Summer 2019 in the UK remains all about ample LNG supply and what that means for a country with high storage inventories (up by 0.4 bcm y/y) and little storage capacity. With the UK also having little in the way of potential demand upside from the power sector this summer—if anything, a y/y reduction in power sector demand is more likely given the start-up of power flows across the Nemo Link—most of the flexibility will have to come from turning away pipeline gas. For the coming winter, full gas storage and the start-up of new UKCS and Norwegian production in late summer and Q4 19 mean that the UK will have ample access to pipeline supply. Combined with incremental LNG receipts, our balances indicate that in a seasonally normal winter, the UK will balance in Q4 19 with little in the way of continental imports, indicating a narrow to flat NBP-TTF Q4 19 basis.
April saw UK consumption drop by 0.19 bcm (3%) y/y, caused by record-high temperatures and brisk wind generation. Seasonally normal weather will give May-June a modest demand boost y/y, but we then expect UK demand to be lower y/y through the rest of the year, guided by power sector gas demand losses.
With the IUK pipe back online following an early summer annual maintenance closure, the UK is returning to the dynamics we have seen in previous months—weaker power sector gas demand and ample LNG supply supporting strong exports to continental Europe. Our most significant change to the UK summer balances is a downward revision to pipeline flows, which are now expected to be around 1.7 bcm lower y/y (13%) over the six-month period, compared to a 1.1 bcm y/y drop forecast last month. That revision was driven by indications from April that Norwegian production will be more sensitive to prices, with a willingness to rein in flexible production even further in the face of market weakness.
While there are few new surprises in store for the UK this summer, potential dynamics in Q4 19 are making the Q4 19 NBP-TTF basis a spread to watch. We have revised our forecast for the UK’s winter LNG takes, to 1.9 bcm (22%) of growth y/y, up from the 1 bcm y/y rise we expected last month, based on our upward revision to Europe’s aggregate winter LNG takes. Most of the y/y rise in sendout (+1.4 bcm) will be in Q4 19. Additionally, North Sea and Norwegian production should receive an early winter boost from new projects set to come online (Culzean and Johan Svendrup), although the supply impact in the UKCS will be modest given declines elsewhere.
Despite expectations for strong Norwegian and UKCS production in Q4 19, the UK supply-demand balance in the first half of winter looks loose enough for pipeline imports to be lower y/y, as weak domestic demand and NBP prices at a discount to the continent in early winter should encourage incremental Norwegian supply to be delivered to the continent. A return to seasonally normal weather would see UK res-com demand down or flat y/y nearly every month through January, only rising in the last two months of winter owing to unusually low HDDs in February and March 2019. Paired with y/y power sector gas demand losses, which we expect throughout the winter owing to the ramp up of Belgian power imports and strong incremental LNG sendout, the UK will be able to balance in Q4 19 with nearly 1 bcm less y/y in pipeline supply—and still make small net exports to the continent.
We already saw historically low IUK exports in October-November 2018, driven by the market’s reaction to changes in the IUK capacity cost (see Monthly: NBP, 11 February 2019), and it is now possible that the UK will not need continental imports until January. At that point, the supply-balance tightens, assuming that a return to seasonally normal weather boosts res-com demand. The NBP-TTF Q4 19 basis is currently trading at 2.6 p/therm, but our current balances suggest that the basis should be broadly flat or the NBP eventually move to a slight discount.
That said, there are many factors that could lead the UK to make small continental imports during late Q4 19, and that could subsequently leave the UK to price at a small premium. A delay to the late summer scheduled start-up of the UK’s Culzean field would dent UK production, as would any delays to the Q4 19 start-up of the 8.5 bcm Johan Svendrup field to Norwegian output. Given the slow start to life of Aasta Hansteen, such delays cannot be overly discounted. Also, there is plenty of weather risk and a very cold November-December would be enough to push the UK back to needing continental imports in Q4 19.
|Fig 1: Net UK power imports vs gas-fired generation, GW, TWh (RHS)||Fig 2: Aggregate UK demand, y/y change, bcm|
|Source: DBEIS, ELEXON, Energy Aspects||Source: DBEIS, National Grid, Energy Aspects|