March 22, 2013 12:56 pm

Gas price spike underlines UK supply fears

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A gas burner of a stove is pictured in London, on July 31, 2008. British energy firm Centrica said Thursday that net profit surged 79 percent to 1.802 billion pounds (2.286 billion euros, 3.569 billion dollars) in the first half as it charged more for its gas and electricity to fight soaring wholesale costs."Centrica once again delivered a good financial performance during six months when wholesale natural gas prices in the UK were on average more than double those in the same period of 2007.©Getty

British wholesale gas prices surged to a new record on Friday after one of the country’s main import pipelines was temporarily shut by a technical fault, fuelling concerns about shortages as more wintry weather arrives.

About 15 per cent of the UK’s gas comes from storage and it is usual for stored supplies to run low at this time of year.

However, the persistent cold temperatures have exacerbated the situation. With few cargoes of liquefied natural gas (LNG) arriving in Britain in recent months, the country has been heavily dependent on pipeline gas from continental Europe and Norway, hence the price spike on Friday.

Total stocks are about 10 per cent full, the lowest since March 2010 and Centrica, the owner of British Gas, restricted withdrawals from its Rough storage facility in Yorkshire this week. Two LNG cargoes are on their way and will help relieve the pressure but they are not likely to arrive until next week.

“The outage underpins the UK’s import reliance,” said Andrew Horstead, analyst at Utilyx, an energy consultancy. “The next few days are forecast to be cold, heating demand will increase and the UK has almost bled its storage facilities dry.”

Gas prices for within-day delivery rose to 150p a therm on Friday morning, more than 50 per cent above Thursday’s closing price, after the UK-Belgium Interconnector was shut due to a water pump failure. The interconnector is one of the main sources of imported gas.

The pipeline started flowing again at full capacity by early afternoon and within-day gas prices fell back to about 100p a therm.

However, the increase has raised fears households could be hit once again with higher energy bills. Ann Robinson, of uSwitch.com, a price comparison site, warned that energy companies should not use the price spikes “as an excuse to increase their prices next winter”.

An analysis by Reuters showed the country could run out of stored gas by April 8, based on the fall in reserves since the cold spell began at the start of March. The Met Office is forecasting that the cold weather will last until April.

SSE, one of the largest electricity suppliers, said on Thursday that the government was underestimating the risk of a power shortage. “The government is significantly underestimating the scale of the capacity crunch facing the UK in the next three years,” said Ian Marchant, SSE’s chief executive. “There is a very real risk of the lights going out.”

Britain’s heyday as a significant producer of oil and gas from the North Sea is long gone and energy imports exceeded UK production in 2011 for the first time since 1974.

Less LNG means the UK has become heavily dependent on imports from Belgium and Norway. Gas prices already spiked to similar levels this month after a power cut at a Norwegian gas processing plant reduced production and exports to the UK.

The government is investigating the potential of indigenous gas reserves, in particular shale gas, which was promised a generous tax regime in Wednesday’s Budget. In the short term, while the gas is unlikely to stop flowing, the UK’s increasing reliance on imports will increase its exposure to price volatility.

The Department of Energy and Climate Change stressed that gas supplies “are not running out”.

“Protracted cold weather increases demand but the UK gas market is functioning well and our gas needs are continuing to be met. Gas storage would never be the sole source of gas meeting our needs . . . More than half our gas needs are still provided from the North Sea, but it’s a reality that we now rely on a diverse range of sources,” it said.

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