Updated: Britain’s Centrica to close Rough storage site

20 June 2017 17:11 Source:ICIS

The ICIS NBP price premium for gas to be delivered in Winter 2018 rose by 0.295p/th compared to the Summer ‘17 contract on Tuesday, after Centrica said it would close Britain’s largest natural gas storage site Rough and market the 5.2 billion cubic metres (bcm) of cushion gas at the facility.

The ageing asset has suffered numerous problems over the past few years. On 12 April, operator Centrica Storage (CSL) said the site would be offline for the 12 months to March 2018 as it underwent testing ( click here for story ).

Rough is operated by CSL, a wholly owned subsidiary of Centrica.

On Tuesday, Centrica said: “As a result of the high operating pressures involved, and the fact that the wells and facilities are at the end of their design life and have suffered a number of different failure modes while testing, CSL cannot safely return the assets and facilities to injection and storage operations.”

Britain’s remaining stores are all medium-range, or fast-cycle, emphasising deliverability over capacity.

“From a commercial perspective, an assessment of both the economics of seasonal storage today, and the costs of refurbishment or rebuilding the facility and replacing the wells, suggests that both pathways would not be economic.”

The winter-summer spread, which underpins the profitability of seasonal capacity, has been crushed over the past several years.

The end of Rough will place more emphasis on Britain’s other forms of supply - Norway, mainland Europe and LNG - to meet demand during peak winter periods.

“British gas supply sources remain diverse and flexible, comprising gas from Norway, the UK Continental Shelf, interconnectors to the continent, medium range storage facilities and LNG tankers and as such Britain is not dependent on any one piece of infrastructure for security of supply. There is also considerable headroom left in the market in terms of supply, which remains the case even with the withdrawal of Rough,” energy regulator Ofgem told ICIS.

Market impact

The NBP Winter ’18 – Summer ’18 spread was dealt at 7.07p/th on Tuesday afternoon, after closing at 6.775p/th on Monday, transaction data seen by ICIS showed.

One trader at a utility said that the relatively muted price move was because participants had largely been expecting the outcome.

The potential for Rough to return for the 2018/19 storage year had kept a lid on seasonal spreads further down the curve, but the announcement removed Rough’s seasonal flexibility from the NBP.

There was an initial slump across the far-curve, likely due to the cushion gas that Centrica plans to the market. But prices slowly regained value as traders digested the news, possibly accounting for Centrica’s strategy to market the volumes over a period of several years.

Regulatory approval

When it was fully operational Rough accounted for around 70% of total British storage capacity and was the market’s sole seasonal storage site. As such it has a number of undertakings under competition law that have been in place since 2003, when Centrica bought the site. Centrica and CSL were also separated under the measures.

Britain’s competition watchdog, the Competition and Market Authority (CMA) is responsible for the governance of the undertakings and will be one of the organisations that Centrica will seek approval to end storage operations from.

A spokesman from the CMA said that if CSL were to ask to change the undertakings then they would follow standard procedure, as applied when Centrica asked for a temporary reduction in capacity obligations in 2016 ( click here to read story ).

In 2016, CSL submitted an application to energy regulator Ofgem and CMA, after which participants were given an opportunity to comment on the application before Ofgem signed off on the decision.

CSL will also need a gas production license from Britain’s offshore regulator, the Oil and Gas Authority, in order to convert the storage site into a field.

Cushion gas

CSL intends to produce all recoverable cushion gas from the field, estimated at 5.2bcm.

A spokesman from Centrica told ICIS that after getting the appropriate approvals, a process estimated to last “several months” the gas would be produced over several years.

The spokesman added that Centrica would share a withdrawal curve with the market – displaying rates of deliverability to the British grid over Rough’s lifetime – after assessing the capabilities of the field to deliver its recoverable reserves.

It was too early to say how the volumes would be brought to market, whether through auctions or the spot market, but that would be discussed between Centrica, the regulators and the government.

Click here to read an ICIS briefing on Rough’s woes. thomas.rodgers@icis.com

By Thomas Rodgers