High UK prices point to market flaws, need for storage: Statoil

This week's high prices for gas in the UK reflect the need for strategic storage, Statoil's executive vice president for gas, Rune Bjornson, said Tuesday. He told the Flame conference in Amsterdam, Netherlands that there was a need for strategic storage in the UK gas market.

"The events of yesterday (March 13, when UK gas prices quadrupled) clearly reflect the need for strategic storage," Bjornson told a round-table session.

The head of markets for British energy regulator OFGEM Steve Smith had earlier said that it was difficult for governments or regulators to assess the need for such storage. Professor Jonathan Stern, of the Oxford Institute for Energy Studies, said while he agreed with Smith on that, he believed "it is now clear that countries such as the UK, with a large dependence on gas, have to have strategic storage."

He asked what would have happened if the Rough field, the main UK offshore storage facility, had gone out of service in November, at the start of the winter, instead of [when it did in] February.

From the floor, Simon Blakely, of energy consultants CERA, said it was, in fact, "easy to tell five years ago or so that this situation was going to happen" and that the British needed to listen to the lessons offered by Statoil and RWE.

Smith denied that the situation was foreseeable even three years ago, citing studies carried out then which failed to predict it. "The current UK situation is not one that we [OFGEM] or the government are happy with. We need to find solutions that are suitable not just for one situation, like now," he said.

Bjornson said: "We [Statoil] have been knocking at the [UK] government's door for a very long time to [get them to] build new pipelines and storage. It took more than ten years to get through."

In terms of the need for infrastructure upgrading, he said: "It's not a question of the market not seeing it, but a question of the government not accepting it."

BG's Philip Walsh, from the floor, said: "It's not a situation where if you sort out storage, everything else is sorted." Is the need a Continental one? he asked the panel.

"Has the situation in the UK been made worse by the situation in Europe?" replied Smith, before answering his own question, "Yes." He conceded however that even if the Interconnector [pipeline from Zeebrugge] "had been working flat out delivering gas from Europe," the UK would still have had problems. "If we had the UK level of transparency in Europe, we would have fewer problems. Some of that lack of transparency [in Europe] has made a difficult UK situation worse," Smith said. He pointed out that "because so much gas use [in the UK] is power-based, coal stocks and coal-fired plants represent [UK] storage that often isn't counted."

Bjornson said, "If we invent a new, better system every year, it could be good but it certainly wouldn't be predictable." He made the case again for long-term contracts, saying both long and shorter contracts were required "to make the market work and to ensure that every asset is used to its full capacity."

Dr Klaus Homann, chief executive of RWE Transportnetz Gas, referring to the way that power demand operates in the UK market and the volumes involved, said: "I am still not convinced that natural gas is suitable for power generation." ---Eloise_Logan@Platts.com

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