UK gas prices to rise due to N. Sea maintenance work

North Sea oil rig2British natural gas prices for delivery in late summer and autumn are set to rise in coming weeks as large-scale North Sea maintenance makes it more difficult for utilities to stock up on reserves ahead of peak demand in winter.

Prices could be pushed even higher by the Ukraine crisis, which many analysts fear will result in a disruption in the supply of Russian gas destined for western Europe and flowing through Ukraine.

“We do expect prices to rally in the coming weeks based on maintenance and profit-taking on recent price declines (closure of short positions),” Hans van Cleef, senior energy economist at ABN Amro, told Reuters.

British natural gas prices for delivery a month ahead have almost halved this year as healthy supplies have combined with low demand due to mild weather, improving energy efficiency, increasing supplies of renewables and low population growth.

Yet analysts say North Sea maintenance is likely to reverse that trend, at least in the short term.

Maintenance is planned from Aug. 1-14 on the Forties pipeline system and the Central Area Transmission System (CATS)Riser Platform, both in the North Sea.

The riser platform, operated by BP, feeds gas into the CATS pipeline, which carries more than 48 million cubic metres of gas a day (mcm/d) from the North Sea to Teesside in northeast England.

The Forties pipeline system, also operated by BP, receives oil and gas liquids from more than 50 offshore fields and delivers gas into the St Fergus terminal in Aberdeenshire.

Data from Thomson Reuters Commodities Research and Forecasts show total British North Sea gas production is expected to drop by an overall 18 mcm/d during the first two weeks of August. Oliver Sanderson, a senior gas analyst at the Thomson Reuters’ forecasting group, said:

The outage will constrain supply and should therefore lead to withdrawals from storage and push up prices, and it may cut back on exports to continental Europe.

“I wouldn’t be surprised if day-ahead prices in August pushed towards 40 pence per therm during the peak maintenance period, especially as there is a scheduled outage for Norwegian deliveries to Britain for the second half of August.”

North Sea production changes often have a strong market impact, as seen in recent outages impacting the St Fergus terminal or at ConocoPhillips’ J Block field.

Despite the bullish price outlook for the coming weeks, analysts said that price increases could be limited, because there had already been plenty of stock-building over the past few weeks amid low summer demand, and because reserves were already at healthy levels following a mild winter and spring.

Britain’s gas storage sites are currently filled to an average of 89.2% – more than double that at this time last year – 40.65%.

European gas demand also has been falling steadily, from a peak of over 510 billion cubic metres (bcm) in 2010 to under 420 bcm this year, and gas use is not expected to rise back above 450 bcm, according to French bank Societe Generale.

“Barring a sudden acceleration in economic activity in H2 2014 – clearly not the consensus view at present – or a ‘Siberian’ (cold) Q4 across the whole of Europe, we see limited risks to our forecast,” the bank said in a note this week.

One such risk, which could lead to price spikes, could be a potential cut in Russia’s supply of gas to Europe as a result of the Ukraine crisis.Russia meets almost a third of European gas demand, and it pipes almost half of these supplies via Ukraine.

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