The UK is poised to face winter 2019-20 with a loose supply-demand balance, which should keep demand for imports from continental Europe low. UKCS and Norwegian supply should be strong owing to incremental supply from new fields, while higher global liquefaction capacity will push UK LNG receipts 2.7 bcm higher y/y. These supply gains will comfortably offset a moderate rise in aggregate demand if there is seasonally average weather. With our forecast showing the UK balancing comfortably without continental imports, except in January and possibly February, we expect the NBP-TTF Q4-19 spread to narrow. The NBP Q1-20 will retain a high premium to continental equivalents until there is more clarity on the impact of possible issues at EDF’s French nuclear fleet.
Fundamentals currently point to the UK being very well supplied this winter. Aggregate Norwegian pipeline supply into Europe will be roughly 2 bcm higher y/y owing to incremental supply from Aasta Hansteen and Johan Sverdrup in Q4 19, with more new fields expected to start by year-end. New supply from the big Culzean field will stem the sharp 1.5 bcm y/y decline in UKCS supply seen last winter to a much softer 0.2 bcm drop y/y in winter 2019-20. LNG regasification will receive a 2.7 bcm y/y boost from more supply globally. We expect total UK supply will be 1.4 bcm higher y/y.
Those supply gains will comfortably offset our forecast 0.2 bcm y/y rise in aggregate demand, as well as a 1 bcm y/y expected increase in Moffat exports to Ireland owing to declining output from the Corrib field. A return to seasonally normal weather will lead to a 0.6 bcm rise in LDZ demand. The uptick in heating demand will be partially offset by a 0.3 bcm y/y drop in power sector gas demand owing to a forecast increase in power imports from Belgium via the 1.0 GW Nemo Link interconnector over October to January 2020. The main factor that could temper that conclusion is if French nuclear plants have greater outages following the early September announcement of another set of irregularities in components used at some French nuclear plants (see E-mail alert: EDF announcement on nuclear plant anomalies raises spectre of high winter outages, supporting markets, 11 September, 2019). There is little information on how big the impact will be, so the French nuclear situation offers potential upside to our demand-side forecasts. Heavy outages would slow French and Belgian power exports to the UK, limiting UK gas-into-power losses or moving the UK to make net power exports.
UK stocks have already reached maximum capacity and supply is robust, so balances indicate that the UK will continue exporting to the continent well into November. The lack of interest in importing to the UK next quarter is reflected in there being no further uptake from last month in Q4 19 IUK import capacity, with just 113 GWh/d booked.
The NBP Oct-19 price has consistently closed at a discount to continental equivalents this month and we expect the NBP Nov-19 premium to remain much smaller than the 4.29 p/therm needed to make UK imports from the continent economic. Although we currently see the UK balancing in December without continental imports, the NBP-TTF Dec-19 basis is likely to remain close to the point of incentivising flows to the UK because of the risk of cold weather and French nuclear outages.
The NBP-TTF Q1-20 basis is currently trading at a much wider 4.24 p/therm. Although we expect the UK to only need continental imports in January, the Q1-20 basis will remain close to the 4.29 p/therm level needed to incentivise IUK flows into the UK at least until there is more clarity on the risk factors that could affect peak winter. The Q1-20 basis is being supported by some market uncertainty about whether the welding problems at some of EDF’s French nuclear fleet could lead to nuclear shutdowns this winter. A significant drop in French nuclear generation could even lead the UK to make net power exports as it did during the French nuclear problems of 2016, boosting UK power sector gas demand.
If the French nuclear regulator ASN clears EDF plants for operation this winter, we would expect the Q1-20 basis to narrow, but remain close to the cost of capacity as it retains some premium to account for the risk of cold weather in the UK.
|Fig 1: Aggregate UK demand, y/y, bcm||Fig 2: Norway, UKCS and LNG imports, y/y, bcm|
|Source: DBEIS, National Grid, Energy Aspects||Source: DBEIS, Energy Aspects|