Quo vadis – European and UK gas prices?

Gas prices on the rise – an outlook…

A comment from Ashutosh Shastri – Senior Advisor to NovAzure Consulting – on the development of gas prices for the UK and Europe:

The “Gas Year” starts in October for European gas contracts and the coming couple of months portend an unprecedented level of uncertainty on how the annual gas contracts would be altered.

  1. We have had a very severe winter running all the way up to end April/early May in the UK and in Northern Europe- a direct fall out of this outcome is that gas storage levels all over Europe, especially the UK are at record lows and the time available to restock the gas reserves is very short. Usually gas re-injections into storage start early March to be able to replenish storage levels for the next winter. The storage volumes were being drawn down all the way through April/early May.
  2. As a result, the demand for gas (for re-injection into storage) has remained quite high contributing to higher price levels than the levels usually seen in the summer (a period of low demand); consequently the traditional Summer-Winter price spread has disappeared.
  3. Furthermore, to add to the complexity, the UK- which has gas storage capacity a mere 4% of its annual demand- while EU figures are in the region of 20% (France and Germany have 40%)- has an unusual situation still: the largest gas storage asset in the UK- Rough Gas Storage facility- is now out of commission/non-operational.

The only counter narrative to this situation in the UK is that the UK is now ready to receive LNG through its re-gasification capacities; and indeed as the events of the winter gone by have proved: supply security has been mitigated to a certain extent by the availability of this regasification capacity in the UK.

The UK came perilously close to running out of gas this spring but this was averted by a last-minute supply of spot LNG from Yamal in Russia. Interestingly while the UK has sanctions in place, the specific gas loading facility in Russia remained outside the purview of the sanctions! Such spot cargo trades as the one discussed above tend to be heavily skewed in favour of suppliers- both buyers and suppliers understand this.

So, pragmatism (usually) trumps geopolitical rhetoric when it comes to security of supply. So much for the great gas games and the geopolitical rhetoric that is fast becoming cacophonic.

This type of a transaction – A spot Russian LNG contract to supply the UK-or the underlying scenario that drove it is unlikely to be an isolated event in future. A harsh winter restricted only to the UK and not to the continent is an unlikely possibility. So what type of new thinking on gas contracts is required?

There was limited/no spare gas available on the continent to supply the UK via the interconnector; but there was spare gas storage capacity and capacity available in the Interconnector that connects the continent to the UK. This discontinuity can be a potential opportunity. We believe this is the time for some new ideas and innovative structured gas contracts for UK gas buyers especially in the coming gas year.

Another key aspect – and not in evidence in the recent past years – is the rising carbon price in the EUETS. This is being driven by some fundamental changes that were long in the offing, effected by the European Commission and now EU law. The rising EUA prices- the price of carbon emissions traded in the European Union Emissions Trading Scheme (EUETS)- should now begin to trigger a switch away form coal based generation to gas based generation thus finally giving some succour to the investors in the gas fired CCGT plants that have hitherto remained under-utilised.

While it is not clear whether a distinctive “coal-gas switch” will be observed all across the continent this year, the possibility is high. The European gas contracts this year, and going forward, are likely to include the imputed cost of this higher price carbon credit leading to a further upward pressure.

All told, gas buyers in the UK and in NW Europe we are likely facing a high intensity gas contract negotiation with significant upward price pressure for gas buyers particularly in the UK. The bargaining power of buyers is likely to be constricted this year.

The next few months will give us a clue about where we are headed in terms competitiveness for energy intensive buyers.

Would you like to understand more? As a large energy intensive buyer, do you need to mitigate a risk of disruption to your energy supply or increasing gas prices?

NovAzure Consulting has a number of ideas which we can deploy to address this situation. Contact us to find out how we can help you recapture a very significant value at risk. Just click here.


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