Gas Price Volatility to Continue in Coming Winter, Say Experts


The recent spate of gas price volatility continued throughout this year and shows no sign of abating over the coming winter. Pressure on prices is expected from manifold interdependent variables including the weather, capacity of Norwegian supply, Italian procurement behaviour, Dutch flexibility to meet spikes in demand, plus the ability of Ukraine to curb its consumption by increasing efficiency.

This was a view emerging from the British Institute of Energy Economics’ 2014 Academic Conference at Shell House in London last week.

The time it takes to get gas from the ground to the retail supplier makes the supply inelastic in its response to sudden fluctuations in demand. In readiness for the expected cold weather last winter, Europe brought more costly production sources online and amassed supply in storage, explained experts at the conference.

When the first quarter of this year ultimately transpired to be much warmer than expected across virtually all of Europe, the ensuing demand shock had a profound downward impact on price as suppliers tried to offload their gas.

Speakers at the conference illustrated how the conflict in Ukraine caused the first spike to occur in March. The price has remained tumultuous throughout summer, with volatility now “still at levels we’ve only seen a couple of times since 2010,” according to an expert speaking under Chatham House Rule.

Participants postulated that gas price volatility would continue through this winter, as it gets tussled by the influencing factors detailed below.

NORWAY: PRODUCTION PATTERNS 

Last winter, Norway’s production was hampered, with the Troll gas field down by a third because of maintenance work. With Troll now back online, overall production levels are being kept fairly high at ~300mcm/day, in spite of prices being 20-30p/therm lower than they were at this time last year. 

“Do they need the cash flow? Perhaps? They didn’t produce very much last winter, and they actually came in with pretty low production this summer, as prices were so low”.

The implication of this is that Norway could be happy to maintain a plentiful supply this winter even if the market price was low. 

NETHERLANDS AND EARTHQUAKES

The past year has seen an increase in earthquakes around the Groningen field of the Netherlands, and these have been accepted to have been caused by gas production. This year saw restrictions being placed on production permits, raising questions about the field’s flexibility to quickly match spikes in demand- a role which the European market has traditionally relied upon it heavily for. 

“If it does get cold, is Dutch production going to be able to respond the way it did in 2011 and 2012?”

BUYING BEHAVIOUR OF ITALY

There is currently an increasing shift in Italian buying behaviour; imports via Austria (primarily of Russian origin) are significantly down, in favour of imports via Switzerland (through the Transitgas Pipeline). 

“This is pulling on the hub traded market gas in northwest Europe. This is a pretty big swing that we have there; going from historically 10-30mcm/day, up to the 30-60mcm/day range.”

A comparable situation can also be seen in the Ukraine, which has also increased its demand from western Europe by roughly 30mcm/day. 

ANY WAYS OUT? 

“How much production capacity did Norway lose with its Troll maintenance last winter? It was about 30mcm/day.” Taking Italy and Ukraine in conjunction, this equates to roughly 60mcm/day increase in demand; effectively double the increase in supply from Norway (compared with last winter).

Considering whether or not there will be a disruption of gas going through Ukraine into the rest of Europe this winter, it was posited that this hinges not only upon whether Ukraine can reach a satisfactory agreement with Russia for its internal supply, but also “upon the ability of Ukraine to reduce its consumption during winter, and whether or not its peak consumption can be met through storage and other supplies.” 

While the time available for this is clearly limited, Ukraine has vast scope for increasing efficiency; the World Bank published figures on energy productivity in terms of GDP per kg of oil equivalent, which suggest that 97% of the rest of humanity have higher productivity than Ukraine, with the country currently ranked between Ethiopia and Togo. 

Discussing the potential impact on price if Russia did cut off supply via Ukraine, an analogy was drawn to the US market, where the vast Marcellus shale has redrawn the map. Because of the fall in price resulting from the new shale gas, LNG supply to the northeast region has been dropping off significantly as it diverts to higher priced markets. This then left the region exposed when the polar vortex descended last winter; LNG wasn’t able to mobilise quickly enough and prices in New York spiked to around 750p/therm.

It’s with these factors in mind that Europe has been making efforts to increase its resilience in preparation for this winter. Taking the UK as an example, gas supply position is felt to be secure as well as diverse, and storage is well stocked. 

OFGEM, National Grid and the Department for Energy & Climate Change have been working together with the EU to perform various stress tests to model potential outcomes and the only scenarios where they have had concern is “where you have a 1 in 20 [cold] winter and full curtailment from Russian flows, and even that scenario, we believe the market has got the tools to react without going into an emergency situation.”

This view echoed a new European Commission stress test report released in Brussels just a few hours earlier, which detailed Europe’s preparedness to cope in the event of Russia fully cutting off supply. 

Simon Williams