UK Natural Gas Prices, Already at Historically High levels, Set To Rise

A recent article in the UK's Sunday Times warns that, although UK natural gas prices are already at historically high levels, they are set to increase by 25% by next winter. Part of the problem is that the UK is increasingly dependent on imports of liquefied natural gas (LNG), and this winter (2007/08) Japan has been paying twice as much for spot LNG cargoes as the UK has. The implications looking forward are that to secure spot LNG cargoes in future, residents of the UK should be prepared to pay much more for their gas. Meanwhile, in its latest weekly podcast, Platts explains why there are essentially three seperate markets for LNG supplies, and media reports suggest that Russia will be soon be hiking its gas prices for exports to Europe. In other words, barring economic meltdown, natural gas prices are set for double digit increases, annually.

On 09 March 2008, the Sunday Times published an excellent article explaining why the UK gas supplies are about to get much pricier, see Price war threat to UK gas supplies. The sub-title of the article sums up the situation pretty well:

Global demand is forcing LNG suppliers to divert tankers from Britain to countries happy to pay more, which will have knock-on effects on homeowners’ power costs

The article goes on to describe the preparations the UK is making to import lots of LNG, then quotes Frank Harris, from the energy consultancy firm Wood Mackenzie, as saying that most of the hoped-for LNG may not arrive:

“We saw UK gas prices come under pressure a bit last year,” said Frank Harris, head of LNG at Wood Mackenzie, the energy consultancy. “There was a view that as the terminals in Wales come on stream and the capacity at Grain increases that prices would crash. That was based on the simple economics of supply and demand. But the way the global fundamentals are moving mean that nothing like the volumes of LNG that could potentially flow through the UK are actually going to arrive.

“Look at South Hook, where you have these new facilities that are going to be capable of taking 15.6m tonnes a year. I reckon, realistically, we’re not going to see more than about half of that come to the UK. The rest will be sent to meet higher spot prices all over the world.”

Expectations of an LNG-led gas-price slump have well and truly abated. Next winter, wholesale gas prices are expected to jump 25% to about 69p a therm, based on today’s forward prices.

The article also makes the important point that despite the UK is now a major net natural gas importer (the UK imported about a third of its gas requirements this past winter, Dec - Feb), the pipelines between the UK and the continent are still used primarily for exporting gas:

Meanwhile, Britain’s own gas supplies continue to fall. North Sea gas production slipped 12% last year, according to Oil & Gas UK, an industry trade body.

While there are several gas pipelines linking Britain to the Continent, these are still being used primarily to export British gas. Most of the gas in countries such as Germany and the Nether-lands is secured from the likes of Russia’s Gazprom on long-term contracts that are priced relative to oil. Soaring crude costs have pushed gas prices higher across continental Europe. So European utilities have been sourcing UK gas at lower prices via the pipelines.

But if remaining North Sea supplies are being exported, the nation’s dependence on imported gas can only increase.

It is ironic that the UK energy regulator Ofgem recently announced an inquiry into why UK domestic gas and electricity prices are so high, Ofgem investigates energy prices (The Guardian, Fri 22 Feb). To paraphrase the words of Mike Tholen, from the Sunday Times article, we ain't seen nothing yet:

As Ofgem, the gas regulator, continues its probe into the UK gas market, after recent record price rises, one thing seems clear.

“The unfortunate truth for British consumers is that we are about to enter a period of much more expensive energy,” said Mike Tholen, economics director of Oil & Gas UK. “That’s going to feed back to everyone’s gas and electricity bills.”

Coincidentally, last Thursday’s Platts' podcast, The evolution of LNG pricing, was on how LNG is priced in the three main markets i.e. SE Asia (Japan, S. Korea and Taiwan), Europe and USA. I have been following LNG for a few years now, and this is the clearest explanation of LNG pricing I have come across. 5 mins long.

Meanwhile, the Financial Times reports that European gas prices may rise because the Central Asian countries want to increase the price they sell gas to Russia, Central Asian gas prices set to rise in 2009. Gas supply and price forecasts start getting really complicated when Ukraine is involved, but the FT summarizes the situation as well as is possible:

Ukraine, which shifted away from Moscow to seek closer relations with the US and European Union after the Orange Revolution of 2004, has bargaining power by virtue of its control over a vast pipeline system that serves as the main channel for Russian gas exports to Europe. Officials in Ukraine, itself a major importer of Central Asian gas resold by Gazprom, have said they could raise transit prices for gas to compensate for higher import prices. The difference would be passed on to consumers in Europe.

