Market will not deliver gas storage on a scale to ensure security of supply

Paul Boughton

The UK cannot rely on the current market to deliver large gas storage facilities of a sufficient scale to ensure UK security of gas supply, the independent analysts ILEX Energy Consultancy warns.

While the market has successfully triggered investment in new ‘bite-sized’ on-shore storage to cope with the normal variations in seasonal demand, ILEX has identified several factors blocking potential investment in larger longer-term ‘strategic’ storage as insurance against unforeseen major supply disruptions.

Such storage would be similar in size to the current Rough gas storage facility which has a capacity of around 3 billion cubic metres (or around 3 percent of annual UK gas supply), and would typically be a converted partially depleted gas field offshore.

The ILEX report Storage, Gas Prices and Security of Supply was commissioned by the UK Offshore Operators Association (UKOOA) to review current UK gas storage, provide an analysis of the different types of storage in use and to assess the likely provision of gas storage by the end of the decade.

At the root of the problem lies what ILEX calls the ‘storage paradox’: when prices are low, nobody wants storage; when prices are high, nobody can afford to build new storage.

The market value of storage is mostly derived from the difference in the forward gas prices between summer purchases (when gas is cheaper) and the following winter sales price. ILEX argues that when gas prices are low, shippers view the risks of being out of balance as low and therefore put a low value on storage. On the other hand, as the annual gas price increases, the cost of providing the cushion gas (unused gas retained in storage to maintain pressure) becomes exorbitant.

The value of the cushion required for a rough sized storage facility, for example, would be over £2billion equivalent to 18 p/th of working storage volume.

Converting partially depleted offshore gas fields into storage would also involve substantial capital and annual operating costs and these, together with the huge amount of capital tied up in cushion gas, leads ILEX to estimate that at the current market price of 50 p/th for annual gas, the market value of storage would have to exceed 21 to 24p/th to make such developments commercially attractive. In other words, to recover the investment, the summer winter price differential would need to be 25p/th or more and sustained over a period of at least ten years. This highlights the need for the Government to examine the case for strategic gas storage in its forthcoming energy review, says ILEX.

Mike Tholen, UKOOA’s commercial and economics director, said: “The current market structure has successfully driven investment in new gas import routes and short-term storage. However, it may not be capable of providing strategic storage. The case for building strategic gas storage facilities in the UK, to be used only in extreme circumstances of supply disruption, deserves to be properly evaluated and we support ILEX’s conclusion that the Government should give this their immediate attention.” 

For more information, visit www.oilandgas.org.uk

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