It went largely unnoticed by the general media, but last week there was a significant announcement for the UK gas industry: the country’s main gas storage site may have its capacity cut by around a quarter, reducing the volumes that can be held in reserve next winter.
Just two years ago, during a cold winter, there were warnings that the country ‘was just six hours away from running out of gas.’ So why would storage capacity be cut now, and does it matter?
The UK’s main gas storage site is the Rough storage facility, operated by Centrica Storage, a unit of the company’s biggest domestic gas supplier, Centrica.
Rough is an offshore gas field, located in the North Sea some 29 km off the coast of Yorkshire. There are two offshore platforms that pump gas into and out of the subsea Rough reservoir, and a pipeline running to a beach terminal on the shore near the village of Easington.
Rough began producing gas in 1975 and was converted into a storage facility in 1985, allowing gas to be pumped back offshore in the warmer summer months ready for withdrawal during the higher heating demand periods of winter.
According to National Grid’s latest Ten Year Statement on the national gas network, Rough alone makes up 72% of the UK’s existing gas storage capacity.
Centrica Storage says that during a recent routine inspection of the facility, it ‘identified a potential issue with well integrity that could affect all Rough wells.’ The company says it is ‘still evaluating if the well integrity issue can be remedied and, if so, how long this would take.’
But it warned that as a result it may have to cut the amount of stock that can be held in Rough by around a quarter, from a maximum 41.1 TWh achieved in 2014 to a new capacity of around 29-32 TWh (from around 3.9 billion cubic meters to around 2.7-3.0 Bcm).
If the company is concerned about the integrity of the wells that pump gas into and out of the subsea reservoir, then it could increase the safety of its operations by reducing the pressure at which gas flows through the wells. But that means reducing the maximum amount of gas that can be put into the storage site, since the more gas is pumped under the sea, the more the pressure builds up in the reservoir.
With the company still investigating, details remain limited. But since it is asking ‘if’ the well integrity issue can be remedied, it seems possible there could be a permanent reduction to Rough’s capacity. Even if work is possible to restore normal functions, with the injection season due to begin soon, it would seem almost certain to impact next winter’s stock levels at least.
However, the market should be able to cope if Rough’s capacity is reduced.
The newspaper headlines that appear from time to time — such as in 2009 and 2013 — warning that national stocks are just a few hours from empty need to be taken with a pinch of salt. While true in numerical terms (dividing the volume of gas in storage by the country’s hourly consumption rate) the warnings may fail to make clear that storage is not the only source of supply.
It’s like saying there is only one pint of milk in the fridge, but neglecting to mention the milkman is due to deliver two more on the doorstep, and that there is a 24 hour supermarket across the road.
The UK draws its gas from its own offshore production, from storage facilities off and onshore, from major pipeline connections with Norway, the Netherlands and Belgium, and from global producers such as Qatar via sea-borne tankers of LNG, with no single supply source responsible for meeting all demand on any given day.
If the UK has a billion cubic meters less gas in stock next winter, then over the six month October-to-March period, it would have around 5-6 million cu m/day less gas available from storage, a fairly small volume, and far less than the spare import capacity available in the UK’s interconnector pipelines and LNG terminals, which have rarely been used at full capacity in recent years.
The global markets have the potential to compensate for major disruptions to energy supply, as demonstrated by the way Japan managed to cope with the closure of its entire nuclear power sector after the Fukushima disaster in 2011 by stepping up its own imports of fuel oil and LNG.
But ensuring physical supply remains secure comes at a cost. Competing for imports can mean paying higher prices, as in April 2013, when spot markets soared to draw in gas from German storage facilities across Dutch and Belgian connections to the UK.
The tricky question for industry and government is weighing whether it would be more cost-effective in the long-term to invest in the insurance of building extra storage capacity, or just to accept the risk of difficult days and price spikes arising from time to time.
By Alex Froley from Platts, McGraw Hill Financial