The prospect of further gas prices are a major concern in Ukraine, which has struggled to adjust to the higher gas prices.

US officials have in recent years urged energy-rich Central Asian states to back pipelines that would bypass Russia, as part of an effort to undercut Russia’s grip over gas and oil supplies in the region. Last year, Mr Miller warned that US geopolitical jockeying in the region could lead to higher prices for Central Asian gas.

The idea that Europe could or should become less reliant on Russian gas is an illusion. One of the reasons that the European Union used to repeatedly promote for justifying the yet-to-be-built Nabucco Pipeline was 'security of supplies', in other words gas imports from sources other than Russia. But this particular reason went by the wayside when the Nabucco consortium announced late last year that it was looking to Russia to supply gas for the Nabucco pipeline. But that is the subject of another post. Europe, and in particular the UK, will be looking for all the gas imports they can get, whatever the source.

Natural gas costs look to increase.


Maybe shortages in the future?

I didn't know this until tonight, but the NYMEX now lists futures contracts for natural gas out until December 2020!! Thats over 12 years out- (Crude oil still goes out just to 2016). I wonder why they did this....

In April 2017 nat gas futures are lower than April 2008. So the information in this post is either incorrect, the US has some special gas cache, or futures are VERRRRY cheap.

(question re oil strip - what is special about summer 2010? oil futures gradually decline from $109 to $101 in jun 2010 and then gradually rise back up to $104 by dec 2016 - I wonder if this is expected production related (supply) or expected recession related (demand) or neither?

Perhaps with positive-feedback-global-warming there will not be as much need for NG for space heating purposes in 2020.

Alas, I wish it were so, but with global warming more natural gas will be used in generating electric power for air conditioners. And, on the other hand too much global warming may raise the temperature of the oceans, causing a release of methane gas from the ocean depths, which would accelerate global warming and if this continued.............things could get very toasty.

If Piebalgs gets his wish, then more biofuels will be produced in the world. Since he's against deforestation, that means more artificial nitrogen fertiliser use, which means more natural gas goes into that. So the production of ethanol drives the price of natural gas higher.

N-fertilizer is only about 2% of total natural gas consumption and it's not particularily difficult to produce from numerous other sources(E.g hydrogen from gasification + water gas shift of some corn stover, saw dust, bagasse, waste paper).

nate- one reason that the distant futures price looks cheap is that the price incorporates inflation expectations over the term of the contract. the contract is quoted today in current dollars, but it settles in 2020 (or whenever) in settlement date dollars. assume, e.g., 3% inflation per year 2008-2020 and recalculate the 2020 contract settlement price accordingly.

So there's not one but TWO unknowns in the price:

1. Gas availability (the one TOD tends to concentrate on)
2. Inflation expectations...

Can you explain why oil futures have risen given your explanation of contract settlement prices -surely with the dollar falling they should also fall as Inflation expectations pick up...


noutram- only one explanation makes sense: oil investors expect price to rise in real, not nominal terms. i.e. that the price will rise after inflation adjustment is taken into account. why? possibilities: 1. rising demand; 2. static or falling supply; and/or 3. the dollar loses its status as the world's reserve currency and future transactions will be priced in some other currency (such as euros). of the three, the latter is probably the most dramatic in its immediate consequences. imagine thousands of transactions initially priced in dollars that must be completed in another currency. it would be a currency run on the dollar unlike anything since the confederate dollar or the tsarist rouble.

The reason for this is counterparty risk - the risk to each party of a contract that the counterparty will not live up to its contractual obligations. Lots of people would buy these contracts if they thought that they would be honoured.

Do you seriously think that nothing dramatic is going to happen in the world of finance between now and 2020? The whole edifice is teetering at this very moment.

Personally, I would not advise option contracts as a way of protecting oneself anymore than I would encourage people to take out life assurance policies. We will have to learn again how to take one day at a time.

