The UK Gas Market Presentation to Durham Centre for Doctoral Training in Energy 17th February 2011...

The UK Gas Market Presentation to Durham Centre for Doctoral Training in

Energy

17th February 2011

Niall Trimble

Managing Director

© 2005 The ENERGY CONTRACT Company

UK Gas Market

Recent Spot Market History Recent Developments in the Market Forecasts of Gas Supply and Demand Gas Price Forecasts


Recent Spot Market History


Day Ahead Prices for 2008/09 to 2010/11 (p/therm @ NBP)

01020304050607080

October November December February March May June August

2008/09 2009/10 2010/11


Gain in Forward Curve less pronounced

Table A2. Forward Curve Price for 1 Year gas (GY 2009/10)

January 2

2008

July 1

2008

January 2

2009

July 1

2009

January 4

2010

July 1

2010

January 2

2011

Price(p/therm)

51.5p 102.1p 57.0p 44.6p 51.7p 58.3p 58.9p

Index Jan 2008

= 100 100.0 198.3 110.7 86.6 100.4 113.2 114.4

GY 2009/10 until July 2009 and then GY 11/12


Significant Developments in the Market Place


Why did prices increase in Summer 2010?

Rising gas demand in UK 1st 9 months of 2010 gas demand up 9% on 2009

Developments in rest of Europe Demand also above 2009

• Above Take or pay level Contract re negotiation

• Take or Pay level reduced

Much greater interest in UK spot gas Big increase in Interconnector exports in summer 2010

• Summer 2009 flows 35% of capacity• Summer 2010 flows 64% of capacity

Overall effect market firmer prices higher


High demand in Q4 2010

Despite price increase in summer Market still weak Temperatures very low in December

• Coldest December for 100 years Demand exceptionally high

• Record demand on 20th December– [469] mcm/d

Little reaction from Day ahead market • Highest price 65p/therm

– Cf 165p in November 2005– Cf 196p in March 2006

Market still oversupplied?


Significant Developments in the Market Place

Gas prices remain decoupled from oil? In 2009 gas prices decoupled from Oil * In 2010 gas prices rose but so did oil No convergence

Big reduction in price seasonality* Very Significant for storage Historic Average Winter Summer Differential

• 18p/therm Current Forward Curve Differential

• 8p/therm Cause of the reduction

Due to weak markets caused by oversupply Seasonality may reappear when markets tighten up Return of volatility for same reason


Are Gas prices re converging with Oil?

0

50

100

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Ind

ex

Val

ue

fro

m 1

/1/2

00

9

NBP Brent Oil


Gas Price Seasonality 2004/05 to 2015/16

Average Q1 Price Average Summer Price Differential(p/therm) (p/therm) (p/therm) % of Q1 Price

2004/05 31.5 19.3 12.2 38.9%2005/06 47.7 28.5 19.2 40.3%2006/07 81.3 44.9 36.5 44.8%2007/08 51.7 30.9 20.7 40.1%2008/09 57.6 44.4 13.3 23.0%2009/10 69.5 51.4 18.1 26.0%2010/11 42.3 33.2 9.1 21.4%

Average 04 /05 to 10/11 54.5 36.1 18.4 33.5%2011/12 63.5 54.5 9.0 14.2%2012/13 65.0 56.9 8.1 12.5%2013/14 65.8 58.1 7.7 11.7%2014/15 67.1 59.4 7.7 11.5%2015/16 68.3 60.7 7.6 11.1%

Average 04 /05 to 10/11 65.9 57.9 8.0 12.2%


Rising imports

Imports 2008/09 78 mcm/d 2009/10 116 mcm/d Up 49% in 2009/10 Massive increase in LNG imports Imports = 43 % of UK demand in 2009/10


Rising Imports

Average Import Volumes (mcm/d)

Contract Year

Month BBL Langeled Total Pipeline

Grain Dragon South Hook Total LNG

Total

2008/09 Oct 16 52 68 2 0 0 2 70Nov 25 56 81 4 0 0 4 86Dec 26 61 87 5 0 0 5 91Jan 27 55 83 11 0 0 11 93Feb 28 65 93 11 0 0 11 104Mar 24 63 87 12 0 0 12 99Apr 23 43 66 11 0 4 15 81May 11 31 42 11 0 5 16 58Jun 8 25 33 11 0 5 16 49Jul 7 20 27 8 0 15 23 50Aug 11 37 48 5 4 19 28 76Sep 4 46 50 6 4 22 32 82year ave 18 46 64 8 1 6 15 78

