UK exports to Belgium surge on costs below commodity charge

British natural gas exports to Zeebrugge have surged to an average 15 million cubic metres (mcm)/day so far in April, up from an average 1mcm/day sent in the opposite direction towards the NBP in March.

The switch in flows has come despite gas for near-term delivery being more expensive at the British NBP than at Zeebrugge.

Day-ahead basis – the difference of prices at Zeebrugge compared with NBP for gas to be delivered the next day – has remained negative, indicating the Belgian market is at a discount.

This is because it costs less to flow gas that beaches at the UK’s Bacton import terminal onwards through the IUK Interconnector with Belgium than it does to flow the same gas to the NBP. This is creating a British export bias on the Interconnector pipeline.

According to British system operator National Grid, the commodity charge applied to natural gas entering the UK transmission system stands at 0.0512p/kWh (1.5p/th) from 1 April 2014.

The combined cost of shipping the same gas to Zeebrugge Beach is around 0.8p/th lower at roughly 0.7p/th.

This comprises the approximate 0.5p/th cost of fuel for the compression necessary to ship gas to mainland Europe through the Interconnector and the Zeebrugge Beach transmission entry fee of €0.092/MWh (0.223p/th). As all IUK capacity has been allocated under long-term contracts to September 2018, the cost of capacity does not impact on shipper’s short-term decisions to flow gas on the pipeline.

Consequently, if the NBP premium to the Zeebrugge physical hub is less than around 0.8p/th, it can nevertheless make more financial sense for shippers to transit gas away from Britain towards mainland Europe.

According to ICIS closing price assessments, the Day-ahead closing price at Zeebrugge has been higher than at the NBP just once so far in 2014, on 24 March. The next day, British exports to Belgium leapt from zero to 14mcm according to IUK data.

And while the basis immediately returned to a negative value – and a Zeebrugge discount – on 25 March, the Interconnector has continued to export gas to mainland Europe as the Belgian discount has averaged just 0.681p/th.

At current basis values, Zeebrugge Day-ahead, Balance of Month and May 2014 are all around 0.2 p/th cheaper than the NBP. With the discount smaller than the 0.8 p/th difference between using the Interconnector or shipping gas onwards to the NBP from Bacton, British exports could to continue on the pipeline throughout the second quarter.

And as Interconnector flows have proved sensitive to price movements, British exports are likely to increase further in response to prompt bases edging up closer to zero, or even into positive territory.

Darren Reeve, commercial director at IUK, said that “analysis shows that flows through the Interconnector are very efficient at responding to the market signals on both sides of the pipeline…A positive basis is likely to result in much higher flows through the pipeline.”

The Interconnector has a technical capacity of 20bcm/year towards mainland Europe, and reached a record 60mcm/day on 8 April 2011. British exports averaged 12mcm/day in the gas summer 2013, according to IUK data. Jake Horslen