Why UK Natural Gas Prices Will Move North of 100p/Therm This Winter

WHERE IS UK NATURAL GAS PRICES HEADED AND WHY
In 2007 the UK natural gas market became flooded with natural gas thus depressing prices. This flood of natural gas resulted from several sellers, like Norway, Holland (BBL) and LNG traders, had perceived an increased tightness in the UK market (due to declines in UK indigenous supplies and expected growth in consumption) for the heating season 2006/2007 and positioned them to reap the profits from this tightness. What happened, as these players seems to have been unaware of each other (which should be the case in an ideal liberalized marketplace), was that supply increased more than demand grew and in addition the weather became milder than normal, a combination and a recipe for depressing natural gas prices.

UK will increasingly have to cover their natural gas consumption through imports, which suggests that an era of cheap natural gas, which has also acted as a competitive edge, increasingly will have to become harmonized with natural gas prices on Continental Europe which UK increasingly will have to bid against to secure supplies. Indirectly this may now be observed as less natural gas is exported to Continental Europe in the summer months through the Interconnector.

The above points suggest that natural gas prices on average in 2008 in UK will have to put on 150 - 200% resulting in average prices through 2008 of 75 - 90 p/therm at the beach. Recently natural gas is now trading at 60 - 65 p/therm.

It is difficult to predict the weather for the upcoming heating season and this is often the one factor having the greatest effect on short term natural gas prices. Given the seasonal nature of natural gas consumption it should come as no surprise if UK natural gas prices at the beach move north of 100 p/therm before the upcoming Christmas.

For an average household consuming 600 - 700 therm/annually (18 - 21 000 kWh/a) this would translate into an increase of the households natural gas bill of £3 - 400 this year relative to 2007.
SUMMARY
In this post it has been shown why UK households and industries should expect to increasingly be hammered by growing energy prices.

In less than ten years UK went from being a considerable energy exporter to becoming in size a similar energy importer. In 2007 UK imported more than 20% of its energy needs. This import is now forecast to grow at an annual rate of 13 - 15 MTOE (250 - 300 kboe/d; kilo barrels of oil equivalents a day) or 6 - 8% in the years ahead. What makes UK such an interesting subject from an energy standpoint is that the UK has had to transit from a major energy exporter to an energy importer with a speed never seen before for any other comparable economy. There are economies that are and have been more reliant on energy imports than UK (like Germany, France, Italy, Japan to name a few) and these have from these realities developed (seemingly) long term successful strategies involving central government’s involvement to cope with this energy reality.

This post has further shown that the UK energy mix is dominated by natural gas and thus made it vulnerable for potential future supply crunches. To revise the energy mix is a time consuming process and if the world has passed, is on or close to its apex for liquid energy supplies, these will not constitute a sustainable alternative to natural gas for the UK energy mix.

I have been informed that after a coal mine has been closed it may take ten years to recommission it for operations. Coal is mainly used for electricity generation and could of course be used for both heating and cooking purposes, which suggests changing housing appliances and stoves to accommodate this. To base the future UK energy mix on more coal results in future growth in coal imports.

Nuclear energy comes with delicate political maneuvering as the public needs to familiar itself with this alternative. Further needs nuclear plants a lead/construction time of approximately 10 years from approval have been granted.

I have not presented anything about renewables.

(I consequently refuse to use the expression “renewable energy”, as people who are familiar with the laws of thermodynamics know that energy by nature is NOT renewable. Energy may be transformed from one form into another.)

So called renewables will play a role in the future energy mix, but their impact on energy supplies must realistically be viewed against the potent and versatile nature of oil and natural gas.

Like USA talks about its oil addiction it looks like UK needs to talk about its natural gas addiction.

Given the time frame and not least options available to redesign the UK energy mix it looks like the UK “energy supply war” may have been lost before most people became aware that there was one on.

Nature enforces its own limits and a realistic look on the future energy options available for UK, energy conservation and power down now seems the most likely. This is of course a harsh message for any politician to convey to the public as it requires talent and leadership which there generally seems to be a universal deficit of......even in good times.
BY Chris Vernon

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