2009/10 Oct 7 45 52 14 5 24 43 96Nov 29 47 76 12 9 21 42 118Dec 34 58 92 13 10 32 54 145Jan 33 61 94 11 4 34 50 144Feb 31 62 93 9 2 36 47 141Mar 30 61 90 9 1 33 43 133Apr 25 46 71 10 7 40 57 128May 17 39 56 17 6 27 51 108Jun 15 45 60 13 6 13 31 91Jul 15 33 48 7 10 14 31 78Aug 13 31 44 10 8 26 44 89Sepyear ave 23 48 71 11 6 27 45 116


Big disparity between UK and European Prices

Basis of Comparison UK Day Ahead Price Continental Long Term Contract Prices (flat gas basis)

UK prices lower for last 5 years Average Discount – 24% Even in 2010 Discount – 28%


Comparison of UK And European Prices

Year Quarter UK Continental Difference UK as % of Continental

2006 Q1 69.1 41.9 27.2 164.9%

Q2 35.0 44.0 -9.0 79.6%

Q3 33.6 45.2 -11.6 74.4%

Q4 30.2 45.8 -15.6 66.0%

Year Average 42.0 44.2 -2.2 96.2%2007 Q1 22.3 43.7 -21.4 51.0%

Q2 20.2 40.1 -20.0 50.2%

Q3 30.9 38.5 -7.6 80.3%

Q4 47.0 42.9 4.1 109.5%

Year Average 30.1 41.3 -11.2 72.8%2008 Q1 53.1 51.6 1.5 102.9%

Q2 60.4 60.7 -0.3 99.5%

Q3 61.3 69.1 -7.8 88.7%

Q4 57.0 85.1 -28.1 67.0%

Year Average 58.0 66.6 -8.7 89.5%2009 Q1 46.8 86.9 -40.1 53.9%

Q2 27.5 63.3 -35.8 43.5%

Q3 21.5 47.9 -26.3 45.0%

Q4 27.7 49.8 -22.2 55.5%

Year Average 30.9 62.0 -31.1 49.5%2010 Q1 35.9 53.3 -17.4 67.3%

Q2 38.0 55.0 -16.9 69.2%

Q3 43.0 59.3 -16.3 72.5%

Q4 52.5 65.2 -12.7 80.5%

Year Average 42.3 58.2 -15.8 72.4%

Average 40.6 54.5 -13.8 76.1%

Comparison of UK and European Prices (p/therm)


Lack of Progress on Storage

UK Storage Capacity (bcf) Built 161

Under Construction 37 PP but not started 98

Storage Capacity as a % of annual demand UK 5-6% Europe 16% USA 18%

Lack of progress Planning barriers removed Many projects with PP not

going ahead Due to lack of seasonality in

forward curve


UK Gas Supply Demand Forecasts


Supply /Demand Forecasts

Demand Significant decline in forecast levels of UK gas demand

• 2005 to 2009 due to– High prices– Decline in UK Industry– Global recession

• Further decline in future due to policies to reduce CO2 emission• Government expects UK gas demand to fall to 66 bcm/year by 2020

2011 forecast • 19 % below 2005 forecast* • 16% below 2008 forecast


UK gas sales to industry have declined 34% since 2000

UK Gas Demand by Sector, 2000 to 2009 (TWh/Year)

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200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

TW

h /

year

Domestic Industrial Generation Services


Annual Gas Supply Demand Forecast – Declining Demand forecasts

0

2000

4000

6000

8000

10000

12000

14000

2009/10 2010/11 2011/12 2012/13 2013/14 2014/05 2015/16 2016/17 2017/18 2018/19

mm

cfd

Contract Year

Figure C3 - ECC UK Gas Demand Forecasts, 2005 to 2010

2005 forecast 2006 forecast 2007 forecast

2008 forecast 2009 forecast 2011 forecast


Supply /Demand Forecasts

Supply Growing proportion of LNG

• 1% of supply in 2008/09• 11% of supply in 2010/11• 21% of supply in 2016/17

LNG supply is Price Sensitive, so terminal load factor will vary• 2008/09 to 2013/14 only 30%• 2014/15 onwards 48%

Big Seasonal variations in Load Factor• Winter 70%• Summer 25% • Lower in 2008/09 to 2013/14


Forecast of UK Annual Gas Supply and Demand

0

2000

4000

6000

8000

10000

12000

14000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/05 2015/16 2016/17 2017/18 2018/19 2019/20

mm

cfd

Demand Supply


Maximum Beach Supply as a % of Q1 Demand - 1997/98 to 2019/20

0%

20%

40%

60%

80%

100%

120%

140%

Supp

ly a

s % o

f dem

and

Problems arose at these levels

By 2014/15 supply ratio is back to problem levels

Supply ratio peaks in 2009/10 to 2013/14


Gas Price Forecasts


Key Drivers until 2013/14

Gas Market will be depressed until 2013 or 2014 Driven largely by Supply Demand fundamentals