I hope people seeking safety will be interested in buying shares in railway projects in robust economies, new nuclear power, new wind power, companies manufacturing parts for plug-in hybrid cars, biogas projects, lending to energy saving home improvements, etc.

There are hundreds of reasonable business ideas that gives a low but fairly certain return on investment during a time of change driven by lowering greenhouse gas emissions and energy resource constraints.

Like Nate Hagens I am puzzled by the gas futures contracts he cited. I wonder how much money is acutally at risk. Could it be that it is small, merely the result of some folks buying these contracts much as the less affluent might buy a lottery ticket, or a trifecta ticket at the track?

We'll be seeing lots of these in the future, I reckon:

Back to black: return to coal power
The Government will today anger environmentalists by signalling its support for a controversial new generation of coal-fired power stations and warning that Britain needs to burn more fossil fuels to prevent power cuts.

Two new 'clean coal' plants are being approved, seven additional ones are in the pipeline.

UK politicians are playing it as a major victory for their climate leadership.

Time will tell, but many remain somewhat skeptical.

"Meanwhile, the Financial Times reports that European gas prices may rise because the Central Asian countries want to increase the price they sell gas to Russia"

So the Financial Times is spreading the same anti-Russian lie. Europe does not get *any* of the cheap Central Asian gas. It all goes *without markup* to Ukraine, Armenia, Moldova and Georgia. Ukraine (43 bcm/year) and Iran (8 bcm/year) are the two targets of exports from Turkmenistan. Uzbekistan and Kazakhstan export only small volumes via Russia (around 15 bcm/year total).

Also, why do professional Russia haters in the west think that Central Asian gas sold to Europe will be cheap? Where is their evidence that current export volumes are constrained by Russian gas pipelines? The blather is just insane: South Stream is "competition" for Nabucco. South Stream is designed to ship Russian gas you morons.


I agree that the UK media have seriously misrepresented Ukraine in the Ukraine-Russia gas disputes. But I think that there is room for a more serious dispute in future. Yulia Tymoshenko, the Ukrainian Prime Minister, wanted two concessions from Russia, re natural gas imports. The riddance of the middle men, which apparantly been achieved, was one of them (Russia, Ukraine agree to remove gas middlemen). The other has been lower gas prices. This looks very doubtful. Presumably if Turkmenistan raises its gas export prices to say $300 per 1000 cubic metres, Ukraine would have to pay more than this, which it is unlikely to do. Also, Turkemistan is planning to sell its gas to China (30 bcm/year) relatively cheap.

Platts has reported at least three times over the last year, most recently last week, that Norway has reduced, or completely cut off, with no warning gas supplies to the UK thro the Langeled pipeline. Each time it has caused the wholesale price of UK gas to increase, albeit temporarily, but I have never seen this mentioned in the UK media. Why is the UK media reporting so much on the apparent unreliability of gas supplies thro Ukraine (which the UK does not actually depend on), but ignore the unscheduled reduction in supplies from Norway/Langeled?

Doug (or anyone else),

Do you have links to the reports from Platts on Norwegian nat gas deliveries which is being referred to in this post?



Here is the most recent example: UK NBP gas prices surge on Norwegian supply drop, oil jump
. The next item is a Platts article that does not exist any more, from 13 July 2007. I have copied this from the ODAC newsletter where I first reported it:

UK NBP gas prices climb further as low Norwegian flows continue (Platts, Fri 13 Jul)

Comment: You have to wonder what sort of agreement / contract the UK has with the Norwegians where they can export to the UK any amount of gas they like, including, it seems, none.

Article: UK gas prices at the National Balancing Point climbed further Friday as flows from Norway stayed at low levels and the market remained nervous over price volatility, traders said.

... Part of the tightness was due to the continued unplanned outage at BP's CATS pipeline, which has been offline for almost two weeks now. A BP spokesman said Thursday was still no news on the situation, and that the company's earlier assessment that the outage would likely take weeks still stood.

Traders Friday said it was unclear whether the outage would indeed only take weeks or in fact several months, with the former now seen as a bearish outcome in comparison.

