FT briefing: UK gas prices

Why is there a spike in demand?

The Met Office has said there is a 65 per cent chance of a much colder-than-average winter – something not experienced in a decade.

A forecasting service used by many traders has predicted temperatures up to four degrees colder than usual in Britain and up to three degrees lower across the rest of western Europe.

The onset of cold weather in the UK so early in the winter has further stoked fears among traders that there may be gas shortages.

Over the weekend of November 19-20, overnight temperatures fell below freezing across Northern Europe, including the region’s main market, Germany.

Private forecaster AccuWeather has said the US Northeast, the world’s biggest heating oil market, would see slightly lower than normal temperatures this winter.

Where are energy prices heading?

On November 22 the price of gas for delivery in January traded as high as £1.20 a therm. Spot prices for gas traded as high as £1.70 a therm, up from about 31p at the start of the month, making UK gas prices some four times higher than continental European prices.

Unusually, November spot prices for gas have climbed even higher than those for the January contract, typically the coldest and most expensive month.

Because gas is heavily used in Britain to generate power, the wholesale price of electricity almost doubled during the week to November 22.

What are the supply problems?

Until recently, a severe winter would not have posed a serious problem for the UK, which was able to meet demand by turning up production in its North Sea gas fields. However, North Sea gas production has been in decline for the past five years – last year the UK became a net importer of natural gas.

Despite soaring UK gas prices, a gas pipeline between Bacton and Zeebrugge has been operating at less than half its capacity. Compressor problems in Germany are thought to have been partly responsible.

Apache, the US oil independent, said it had closed a crucial North Sea pipeline for several hours on November 21 after a suspected gas leak, adding to supply fears.

Several new pipelines and liquefied natural gas (LNG) terminals planned for the UK will not be ready for this winter.

With prices so high, won’t the market kick in?

British gas prices were among the lowest in Europe over the last decade but they have risen sharply over the past year as the UK became a net importer.

Moreover, many industrial end-users have signed supply contracts exposing them directly to the prices in the spot market, instead of relying on less volatile annual deals. In contrast, European companies buy gas on longer contracts and therefore don’t face a sudden increase in their bills.

Falling temperatures across Europe may also draw gas supplies away from the UK.

However, many UK buyers also suspect that continental European operators are holding back gas supplies, accusing Europe of lacking a functioning market. The European Commission said this week that European gas and electricity markets were “malfunctioning” because of the influence of dominant gas companies, which hinder competition.

Rising UK prices should now help attract LNG shipments to Britain, but the onset of winter in Japan raises the prospect that they could be lured to Asia instead.

LNG shipments bound for Britain have also been diverted to the US and Spain over the past six weeks, where they have been fetching a higher price – up to $14m more per cargo to the US compared to the UK.

As a result, Britain’s first LNG terminal has been mostly idle since it opened in June.

How badly are UK companies being hit?

There are signs that British power stations and factories are turning down their production to reduce demand for gas.

French-owned gas supplier Total, a major industrial provider in the UK, said on November 22 that demand was running at about 80 percent of expected levels.

Chemical maker Ineos Chlor said on November 22 that it had cut its output by up to half.

Terra Nitrogen, a leading chemical and fertiliser manufacturer, said on November 18 it had to import ammonia from elsewhere in Europe to supply its customers because high energy costs had caused it to scale back production.