Centrica’s $200 Million Problem Throws Traders New Curveball
(Bloomberg) -- For five months the natural gas market has had to live without the U.K.’s biggest storage site off England’s east coast. When it returns from emergency maintenance by Friday, traders are facing a whole new challenge.
Rough’s halt has left the Centrica Plc facility with less than half the gas it typically holds going into the peak heating season. That means less pressure than normal in the rock underground that holds the fuel. So when the gas is extracted from 20 of its wells to meet demand from homes to hospitals, it will flow at a pace closer to a walk than a run.
Coupled with a dearth of liquefied natural gas supplies to northwest Europe, that’s increasing the risk of price jumps during freezing weather, according to Ira Joseph, head of global gas and power at Pira Energy Group in New York, an industry consultant. Volatility reached a 5-year high in September after Centrica extended works at the facility.
“In case of peak demand, the picture looks really tight and with lower Rough flows than expected the situation will be even more challenging,” said Pierluigi Frison, a gas trader at Green Network UK Plc in London. “I believe it will be a problem later in the winter.”
Rough, which accounts for about 70 percent of the country’s overall gas storage capacity, will open for withdrawals next week after being closed for urgent maintenance since June. The low pressure “isn’t the optimum point” for cycling gas in and out of the facility, Ross Davidson, a company spokesman in Aberdeen, Scotland said by e-mail. A third of Rough’s 30 wells will still be offline for more works.
Under current conditions, Centrica can withdraw about 33 million cubic meters of gas a day, about 77 percent of what it can normally extract this time of year, according to withdrawal curves provided by Centrica. Continuous depletion of the facility, and thus even lower pressure, means that by the end of the winter that will fall to less than 20 million cubic meters a day.
“This is an event that very few people in the industry have seen, if any,” said Guillermo Baena Gomez, a senior energy trader and market analyst at Advantage Utilities Ltd. in London. “The current stock level is considerably lower than historical levels for this time of year. Actually we are at a level equivalent to the second half of February.”
There’s about 8 percent more gas in medium-term storage than the five-year average for this time of year, according to data from National Grid Plc. At the start of heating season on October 1 stocks were 48 percent more full than average.
Traders may get tested on the new market dynamics already this month, with the U.K.’s Met Office predicting temperatures below average in December.
“If I was a trader, I’m in trouble, because I can’t do much about it at all,” said David Aron, the London-based founder of Petroleum Development Consultants, referring to the physical restraints at Rough. And for Centrica, “the consequences could be quite great,” because it’s pumping less gas.
The company took an impairment charge of 176 million pounds ($222 million) related to Rough in the six months through June 30. Davidson declined to provide further details.
The market’s first reaction when Rough’s new schedule was published on late Tuesday was bearish because the facility is initially adding to supplies, and gas for January has fallen 7 percent since the news. Warnings of fuel shortages are more relevant for later this winter, as other U.K. storage facilities operated by SSE Plc and Electricite de France SA will also get depleted.
Gas prices in the U.K. for delivery in the first quarter are trading at a premium to next summer that’s three times as large as the same measure this year, indicating that Britain will be more reliant on imports.
“I believe that U.K. is better prepared for a mild or even normal winter, but not for protracted colder-than-normal weather,” said Zach Allen, president of Pan Eurasian Enterprises, in an e-mail from Rhode Island. “Given that Rough is starting from a very low point, that gives limited comfort to the markets.”