British-Belgian spread may need to rise to attract continental gas imports

From 2018 the NBP front month natural gas contract may have to move 4p/th above the same Zeebrugge price to incentivise flows towards Britain through the bidirectional Interconnector pipeline.

This is unless a significant amount of annual capacity is booked at auction on 6 March. This appears unlikely given current price spreads and a trend towards shorter-term capacity bookings across Europe.

Currently, the NBP Day-ahead needs to trade around 2p/th above the same Zeebrugge contract to incentivise flow from Belgium to Britain. This allows shippers to cover the commodity charge on gas entering the British grid.

The cost of Interconnector capacity does not factor into this price, as it is sunk for companies that booked long-term capacity out to October 2018.

When the long-term contracts lapse, the capacity cost is likely to factor into shippers’ short-term flow decisions.

Pipeline operator IUK has said that monthly capacity will cost around 2p/th beyond 2018, while daily capacity products will be higher.

If little capacity is booked on a long-term basis, the NBP/mainland European hub price spread will need to be sufficiently wide to cover short-term capacity to incentivise short-term bookings.

This could mean the NBP would have to be at least 4p/th above the Zeebrugge hub on the front month and even higher on the day-ahead.

Forward spreads deter bookings

For the period beginning October 2018, zero annual capacity has been booked in the 20 billion cubic metres (bcm)/year Britain to Belgium direction, while just 3.6bcm/year has been sold on the 25.5bcm/year Belgium to Britain route.

At present, additional bookings seem unlikely given relevant price spreads would not cover the cost of annual capacity.

The Calendar Year 2019 NBP product closed just 0.129p/th above the same TTF contract on 20 February, similar to last year when zero capacity was booked in the 2016 IUK auction in the Belgium to Britain direction.

Short-term capacity bookings are becoming more common, following the introduction of new EU network codes, according to a senior analyst at a consultancy.

“The reason for booking longer-term contracts in the past was that was all you could do. Now, it is almost a question of why wouldn’t you book short-term capacity? Now you have the opportunity to profile, why wouldn’t you?” he said.

Shorter-term bookings

The trend towards shorter-term bookings presents challenges to infrastructure operators such as IUK, as this creates revenue uncertainty.

Annual capacity in the 6 March auction is priced at 1.10p/th, cheaper than short-term products, as IUK is attempts to encourage longer-term bookings. IUK has also been trying to introduce innovative, short-term services to incentivise bookings and improve shipper optimisation opportunities.

A wider Britain/mainland European spread could lead to greater volatility and potentially less hedging moving forward, according to Nick Campbell, analyst at Inspired Energy.

The wider spread could be partially mitigated by a drop in National Grid’s commodity charge (see ESGM 21 February 2017).

Compression fuel costs on the Interconnector and Belgian operator Fluxys’ system entry/exit charges also influence flow decisions, and these costs may change between now and 2018. alex.thackrah@icis.com and jake.horslen@icis.com