costs by delaying non-essential spring and summer maintenance. In Collineau’s view “this could add volumes to the market through to July, but potentially ease the pressure in late-summer.”
Exports to EU reach their limits
Exporting the surplus supply is an option, but space in the Irish market is very limited as is transport capacity on the two interconnectors with Continental Europe. The IUK and BBL, connecting UK to Belgium and the Netherlands, are already operating near full capacity.
“The UK’s export capacity to continental Europe via the IUK and BBL are booked at 65% and 100% capacity, respectively, for May, and at 48% and 100% for June, respectively,” Collineau said. “We expect this level of utilisation to be sustained through summer, providing a minimum 1.7 Bcm/month of takeaway capacity.”
Britain’s total gas export capacity to continental Europe is 2.3 Bcm/month, but the NBP discount compared to prices at the Dutch TTF trading hub is currently not large enough to spur higher flows. In April, utilisation averaged 30% and 75% on the IUK and BBL, respectively.
Less supply from Norway, but more LNG
Norwegian suppliers of pipeline gas have reacted to the oversupplied UK market by reducing their exports by more than half in April, but Norwegian flows are unlikely to drop below 1 Bcm/month through the summer period.
In contrast, LNG supply as move in the opposite direction. “Utilisation at the UK’s South Hook terminal has ramped up significantly as it absorbs more Qatari LNG that cannot find a home in premium Asian markets.
Running low on free storage
The UK’s largest and only long-range storage facility, Rough, closed in June 2017. The field contained over two-thirds of the UK’s total storage volumes. “So as, we approach this year’s summer season, storage is already very limited, with inventories more than 60% full. With only 600 million cm of space for storage injections this summer, so there’s a risk that storage could be full by early June,” Collineau warned.
With summer demand subdued and limits on storage capacity, the UK system could run out of space soon, which is why it might be necessary to cap LNG import capacity at 2 Bcm/month through the summer month. “LNG exporters hoping to place cargoes into the UK market have the most to lose,” he noted, but “there simply won’t be any more space.”
