UK gas output slump helps fuel price rally

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UK gas production is down 28% year-to-date, helping fuel the current European gas price rally, global natural resources consultancy Wood Mackenzie, a Verisk business (Nasdaq: VRSK) said.

Total UK gas production for January-August 2021 amounted to just 17 billion cubic metres (bcm), down from 24 bcm over the same period in 2020.

Other factors have also contributed to the price rally, including record high coal and carbon prices; booming Asian LNG demand; and limited growth in Russian pipeline supplies.

A production drop of the scale seen in the UK was driven by maintenance and new project delays. In particular, the three-week maintenance of Forties Pipeline System in June resulted in the shutdown of supply from all 67 field users.

Additional work on other parts of the system throughout the year meant groupings such as Elgin/Franklin, Shearwater and ETAP have all been offline for much longer.

Operators have also been using this downtime to conduct their own maintenance programmes/TARs, which has extended the three-week shutdown period at multiple hubs.

The delay of Tolmount start-up from July to December further contributed to supply under-performance.

However, Wood Mackenzie expects UK gas production to recover through the remainder of the year. Indeed, August output has already climbed 72% over July. Still, the summer slump means overall 2021 production will be slightly over 27 bcm (vs 34 bcm in 2019 and 35 bcm in 2020). We forecast a rebound to 35 bcm in 2022.

The recovery will be driven by the start-up of new gas projects such as Saturn Banks, and others that were deferred from 2020 as a result of the coronavirus pandemic. These include Arran, Columbus and Finlaggan. Infill drilling at large producers such as Elgin/Franklin, Tolmount reaching peak production in 2022 and Culzean remaining on plateau throughout 2022 will further contribute.

An already tight UK winter balance is premised on this supply recovery, but any disruption will put the UK system under significant strain.

With limited UK gas storage, the levers that the UK can pull to balance the market include higher gas imports from Norway or the continent; additional LNG cargoes; increased coal burn; and higher electricity imports.

Any material demand response in the UK’s gas market will likely come from the power sector which has ancillary services and capacity markets for balancing and security of supply requirements.

Norwegian gas production has also been affected by planned and unplanned maintenances. Continental Europe has been struggling to fill its gas storage ahead of winter and will continue to face tight market conditions throughout winter.

Booking additional LNG cargoes on a short-term basis amid growing Asian LNG demand will prove challenging. The UK’s coal capacity has shrunk to just 4 gigawatts – offering less switching potential in periods of high gas prices than previously.

But of course, high UK coal-burn would be an unwelcome distraction as COP26 parties discuss climate change in Glasgow in November.

We forecast UK and European gas prices to remain elevated at current levels throughout winter – UK producers will be keen to bring production back quickly in order to capitalise on the record price levels.

A recovery in UK gas production is critical for this winter. And going forward, investment into domestic gas supply remains crucial to ensure a smooth energy transition to renewables and new technologies.

The recent call of the Scottish First Minister on the UK government to reassess licences already issued for future oil and gas developments is already creating uncertainty for greenfield projects.

Limiting supply without reducing demand is only going to increase the UK’s reliance on gas imports – where competition for volumes in Europe and globally will continue to increase.

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