Winter is coming. And gas prices are increasing.

There has been a concern over available supply in the coming winter months. Coupled with the weaker pound following Brexit, gas prices are increasing over the last few months. We explain how this affects prices.

Gas storage capacity takes a hit

The first warning signs came in June. Centrica owns the Rough offshore storage facility, located about 18 miles off the coast of East Yorkshire. Gas is stored in 30 wells below the seabed and connected to the mainland via a subsea pipeline. The Rough storage facility is the largest in the UK, and accounts for 70% of the UK’s gas storage capacity.

Ideally, with winter approaching, the Rough field should be close to capacity and fully operational, so gas can be withdrawn to cope with increased demand. However, it has been beset with technical problems this year. This came to a head in June when Centrica closed the Rough field until early August for tests on one of the wells. They suspended these tests early in July, after encountering further problems. The Rough storage facility will remain closed throughout the coming winter for rigorous tests.

Centrica anticipates that:

“at least four wells will return to service for withdrawal operations by November 1, 2016.”

Greater reliance on imports

The demand for gas obviously increases during the winter months. Some of this shortfall will be covered by increased imports from pipelines connected to mainland Europe. There may also be imports of liquefied natural gas from the US. Imported gas is more expensive than gas sourced at home. Energy companies will have to pay more for the gas they buy, before selling it onto their customers. We will therefore see that gas prices are increasing.

So the UK is forced to import more gas from Europe (and potentially the US) at a time when the pound had fallen to multi-year lows against both the euro and dollar. This pushes up the cost of imported gas even further. 

Outlook

Two separate incidents – a weaker pound and limited access to stored gas – illustrate how precarious our energy security can be at times.  Gas prices have been increasing steadily, and we expect they will continue to do so. We recommend looking long-term and taking advantage of current prices before they increase further.

 

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