Rough to permanently close after safety concerns

Centrica have announced today the closure of their Rough Storage facility, confirming that trying to continue operations at the UK’s largest gas storage facility is uneconomic given the ageing life of the facility and on-going concerns over safety.

What is Rough Storage?

In 1985, Rough Storage began operation after depletion of its natural gas reserves and was converted into a gas storage facility given the seasonal trends in gas usage in the UK. The facility consists of a gas storage facility off the coast of Yorkshire and an onshore gas processing terminal at Easington. The processing terminal forms part of a larger facility which can inject approximately 40% of the daily UK supply.

Rough Storage itself has a storage capacity of approximately 72% of the UK’s total gas storage capacity (approximately 9 days’ supply). It can also supply 10% of the UK’s peak gas demand and as such has always been an important part of the UK’s gas infrastructure over winter periods.

As of today, Rough remains the only depleted offshore gas field reservoir that is used for gas storage and retrieval. There have been other projects considered but none have proven economically viable, further reinforcing the fact that gas storage for peak winter periods remains a significant concern for the UK market.

The ageing facility has suffered numerous problems over the past few years and in April 2017 Centrica Storage Limited (CSL) the facility’s operator, announced that the site would be offline until Q2-2018 for testing as the facility is far beyond its operational life. All remaining storage facilities in the UK are medium-range or fast-cycle (smaller in capacity but quicker in withdrawal), emphasising deliverability over capacity.

What has Centrica said?

“CSL has now completed the wells testing programme and has analysed the results of this extensive programme. CSL has also completed a review into the feasibility of returning Rough to injection and storage operations and concluded that, as a result of the high operating pressures involved, and the fact that the wells and facilities are at the end of their design life and have suffered a number of different failure modes while testing, CSL cannot safely return the assets and facilities to injection and storage operations.

Furthermore, from a commercial perspective, an assessment of both the economics of seasonal storage today, and the costs of refurbishment or rebuilding the facility and replacing the wells, suggests that both pathways would not be economic.

As a consequence, CSL intends to make all relevant applications to permanently end Rough’s status as a storage facility, and to produce all recoverable cushion gas from the field, which is estimated at 183 billion cubic feet.”

What does this mean for consumers?

Bullish factors:

  • As recently as 2013, day-ahead gas prices spiked to 125 p/therm during May when the winter had been particularly cold (it snowed in April). The cold weather meant that Rough was nearly completely out of gas (it usually only gets down to around 15% capacity). Therefore, in peak periods we will see greater volatility in the absence of sufficient LNG stocks.
  • This suggests that only 5 winters ago, Rough was still considered a major part of the UK’s gas infrastructure, and was still very important at meeting peak winter demand.
  • The UK has significantly less gas storage capacity compared to other large Western Economies (i.e. France, Germany, Spain)

However, there have been structural changes in the UK/global gas markets:

  • The extensive issues over the last 18-24 months have helped ease and transition the gas market into the understanding that the end of Rough’s operation was in sight. The contribution from gas storage for Winter-2017 was always going to be limited, and making this decision now means UK gas suppliers will have sufficient time to expand LNG deals with Qatar (Shell recently announced a new extended deal with Qatar LNG to deliver up to 1.1 million tonnes of LNG per annum for five years).
  • We’ve known for years that Britain would likely have to ramp up LNG imports in order to meet winter demand requirements. New LNG terminals have been coming online around the world for the last few years. In particular, US LNG terminals are coming online around 2016-2019, and Australian LNG projects will ramp up exports from 2017-2023. The US will export to Eastern Europe to ease reliance on Russian gas and Australian LNG will feed the larger Asian markets (Japan, China, India), which will free up greater volumes of Qatari LNG to deliver to Western Europe (incl. the UK).
  • Centrica plan to produce all recoverable cushion gas from Rough, which is estimated at 183bcf (approx. 5.18bcm). This is a significant volume and could further ease the transition for future winters.

In summary:

  • The UK is likely to be more reliant on LNG and imported gas over peak winter periods, and with less gas injected into storage over the summer months we are likely to be more susceptible to price movements where LNG deliveries are not guaranteed or are re-directed.
  • During colder winter seasons, we are also likely to see greater short-term volatility as the UK shifts towards a more reactive gas system based on much lower storage capacities.
  • We are also not likely to see new long-range storage being built as recent projects to convert depleted gas fields have proven uneconomic.

What should consumers do?

While the markets have not reacted significantly this morning and given the risk of Rough storage being offline has been priced into the wholesale markets, it is imperative that consumers address this long-term risk for periods of high gas demand.

We are working with our clients to help them understand:

  • Their future risk to market prices given this announcement.
  • Whether this change has a material impact on their risk appetite for hedging.
  • What our thoughts are on the future of UK gas storage and more importantly future market conditions now that Rough has ceased operation permanently.

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