Year in Review: NBP moves into second place, but stems production decline

The past year has been a moment of transition for the British gas market as it is knocked from its position as the most liquid OTC market in Europe by the nascent Dutch TTF.

It has also seen the reversal of a number of trends: namely the resurgences of British gas production, and an increase in the use of gas plants in the power market.

While many view these as positive development for the NBP, clouds loom on the horizon as a crumbling oil market and ever decreasing demand raise the prospect of further belt-tightening in the future.

Demand

The British weather forecasting agency issued a statement on 3 December saying that Britain was on course to experience the warmest year since records began in 1850.

Weather is the largest single driver of demand in Britain, as it affects the amount of gas consumers’ use to heat their home and businesses. In the first 11 months of this year, British consumption, excluding exports, totalled 70.6 billion cubic metres (bcm).

This is a decrease of nearly 8% compared with the same period in 2013. The decrease was driven not just by reduced consumer demand, which fell 15% in the same period, but also by a diminished need for storage injections; a result of Winter 13/14’s low gas consumption.

With the mild winter seeing reduced demand for the gas in storage, stocks replenished quicker than normal, muting summer demand. This weighed on near-term prices, reviving a large spread between summer and winter prices, which incentivised more injections.

Consumption could have been lower if not for a response from gas-fired plants, which for the first time in nearly three years enjoyed a sustained period of favourable economics due to flatlining gas prices.

Day-ahead prices averaged just 37p/th in July this year. This prompted an increase in gas consumption from power plants of 36% to 1.6bcm.

Supply

With demand languishing at multi-year lows, supply margins were never tested in 2014, with any outage easily countenanced by strong flows from storage sites.

While gas output from the UK continental shelf has declined steadily since peaking in 1999, 2014 saw the first year of rising gas output as a spate of new fields were brought online and the basin reaped the benefits of efficiency drives by producers.

Fields such as Jasmine, which is owned by BG Group ConocoPhillips and Eni and started up late in 2013, were one of the key factors driving the increase in production. Total’s Laggan-Tormore and GDF Suez’s gas fields are set to come online in 2014, which will increase supply further.

BP also restarted supplies from its Rhum gas field in October, after it was shut down in 2010 due to sanctions against joint owner the Iranian National Oil Company.

However, the severe decline in oil prices poses a threat to some of the 17bcm of gas production produced yearly in fields alongside oil. Often the economics of these fields are built on the premise of high oil prices, that can support production of less lucrative gas.

September saw the inauguration of Storengy’s Stublach fast-cycle storage site in Cheshire. The site began commercial operations with a capacity of just 40 million cubic meters, but this will be expanded to 100 mcm by the new year.

Prices

While the year was characterised by slumping prices, there were strong upswings at the NBP driven by conflict in Ukraine, a key transit point for Russian gas heading to European markets.

Concerns over Russian supply were one of the dominant themes for most of the year following the annexation of Ukraine’s Crimean peninsula, which dragged relations between Russia and the west to their frostiest since the cold war.

Gas supplies played a central role and intense international scrutiny came to bear on Russia’s Gazprom which supplies nearly a third of the EU with gas.

While tensions were high, there was not a single instance of Russian supply to Europe being disrupted.

This fact did little to prevent tensions in the market, as many struggled to weigh up the potential of supply disruption to gas transiting Ukraine’s restive east and the remote possibility that a trade war could ratchet up to the point where one side began to use gas supplies as tool against the other party.

This saw the market torn between the bearish fundamentals on one hand and intense-bullish headline driven upswings.

By year-end, an EU-brokered deal saw supplies from Russia to Ukraine resume under new terms and conflict largely confined to the east of the country.

In gas year 2013/14 volumes traded at the NBP were 9,746/TWh, 509TWh lower than that traded at the Dutch TTF hub.

Regulation

On the regulatory front the most significant development was the introduction of the new offshore regulator, put in place to maximise Britain’s aging oil and gas reserves.

The new British Oil and Gas Authority, due for inauguration in 2016, could increase oil and gas production from North Sea fields by 3-4 billion barrels of oil equivalent (boe) over the next 20 years, a government impact assessment found.

Through streamlining consents, lowering costs and enforcing better use of infrastructure, the regulator will try to incentivise both new production and extend the life of existing assets, which the Department of Energy and Climate Change (DECC) said could boost output significantly.

Further changes were made to the Uniform Network Code that governs movement in and out of the British system.

Britain’s gas day will now move in line with rest of continental Europe on 15 October 2015, to comply with EU legislation aimed at harmonising markets across Europe.