Easington scale-backs: Where do we go from here?
Recent scale-backs of interruptible entry capacity at Britain’s Easington terminal have left players at the NBP arguing that the current infrastructure planning fails to guarantee a proper functioning of the market or to support the continued development of liquidity at Europe’s most active gas hub.
Interruptible daily capacity at Easington traded at around 2.00 p/th on the secondary market last week, well above the St. Fergus entry capacity prices of 0.10 p/th. However, the highest price paid for firm capacity at Easington in the February rolling monthly system entry auction was 14.67 p/th. National Grid has been selling firm capacity up to baseline capacity over the last few months and has sold out to baseline again for February. In addition, it sold in the range of 25-40% of the baseline as interruptible capacity each day.
Thus far, operator National Grid has decided not to change any baseline capacities at UK entry points, but it is unclear whether this situation will change in future. The TSO has pushed back the annual monthly system entry capacity (AMSEC) auction from February to April this year.
Players have described the recent scale-backs as “farcical” and “contemptible”, as participants holding interruptible entry capacity at the UK’s biggest storage site, Rough, were unable to take gas out of store in recent sessions, following action by the TSO in response to high entry nominations at Easington.
Current regime is inadequate, say players
Under the current rules, National Grid bases its infrastructure planning solely on signals it obtains through long-term entry capacity auctions. In effect this means that shippers would need to cover their entry capacity needs fully, five or more years in advance of delivery in order to be certain of obtaining their desired entry capacity.
“National Grid’s obligations through the long-term auctions look alright on paper, but they clearly don’t work in practice,” one participant said. “Norwegian producers have had an enormous informational advantage and probably bought long-term capacity at the auctions at an early stage in a rational, commercial manner. National Grid can see who is buying at the auctions and could have used the information that was available to it — and not to other shippers — to make a better assessment of what infrastructure capacity was required.”
“We need more accountability by National Grid in this area,” another participant said. “There is no incentive on the TSO to improve its forecasts for new sources of supply, as it knows it can eventually pass on costs to shippers.”
British energy regulator Ofgem, however, stands by its view that the current market signals provided by the long-term auctions are sufficient. “We believe the long-term auctions are appropriate for National Grid to make infrastructure planning decisions,” a spokesman for the regulator told Heren Energy on Wednesday. “Shippers have known about Langeled for years and it is a commercial decision for them whether or not to buy long-term entry capacity.” However, the spokesman acknowledged: “It is also important that National Grid moves quickly to determine to what extent capacity transfers between entry points are possible and to explain to shippers what is going on and why.”
This, according to most players on the market, has not happened. There is underlying confusion over why more gas was not allowed out of Rough at the end of last week, even when demand levels appeared to fall below baseline capacity intra-day.
Part of the underestimation in the market of Langeled volumes this winter appears to have been rational, however. “You have to remember that earlier last year [Norwegian producer] Statoil was not raising hopes that it would be sending big volumes through the pipeline this winter and this rather ‘downbeat’ approach’ is probably one of the most striking features shaping the market this winter,” one source said.
Should players have bought firm capacity?
National Grid continues to argue that shippers knew that the long-term capacity auction signals were the basis for its infrastructure planning decisions and says companies should therefore have simply covered their long-term needs. “If we’d had firm signals five years ago, we would not be in this situation, but we haven’t seen those signals over the past five years. The signals we got were that demand would still be below our baseline capacity [of 98 Mm³/day],” a spokesman for National Grid told Heren Energy.
However, given the continued lack of depth in the NBP forward market beyond the front couple of years, it is unlikely that storage players would be able to fully hedge their storage capacity with gas purchases five years ahead (see ESGM 13.021). Under these circumstances, is it really sensible to have in place a regime that essentially forces storage players to buy up long-term entry capacity at Rough five years ahead in order to be certain of being able to withdraw the gas on high demand days?
“We continue to have discussions with the gas industry and we welcome further dialogue,” the National Grid spokesman said. On the question of publishing grid pressures, he said: “It’s certainly something we we’ll look at,” but did not define any concrete plans in this area.
Last week, the UK’s biggest gas supplier Centrica called on the market to demand that National Grid publish grid pressures across all entry points on the network (see ESGM 13.019). The argument is that this would enable all participants to see whether constraints were occurring even at times when National Grid was operating within its tolerance levels.
Will the situation improve next winter?
There are no firm indications from National Grid that problems facing storage players at Rough will ease next winter. In fact, demand at the Easington entry point is likely to increase, as the northern section of Langeled is due to start up in 2007, when the Ormen Lange field in the Norwegian Sea comes on stream. This is expected to increase the daily volumes through Langeled up to a maximum 74 Mm³/day — the pipe has been flowing at around 45-60 Mm³/day so far this winter. This, in addition to maximum withdrawal rates at Rough of 45 Mm³/day, combined with volumes coming into the NTS through the other points at Easington (BG Amethyst, BP, BP Dimlington) suggests there could be, if anything, even more capacity scale-backs next winter.
National Grid is building an East-West pipeline, which is scheduled to be ready in October 2007, but the company could not confirm this week whether this would immediately relieve congestion at Easington and Hornsea. The pipeline will also be supporting the new Albrough storage site and will provide “sufficient capability to support baseline capacity [at these three points],” NG said this week. Beyond this, it could build further compressors at Easington, but under the current regime has no financial incentive to do so.
Participants have highlighted the implications of events at Easington for other UK entry points. “Teesside, Grain and Milford Haven will also be similarly affected,” one source predicted. “It is no coincidence that all of these entry points involve new supplies seeking to access the transportation network and the UK market.”
Teesside is the location for Excelerate’s GasPort LNG project, where a first cargo is due to arrive in mid-February (see separate story). The South Hook and Dragon LNG projects are scheduled to start up late this year, while the expansion of the Isle of Grain LNG terminal is planned for late 2008.
The concern now is that the artificial constraints on supplies into the UK are increasing uncertainty in the market and this could feed into forward prices and ultimately impact prices paid by consumers.
Ofgem said on Wednesday that it continued to monitor the situation closely, but added: “Obviously, if shippers are unhappy with the current regime, they always have the possibility of raising a network code modification.” Such a move would be too late to alter conditions for this winter, but could improve the scenario for Winter ’07. In any event, most agree the current situation is sub-optimal and that something must be done. It looks as if it is up to shippers to take the initiative, as National Grid has no incentive or requirement to change its current operational behaviour. ADS
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