... Flows from Norway were negligible, as they had been since Wednesday. The Langeled pipeline was flowing at about 5 million cu m/d, having dropped to zero overnight and jumping a notch during the morning. The pipeline had flowed at about twice that level earlier in the week, and as much as 10 times the level in the previous week.

Norwegian producers said Thursday that low flows were not due to an field or infrastructure outages, planned or unplanned, and instead blamed relatively low UK demand.

But traders expressed incredulity at these statements, with one saying Friday: "People are edgy now because they don't know how Norway will flow. I don't believe that it's because of low UK demand, that doesn't make any sense." He added that the Norwegian flow rates over the past few months had made the market "untradeable."...



thanks a lot.

A tough part of understanding the future UK nat gas supply picture goes into understanding the existing, future and shape of deliveries in the commercial arrangements between Buyers and Sellers.

If you got potential supplies (which might be reasonably estimated from data from open sources like BERR and NPD), available transport or receiving capacities what remains as the hard part is the commercial arrangements between Buyers and Sellers.


Platts has reported at least three times over the last year, most recently last week, that Norway has reduced, or completely cut off, with no warning gas supplies to the UK thro the Langeled pipeline. Each time it has caused the wholesale price of UK gas to increase, albeit temporarily, but I have never seen this mentioned in the UK media.

A search finds ONE MSM mention.

Time to cut the excuses

Centrica has sought to become less dependent on Russian gas by signing contracts with Norway to provide supplies through the Langeled South Pipeline, which came on stream in October 2006. It had been hoped this would help to provide more stable supplies and prices.

But our European partners have not been playing fair. During periods of higher energy prices, supplies have been diverted to the German market, forcing Britain to pay more for wholesale gas. This price is then passed on to the consumer.


thanx a lot for your link.


Several comments:

- thanks to UK insistence, the EU has adopted ultra tough 'pro-competitive' measures to prevent final destination clauses (ie clauses in contracts between foreign suppliers and European buyers, say Sonatrach and GDF that the buyer must split profits from onselling the gas elsewhere). This pisses off the gas sellers, who have told in no uncertain terms that they would retaliate if their clients onsold gas withotu profit sharing. Suez/Distrigas tired, and Sonatrach did retaliate by not renewing on of their LT contracts. Thus GDF and Distrigas cannot divert LNG cargoes to the UK when prices would warrant it (because it would piss off Sonatrach), but they can diver tthem to the US (no EU rules agianst that as it's not the internal market). So no 'European' LNG can go to the UK...

- in any case, the main reason continental Europeans are not selling to the UK when prices are high is because they have contractual commitments to deliver at home. Which means that UK prices are not high enough to be worth defaulting on contractual obligatiosn elsewhere. Being a lot more volatile, and less based on long term contracts, UK gas prices can be attractive to continentals to replenish their supplies when prices are low (of course, it helps that you have a lot more storage capacity on the continent...)

- Ukraine has ZERO impact on the price of Russian gas, which is indexed to the price of oil (with a lag), and is sold, under Gazprom's responsibility, at the Western border of Ukraine (or even, usually, at the Czech border, ie the old iron curtain limit). Transit via Ukraine is Gazprom's problem and has no impact on European prices. original supply (ie Russian or Central Asian) is just as irrelevant to Europeans who have long term contracts.

ie Russia, Germany, France know that gas is an infrasturcutre busienss that requires stability and long term commitments, whereas the UK is under the sway of bling market ideology that pushes for spot prices, a disastrous way to run that particular industry, unless you have loads of oversupply. In other words, the North Sea gas bubble was a dangerous (and temporary) illusion.


As Euan Mearns has detailed in a couple of gas posts on TOD, the UK gas supply situation is dire in a way that it is not for the rest of Europe. The three big trends for the UK are: its gas consumption is forecast to increase substantially to 2020, I doubt this will be possible; its own production is falling, to not far off zero by 2020; UK govt representatives at the Dept of Business Enterprise (economists) expect the shortfall of about 100 bcm by 2020 to be made up by additional imports from continental Europe, possible but not very likely, and massive amounts of LNG, very unlikely. The UK is headed for a situation where it will find it difficult to import sufficient gas to meet its needs at any price. And as usual, we will blame someone else. Our European neighbours seem to be the current favourite.