British gas market unlikely to get new storage sites

New natural gas storage sites in Britain face an uphill battle to find investment as market conditions continue to hinder profitability, analysts have told ICIS.

In its most recent quarterly results, SSE – one of Britain’s big six energy suppliers, described its own revenue from the storage industry as “very low” primarily due to the “extremely challenging” environment that the British storage market is in (see ESGM 18 May 2015).

Market conditions have increasingly eaten into the profits of storages owners over the past decade.

“The Winter-Summer premium has diminished so much that physical traders no longer see the value in holding gas in storage,” Nick Campbell, analyst at Inspired Energy said.

“While volatility has been relatively low traders don’t want to tie up the cost of buying the option that storage facilities provide,” he added.

As a result, new storage sites are struggling to find investment.

Chris Le Fevre, analyst at the Oxford Institute of Energy Studies, said that he would be “surprised to see new storage sites being built” considering the current market.

Fast churn in low volatility

Fast-churn sites in the UK are able to profit in a more volatile market. When the market spikes, shippers with gas in store can sell volumes injected earlier, at a lower price, at a substantial premium.

Plans to build a number of new fast-cycle sites were announced between 2005-2007 when high volatility suggested these stores could be profitable.

However, the NBP’s volatility has drastically fallen since then. The establishment of multiple LNG terminals and greater import potential from the Norwegian shelf means that Britain’s supply mix is now sufficiently diverse to prevent market spikes.

“If you look at the changes in the past 10 years, there has been a drop in peak demand and a rise in peak availability,” Le Fevre said.

As a result, most of these projects have either been cancelled or developments have been put on hold.

For example, Germany’s Wingas postponed plans to convert the onshore Saltfleetby field into a storage site in 2012, citing unfavourable market conditions.

The Presall facility, operated by Halite Energy, remains one site still looking for investors. A spokeswoman from the company said that Halite is in negotiations with a number of parties with a view to investing.

“It’s hard to see why people are investing in fast-churn storage as LNG is essentially playing that role now,” one trader active on the NBP said.

“There is definitely a valid argument for making LNG the UK’s storage market,” another trader agreed.

LNG has played an increasingly important role in Britain’s supply mix, with the tanks at the facilities able to operate in a similar fashion to storage sites by ramping send-out up and down in accordance with spot price signals.

“I could envisage LNG terminal operators one day offering virtual storage products, but cargoes would need to arrive to facilitate them,” one trader said.

Opportunities

Market participants insists there is a future for fast-cycle storage in Britain, with changes in the power market opening up more opportunities.

“I still think there is a market for fast-churn sites”, one trader said, “but it may be a case of operators having to work them harder to capture value.”

The build-up of the renewables sector and decline of coal-fired generation means that power demand is more prone to spikes, especially in the winter. A day of high demand, coupled with conditions that are not conducive to wind or solar generation can cause short term spikes in the UK power price, which gas-fired plants are to respond to by rapidly ramping up production.

“With the rapid pace of change towards renewables, the long-term model seems outdated,” according to Le Fevre.

It is in this situation that fast-cycle storage sites can become profitable, delivering fuel to the power plants in a short space of time.

Seasonal struggles

However, opportunities for seasonal storage sites appear more limited.

Britain, has only one long-range store, Rough, and plans to build additional seasonal reserves have fallen by the wayside.

Centrica, who operate Rough through subsidiary Centrica Storage, sought to repurpose the old Baird field into a seasonal store but only with government support. The UK government decided not to provide a subsidy and the project was cancelled.

Long-range sites are increasingly in need of government assistance as their profitability has faded. Seasonal sites make money by injecting gas at low prices in the summer, then selling them at a winter-time premium. But this Winter-Summer price spread has shrank rapidly over the past decade.

“It is a case of security of supply versus commercial viability,” one NBP trader said, “because the industry does need seasonal stores but they are struggling to stay profitable.”

Nick Campbell said that two things need to occur before storage can be profitable again: “The premium of Winter over Summer needs to increase, which doesn’t appear to be happening due to the onset of global LNG dampening the winter premium and secondly the cost of building and operating facilities needs to fall.”

The expectation of oversupply in the global LNG market has slashed seasonal spreads in Britain (see ESGM 3 December 2016).

“It’s hard to see why people would want to build storage at this point, I can only hypothesise that those seeking to build sites believe conditions for storage will improve in the future,” a trader from a European utility said. thomas.rodgers@icis.com