The decline rate and colder weather have also contributed to a noticeable growth in U.K. LNG (Liquefied Natural Gas) imports and a decline in natural gas supplies sent from the U.K. to Continental Europe. This pattern of increasing LNG imports and declining exports to Continental Europe is expected to continue.

Apart from a colder than normal winter, a considerable contributor to the growing use of storage withdrawals to balance demand this winter has been an accelerated decline rate in indigenous U.K. marketable natural gas supplies--recently as high as 17% on an annual basis.

Compared to previous years, this heating season in the U.K. has called for record withdrawals of natural gas from U.K. storage to balance demand. This drawdown will result in increased demand for natural gas for refilling of the U.K. storage facilities this spring/summer.

DISCLAIMER: The author holds no positions in the oil/energy market that may be affected by the content of this post.

U.K. STORAGE DEVELOPMENTS

The availability of natural gas from storage facilities adds needed flexibility to the supply system, since pipeline and LNG sources do not match up well with daily demand.

The U.K. storage system has 3 classes of storage facilities: LRS (Long Range Storage), MRS (Medium Range Storage) and SRS (Short Range Storage). Simultaneous operation of these facilities can add 120 + Mcm/d to the supply.



Figure 01: The diagram shows development in total working natural gas in U.K. storage for the contractual years 2005 - 2009.

For the contractual year 2009 (which started October 1st 2009 and ends October 1st 2010) increased use of storage withdrawals has been used to balance demand. At present, it looks like the minimum amount in storage will be 400 Mcm (or about 10 % of total working natural gas in storage, or about 1 day of present total U.K. consumption). This level may be tested, if there is another cold snap.

April of 2008 (Contractual Year 2007) saw a cold snap that resulted in storage withdrawals of around 200 Mcm. The most recent weather forecasts indicate colder weather than seasonal averages for early April, so this could happen again. This could call for further storage withdrawals and thus delay the start of meaningful storage injections. Right now, as documented in the diagram above, U.K. working natural gas in storage is more than 800 Mcm lower than the same time last year.

The diagram above illustrates that the trend over the recent years have been increased use of storage withdrawals to balance U.K. demand. It should come as no surprise if U.K. total natural gas storage capacity becomes subject to more demanding tests in the near future.

Figure 02 also illustrates that between December 1st 2009 and now, net storage withdrawals have been around 1 300 Mcm higher than in the two previous years.



The need for storage withdrawals seems very much to be weather driven and, as spring approaches, the need for natural gas fired heating can be expected to decline.

STORAGE REFILLING

Most of the injection/refilling seems to happen prior to August each season. The reason for lowered injections during August and September (apart from the fact that the storage tanks are by then mostly refilled) may be that the refilling program is coordinated with the annual maintenance programs for the offshore production installations.

Earlier in the post, I mentioned that this spring/summer, U.K. storage refilling will require around 800 Mcm more natural gas relative to the two previous years and refilling will start later. This calls for higher daily injection volumes and/or an extended refilling period.

Figure 01 (shown previously) illustrates that storage facilities have reached around 90 % filling by end of August in each of the years shown.

During April and May 2009, injection averaged around 25 Mcm/d and declined to around 20 Mcm/d during June and July 2009.

The diagram illustrates that during August and September, where the Interconnector (Bacton - Zeebrugge) normally is down for annual maintenance, natural gas injections for storage are low, and occasionally there are storage withdrawals.

Declining indigenous supplies, the higher need for refilling, and scheduled maintenance of the production installations suggest that LNG imports may need to be 30 - 50 Mcm/d higher this coming August/September that they were in the same months of 2009.



On an average winter day, imports are now greater than U.K. domestic supplies.

At the present time, it is expected that natural gas imports from the Netherlands and Norway will remain at approximately level for the next few years. How then should the decline in indigenous production be replaced? Continental European countries are also experiencing a general decline in natural gas production, so the only sources of meaningful additional supply seem (based on current knowledge) to be LNG and Russian gas coming by pipeline through the Interconnector.

”THE ELEPHANT IN THE ROOM” IS DECLINE RATES

A major contributor to the steep increase in U.K. natural gas imports is the accelerating decline rates with respect to U.K. marketable natural gas supplies. Marketable natural gas supplies means natural gas that arrives at end users--that is, gross production adjusted for producers own use, operators own use and metering differences, etc.

From January 2009 to January 2010, U.K. marketable natural gas supplies declined from 199 Mcm/d to 158 Mcm/d. The steep annual decline rate is the proverbial “elephant in the room”.

Based upon data for U.K., proven natural gas reserves as of end 2008 the R/P (Reserves divided by Production) ratio has been estimated at 4,3 as of end 2008 and as of end 2009 preliminary estimates for R/P results in a similar ratio. This suggests that annual decline rates of 15 - 20 % for U.K marketable production should be expected for the near future.

THE INTERCONNECTOR (Bacton - Zeebrugge)

Continental Europe and U.K. have mutually benefitted from the bidirectional Interconnector between Bacton and Zeebrugge. For the period 1998 to 2004, this allowed U.K. to be a net exporter of natural gas to Continental Europe. Recently the Interconnector has allowed for U.K. exports during the summer and imports during the winter as illustrated in the diagram below.

One of the effects from the aggressive decline rates are that the flows between Continental Europe and U.K. are about to change. As the diagram above illustrates, natural gas has mainly flowed from Continental Europe to U.K. this winter. With continued decline in U.K. indigenous natural gas production, it may now be expected that the Interconnector in the near term will supply U.K. with natural gas most likely ultimately from Russia.



So far this Contractual Year (as between October 1st 2009 and March 24th 2010), approximately 3 Gcm (Bcm) less natural gas has flowed from U.K. to Continental Europe.

Inasmuch as Continental Europe’s natural gas production has been in general decline in recent years, one might expect this decline to give rise to a similar additional amount of natural gas imports, mainly from Norway and/or Russia into Continental Europe.