With no additional LNG supply projects slated to come on stream until late 2014 or early 2015, few Japanese nuclear plants expected to return to service in the near term, and Elgin-Franklin only increasing gradually to pre-leak capacity in 2015, Frankfurt based Deutsche Bank expects the next winter’s balance to be dependent on storage and interconnectors.
This trend was spotted last year also.
Summer-winter spreads and volatility likely have upside to the degree that greater storage capability lowered the risk premium from 2010 to 2012.
Meanwhile, the weekend outage at the Norwegian field, Ormen Lange, caused by a downed power line, reduced total UK imports from Norway from 116mcm/d (33% of supply) to 47mcm/d (16% of supply), pushing prices to 91p/th and within-day gas to 115p/th on Monday.
A supply vulnerability underlying this price spike has been in development since 2011 as LNG imports have declined as a result of outages of nuclear capacity in Japan and major new supply contracts from Qatar to Asia which have begun delivery this year.
The contrast with the US gas market could not be greater, as LNG was pushed out of the US as gas prices declined and domestic production rose, while LNG has been drawn away from Europe despite higher prices and declining indigenous production.
Lower utilisation of LNG terminals has also reduced the effectiveness of LNG terminal gas storage as a means of buffering supply, thus raising the risk of price spikes in the event of high demand or supply outage.
The supply challenge is made more difficult by a 17% decline in UK continental shelf production in the past twelve months, which was heightened by the gas leak at Elgin-Franklin.
Going forward, the management of LNG sales from Angola LNG by a Sonangol-Trafigura joint venture will determine whether Europe receives any portion of that production, although prices suggest it will be relatively little.
Source: Deutsche Bank