EU Gas Storage Capacity Needs to be Cut: WoodMac

The European Union as a whole has too much storage capacity for the operators to make money, but cutting it back to create the kind of spreads that they need could cause governments to worry about their country's security of supply, argues a new report by Wood Mackenzie.

Storage capacity has grown by 18bn m³, even allowing for 8.2bn m³ lost to closures since 2011 – including the 3.4bn m Rough facility – while demand has dropped off in Europe by some 15%, leaving the region with 90 days' cover. This compares with about 64 in North America, according to the report, European gas storage operators under pressure published August 16.

This oversupply is because final investment decisions were taken at a time of market growth, not contraction, and the report's author Graham Freedman told NGW that the decisions would be underpinned by long-term gas contracts, which have also proved to be for greater volumes than the market needs.

Energy efficiency, the availability of liquefied natural gas and declining industrial demand have all eroded the value of the peak day therm.

The report looks at the typical winter-summer spreads and the tariffs charged, and finds that removing a quarter of the capacity would bring the two into closer alignment. At the moment, the cost of using storage is to a shipper is far greater than what he might expect to gain from selling peak gas, based on the summer-winter price difference.

Although the past winter yielded a surprising benefit to shippers who had booked capacity the previous summer, none of that benefited unbundled operators who sold their capacity the previous summer, when nobody know how long and cold the winter would be, and the winter price was not much higher than the summer price. The real value of storage was only derived in the very short term. But overall, storage contributed about a third of 2016-17 winter demand, and up to 42% on the peak day, January 18.

Across the EU, despite the intention to create a single market, different countries have different approaches, with Italy making up any storage revenue shortfall with system charges elsewhere, and the UK – whose position could become a lot more vulnerable once it is outside the EU – more or less washing its hands of the matter, in favour of market signals. But LNG takes time to arrive, as the report points out, and can be expensive. Other countries again have strategic reserves, or impose obligations on suppliers to book capacity to cover social and housing needs.

The report says: "With storage operators being forced to sell capacity for €1-2/MWh, in line with market value determined by summer-winter spreads, many have reported significant losses in their annual accounts. It is likely that only the operators of large storage facilities have the necessary economies of scale to survive in this depressed value environment, although fast acting salt cavities can obtain some premium value in the market by offering more flexible/reactive daily and intraday services." 

It says that "even if 25% of European gas storage capacity is withdrawn from service, the summer-winter spreads will not return to the €3-4/MWh range before 2021/2022. We expect LNG reaching the European gas market will double to average over 100bn m³/yr through the forecast period 2019-2025. Combined with Gazprom’s market share strategy, this will further depress overall price levels and reduce summer-winter spreads. Hence, with little sign of price spread recovery until 2021, we would expect further storage closures/mothballing to take place, particularly if national government support from EU countries is not forthcoming."

But recognising that closure rather than mothballing could lead to price spikes in extreme winters, and supply failures, it says that "increasing price spreads should not necessarily be seen as a solution – instead there is a need to recognise the systemic value of storage in a coherent way across the single market of the European Union."

The modelling used did not take into account the possibility of the Ukraine gas storage capacity, Freeman said: there could be another 14bn m³ coming to market in the coming years. "That would be another major weight on the system," Freedman said. The state-owned operator Ukrtransgaz has begun to interest western European companies in its services, as it needs to fill the gap left by Gazprom.

William Powell