Winter supply demand ratio very favourable Modest influence of European Oil linked prices

2006 to 2010 - UK prices 24% below European level


Key Drivers 2014 onwards

Market should start to tighten up around 2013 or 2014 Winter supply demand ratio starts to fall

Increasing influence of European Oil related prices* Prices will become higher and more volatile

Due to deficiencies in UK traded market * Key driver – building of offshore storage

Onshore storage will be insufficient Offshore is expensive and risky More offshore storage would reduce price and volatility


Gas Price Forecasts – Background to the Forecasts - 1

Oil Price Important post 2013 - 3 cases Low Case - $55/Barrel by Q1 2012, then rising with inflation. Base Case - $90/Barrel until Q4 2011, then rising with

inflation High Case - $120/Barrel by Q3 2012, then rising at 1.0%

above inflation


Deficiencies in the UK market

Market very vulnerable to disruption in longer term Much worse placed than US

Forward Curve doesn’t work well Supply dominated by a few suppliers

• ExxonMobil, Gazprom, Statoil and Qatar Gas will have 30-40 % of market in 3 years

• Could they withhold supply? Lack of storage is a problem

• UK gas storage capacity is 5-6% of annual demand (with under construction)

• cf USA 17.9%

• No sign of this being resolved Bad for UK gas consumers but good for gas producers!


Month Ahead Gas Price Forecast, 2011 to 2016

(p/therm @ NBP)Contract Year Quarter Low Case Best Guess Case High Case

2010/11 Q2 48.0 49.3 51.0Q3 44.0 47.0 49.0

2011/12 Q4 50.3 56.0 59.7Q1 50.0 60.3 65.7Q2 32.3 50.3 58.0Q3 29.0 48.0 56.0

2012/13 Q4 41.6 57.0 67.2Q1 44.7 61.0 73.5Q2 37.4 51.0 62.0Q3 36.0 49.0 59.7

2013/14 Q4 47.0 64.0 78.2Q1 55.1 75.0 91.8Q2 40.4 55.0 67.4Q3 38.9 53.0 65.1

2014/15 Q4 53.6 73.0 89.8Q1 62.5 85.0 104.8Q2 47.8 65.0 80.3Q3 46.3 63.0 77.9

2015/16 Q4 58.8 80.0 99.2Q1 66.2 90.0 111.8Q2 50.0 68.0 84.6Q3 48.5 66.0 82.3

Quarterly Gas Price Forecast - Month Ahead Prices


Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32010/11 2011/12 2012/13 2013/14 2014/15 2015/16

0

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60

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120

Figure F2BG Quarterly Price forecast 2011 to 2016 - Best Guess Case

Floor Forecast Price Ceiling

p/t

he

rm@

NB

P


Contract Year Quarter Best Guess Forward Curve Difference

Month Ahead ESGM 12 Jan

2010/11 Q2 49.3 55.1 -5.8Q3 47.0 54.5 -7.5

2011/12 Q4 56.0 59.8 -3.8Q1 60.3 63.8 -3.4Q2 50.3 58.0 -7.6Q3 48.0 57.6 -9.6

2012/13 Q4 57.0 61.5 -4.5Q1 61.0 65.7 -4.7Q2 51.0 58.9 -7.9Q3 49.0 58.7 -9.7

2013/14 Q4 64.0 62.6 1.5Q1 75.0 66.8 8.3Q2 55.0 60.0 -5.0Q3 53.0 60.0 -7.0

2014/15 Q4 73.0 66.1 7.0Q1 85.0 66.1 19.0Q2 65.0 61.5 3.5Q3 63.0 61.5 1.5

2015/16 Q4 80.0 68.0 12.0Q1 90.0 68.0 22.0

Comparison of Forecast Price and Forward Curve(p/therm @ NBP)


Implications of the Forecasts

Day Ahead prices expected to rise significantly in 2-3 years Not reflected in forward curve Time for Buyers to hedge? Seller should hedge summers for 3 years

Cheap UK spot gas has affected other parts of Europe Competition has lead to reduction in price to end users Profitability seriously reduced in many markets Intensive activity on price reviews

• Many going to arbitration Era of cheap UK spot gas may end in 2-4 years time

This would feed through into Long term contracts • Through price review process

• More arbitrations to increase price by 2014/15


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The UK Gas Market Presentation to Durham Centre for Doctoral Training in Energy 17th February 2011...

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