U.K.’s Record Norway Gas Need Spells Price Jumps: Energy Markets

The U.K. has never been so reliant on natural gas from Norway, raising the possibility of higher prices when supplies to Europe’s biggest market for the fuel are disrupted.

Gas for same-day delivery surged 64 percent to a seven-year high on March 4 after a power failure cut supply from Norway’s Ormen Lange, Europe’s third-largest gas field.

The U.K., a benchmark for Europe’s $1 trillion gas market, is becoming increasingly dependent on foreign producers as North Sea supplies decline and shipments of liquefied natural gas, or LNG, trade near a record high. Norway was the source of an unprecedented 48 percent of Britain’s gas Dec. 26, data from network operators Gassco AS and National Grid Plc show.

“The recent price spikes highlight our reliance on Norway in a period when there isn’t the LNG arriving that we got used to,” Craig Lowrey, a consultant at the Utilities Exchange Ltd. who has tracked gas markets for 18 years, said in a March 6 phone interview from Ipswich, England. “I don’t see there being a shift in reliance on pipeline gas until we see an easing in the LNG market.”

U.K. gas for next-month delivery averaged 66.74 pence a therm in the first two months of this year, the most for the period since at least 2004, when Bloomberg began collecting broker data from Marex Spectron Group Ltd. It closed at 68.7 pence today in London. That’s equivalent to $10.26 per million British thermal units.

Gas for April delivery on the New York Mercantile Exchange rose 1.3 percent to $3.629 per million Btu today, settling at the highest closing price in 13 weeks.

LNG Imports

Imports from Norway rose 23 percent in the fourth quarter from a year earlier to the highest level for the period since the U.K.’s Department of Energy and Climate Change began compiling the data in 2000.

Power use at Ormen Lange returned to normal on March 6, according to Royal Dutch Shell Plc, which owns 17 percent of the field.

LNG tankers with a total capacity of 5.5 million cubic meters (3.1 billion cubic meters of gas) arrived in the U.K. in the five months through February, according to data compiled by Bloomberg. That’s down 53 percent from the same period a year earlier.

LNG for delivery in four to eight weeks in Northeast Asia cost $17 a million Btu on March 4, after reaching a record $19.40 on Feb. 4, according to assessments by New York-based World Gas Intelligence.

Biggest Capacity

Norway, with the biggest pipeline capacity into the U.K., has been the main beneficiary. Britain’s imports from the Scandinavian country rose as high as 138 million cubic meters a day on Jan. 16, compared with an average 76 million last year, Gassco data show.

Norway provided the U.K. with 8.8 billion cubic meters in the fourth quarter, according to provisional DECC data. Links from Belgium and the Netherlands supplied a combined 3.4 billion cubic meters. LNG shipments accounted for 2.5 billion.

The U.K. produced 41 billion cubic meters of gas in 2012, down from 86 billion in 2006 and a peak of 117 billion in 2000, DECC data show. The decline in output accelerated last year as Total SA’s Elgin-Franklin platform in the North Sea was closed.

‘Good Business’

Norway has gained a growing share of the U.K. market partly because it has embraced “spot” rather than oil-linked pricing faster than rivals such as Russia, making it cheaper for consumers, according to Thierry Bros, a gas analyst at Societe Generale SA in Paris. The amount of European gas bought at these market prices may surpass 50 percent in 2014 for the first time, he said.

Russia doesn’t ship directly to the U.K., yet its fuel may end up in Britain through the links from the Netherlands and Belgium. The former Soviet country supplied 26 percent of European gas last year and 27 percent in 2011, according to OAO Gazprom, Russia’s monopoly exporter.

“Because Norway has been more flexible in prices they are earning market power and market share,” Bros said by phone from Paris. “It’s a good business for Norway. The U.K. needs to hope they don’t abuse their market position.”

Most Russian gas is sold to European customers under long-term contracts linked to oil prices, according to Gazprom. Fuel from Russia cost $410.04 a thousand cubic meters ($11.17 a million Btu) at the German border in January, data from the International Monetary Fund show.

Statoil ASA, Norway’s state-owned gas company, has cut output to boost prices in a strategy it calls “value over volume” since at least 2010.

Record Sales

“In Europe, as part of the value-over-volume strategy, the company produced somewhat higher gas volumes in 2012 than previously assumed, which reduces estimated 2013 gas production by approximately 15,000 barrels of oil equivalent (2.4 million cubic meters) per day,” Stavanger, Norway-based Statoil said Feb. 7 in a statement.

Sales to Europe reached a record 88 billion cubic meters in 2012, up from 80 billion a year earlier, the company said.

“History has shown Norway and Statoil to be a very reliable supplier of natural gas, a position we intend to keep,” Morten Eek, a spokesman for Statoil in Stavanger, said in an e-mailed response to questions, declining to comment on value over volume.

European Trading

No single supplier to the U.K. should be able to abuse its position without triggering a reaction from other participants, either by increasing supply or reducing demand, according to Jonathan Stern, chairman and founder of the Oxford Institute for Energy Studies.

The U.K. accounts for more than half of Europe’s gas trading after being the first to move away from long-term contracts tied to the price of crude and oil products, according to London-based Prospex Research Ltd.

Russia, which has defended the use of oil-indexed gas pricing, saw its exports to Europe through state-controlled Gazprom drop 8 percent to 138 billion cubic meters in 2012.

While Norway may expand gas exports by as much as 22 percent through 2020, according to Petroleum and Energy Minister Ola Borten Moe, a drop in production this year may leave the U.K. even more vulnerable to periods of high demand.

Western Europe’s largest natural gas exporter may produce 15 percent less of the fuel in 2013 because of maintenance work at offshore fields from April, according to the Norwegian Petroleum Directorate.

The March 4 price jump showed that the U.K. has developed a vulnerability to supply cuts as LNG imports have declined, Michael Hsueh, an analyst at Deutsche Bank AG in London, said in a March 6 research note.

“We expect next winter’s balance to be similarly dependent on storage and interconnectors,” he said.

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