UK winter 07 gas too high for major users

London (Platts)--12Jan2006

UK winter 07 (October 2007 to March 2008) gas at the NBP was priced at
76p/th on the forward market Wednesday, probably too high for industrial users
to be interested in buying it. 
     At this price, the contract was a little lower than winter 05 at its more
than 80p/th peak when it still traded as a forward contract. Winter 05 peaked
at about 82p/th on Jul 12, 2005. 
     The high level of winter 07 gas comes despite the fact that two major new
liquefied natural gas import terminals will open by then.
     ExxonMobil and Qatar Petroleum are due to open a 10.5-bil cu m/year LNG
import terminal at Milford Haven in Wales in time for winter 07, and BG Group,
Petronas and Petroplus are to open a 6.0 Bcm/year terminal nearby. Together,
these projects could add an extra 16 Bcm/year of gas to the UK market, equal
to 16% of annual national demand.
     In addition, the northern-leg of the Norway-to-UK Langeled gas pipeline
will be open by end of 2007. This means that Norwegian gas can be fed to the
UK not just via the southern-leg of the Langeled pipeline but all the way from
the massive offshore Ormen Lange gas field via the northern and southern legs
of the world's longest subsea pipeline.
     The new boost to security of supply for winter 07 come after a further
expansion of the Belgium-to-UK Interconnector pipeline in winter 2006 and the
completion of the Dutch-to-UK Balgzand-Bacton Line in Dec this year.
     Yet despite all this new infrastructure, the bullish forward prices
suggest that gas in winter 2007 may still be too high for energy intensive
users of gas, such as chemicals firms, who use gas not only for energy but
also as a feedstock in their processes. They were used to 20p/th prices in the
early years of this decade, and some seem unwilling to manufacture over about
60p/th, though it is difficult to pin down any precise number.
     In the current winter, many chemicals firms and brick-makers have shut
down due to high gas prices. If daily gas prices turn out as high in winter
2006 and winter 2007 as they are now in the forward market, these firms may
have to shut down in those winters, too.
     One chemical industry source said that the industry welcomed all the new
infrastructure coming onstream for the next two winters, but said it was
"necessary" rather than "sufficient" to ensure gas imports. "Even with this
winter's high UK prices, existing import routes have not been used at anything
like full," he said. High forward prices for the next few winters suggest they
may not be flowing to capacity in those winters either.
     Users would probably not be able to afford to sign up to supplies for the
next couple of winters in the forward market at current forward prices, the
source said, leaving them reliant once again on buying gas day-to-day and
hoping for warm weather in the next couple of winters too.
     The UK government's position has been that although the gas market is
difficult for users in the short-term, the liberalized market has brought on
billions of pounds of new infrastructure, such as the new LNG terminals, which
will ensure the supply situation eases by 2007. Government says industrial
users would be unlikely to relocate their businesses overseas just because the
UK has high gas prices for one winter. But the forward prices show that gas
prices could still be too high in winter 2007, even with the new LNG projects.
---Alex_Froley@platts.com

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