LNG Volumes
As shown in Figure 6.4, LNG imports were relatively low in 2018 but increased in the last quarter with highs in December 2018 (volume of 1,674 mcm) and subsequently in April 2019 (volume of 2,336 mcm). Such high volumes had not been seen since April 2011 (3,154 mcm).
As it is a global commodity, LNG deliveries are highly price responsive to the world market. So while an increase in LNG volumes is a positive for security of supply, it also means that GB prices are more sensitive to changes in global LNG market prices. Given the remarkable increase in LNG deliveries that we have seen in 2018, it is important to understand the drivers and implications of increased LNG supply.
One of the key drivers of the increase in LNG supplies was the fall in the premium between LNG spot prices at key Asian hubs and hubs in North West Europe (NWE), including in GB. It was therefore more profitable for U.S. and Qatar cargoes as well as for cargoes in the Atlantic basin to sell their LNG to Europe rather than to Asia. Figure 6.5 below shows the spread between GB and Asian LNG prices.
The global trend of stronger LNG flows to GB has affected GB’s gas supply mix – LNG became an important source of GB’s gas supply in winter 18/19, making up almost 12%
of total GB gas supply compared to just 6.1% in the previous winter. As LNG prices have been relatively low, the effect on GB of the LNG influx was higher margins rather than high prices, which has been positive for security of supply.
149 Figure 6.4: LNG volumes and number of cargos from April 2011 to April 2019
Source: Ofgem calculations, Bloomberg.
Figure 6.5: LNG volumes and the spread between Asian211 and GB LNG prices (April 2018 to April 2019)
Source: Ofgem calculations, Bloomberg, ICIS Heren.
211 The East Asia Index (EAX) for spot deliveries to Japan, China, South Korea and Taiwan. The spread is the difference between GB and EAX prices. Asian LNG prices tend to maintain a thin premium to NWE during times of healthy supply, to ensure cargoes from suppliers such as Qatar (as the biggest LNG producer) retain an incentive to deliver and sell eastwards, as LNG is the sole source of gas supply for Japan. During periods of tighter supply as a result of lower production and higher demand, the Asian market tends to build a much bigger premium, causing the spread between EAX and GB prices to be wider.
150 The origin of LNG
Increase in LNG deliveries from the US and Russia and less from Qatar
Security of supply is also strengthened by LNG deliveries from more diverse origins, as happened in 2018. The greater diversity reflected an increase in global production capacity. It is a positive development for GB security of gas supply because it raises the likelihood that GB will attract LNG cargoes when needed.
In 2017, more than 83% of all LNG imports came from cargoes originating in Qatar, but in 2018 this fell to 40%. In contrast, arrivals from US and Russia increased significantly in 2018 compared to 2017. LNG from the US in 2018 was almost 16% of total LNG imports, while there were no cargoes from US in 2017. Similarly, LNG from Russia in 2018 was just over 19% of total LNG imports in 2018, compared to 1.5% in 2017. This increase in LNG volumes from Russia is due in part to the early start-up of the Yamal train exports, which reached its full planned capacity of 16.5 million tons per year. Figures 6.6 and 6.7 show the changing picture of the origin of LNG.
Figure 6.6: The origin of LNG volumes in Winter 2017/18
Source: Ofgem’s calculations, Bloomberg.
151 Figure 6.7: The origin of LNG volumes in Winter 2018/19
Source: Ofgem’s calculations, Bloomberg.
With the additional competition in Europe from US and Russian LNG, Qatar may shift its focus to emerging markets such as Bangladesh, India and Pakistan. However, Qatar is likely to remain a key supplier into the UK as it has a majority stake in the South Hook terminal.
Impact on wholesale prices212
High LNG volumes delivered to GB terminals (as well as to north-western European terminals) were one of the factors that helped to drive wholesale gas prices down since the start of winter 2018/19. Figure 6.8 shows this declining trend in gas prices that influenced wholesale electricity prices in turn. From an average peak of 73.7p/th in September 2018, prices for the gas day ahead contract decreased to an average of 39.3 p/th by end of March 2019.
212 Prices used are nominal, highlighting mainly the recent trend in energy prices from Q4 of 2018 to Q1 2019.
152 Figure 6.8. Average monthly price movements for Gas and Electricity
(Day-ahead contracts) from 2016 to Q1 2019
Source: Ofgem’s calculations,213 ICIS Heren.
Storage
Storage levels rose during 2018 and remain very healthy, in GB and in the Continent
6.13. The increase in LNG has had an effect on storage utilisation in GB. Owners of storage capacity inject gas when prices are low and withdraw it when prices are high (usually during peak demand). GB storage operates flexibly in response to relatively short-term price signals.214 When storage levels are low, the market may be nervous about the ability of the system to meet spikes in demand, therefore if storage levels are high, it may be reassuring for the market from the perspective of security of supply.
213 Ofgem publishes average monthly price movements for both gas and electricity (day ahead
contracts) in the website: https://www.ofgem.gov.uk/data-portal/wholesale-market-indicators
214https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachmen t_data/file/753170/BEIS_Ofgem_Statutory_Security_of_Supply_Report_2018.pdf p.28
153 6.14. After the ‘Beast from the East’ cold snap in March 2018, GB storage levels were
nearly depleted at the end of winter 2017/18, at only 18% by the end of March 2018.
However, with milder temperatures over winter 2018/19 and an abundance of LNG there was less need for storage withdrawals. As a result, storage levels were much higher and steadier for most of Q3 and Q4 of 2018 as well as in Q1 of 2019 than in the 2017/18 winter, remaining above prior 6-year averages as shown in Figure 6.9.
6.15. This was a European wide story. UK storage only makes up about 1.4% of European storage but is connected to the continent by two major interconnectors, BBL and IUK.
As in GB, European storage ended winter 18/19 at 5-year highs due to low demand and sustained arrivals of LNG. This curtailed withdrawals from European storage sites in the second half of February and March 2019, further depressing gas prices and helping to give the market confidence in GB’s ability to meet any supply challenges.
Figure 6.9: Medium Range Storage (MRS) Gas Storage levels in mcm and in %, Q1 2018 to Q1 of 2019, GB
Source: Ofgem calculations, Bloomberg
Note: Prior 6Y Range* - is the range over previous six years with base year as 2018.
MRS storage is now GB’s only source of storage capacity
6.16. In 2018, EDF announced the withdrawal of the Hole House Farm storage facility from commercial operation. With a capacity of 0.022bcm, Hole House Farm was the
154 UK’s smallest storage facility and no significant security of supply impact is expected to arise from this commercial decision.215 Medium range storage (MRS) sites, totalling around 1.36 bcm now make up GB’s remaining storage capacity since the closure of storage capacity at the long-range Rough site (3.7 bcm) in 2017.
6.17. GB still has significant infrastructure capacity to receive gas, as confirmed by the modelling work and analysis undertaken by Ofgem and BEIS to assess GB gas security of supply.216 These studies concluded that GB should have adequate supplies to meet high demand scenarios even in the absence of Rough217 and when there are supply outages.218