UK gas prices surged to an all-time high of 350p per therm on Thursday, up 520 percent year-to-date amid soaring demand and continued supply concerns across the continent this winter.
While prices dropped to 320p per therm on the UK Natural Gas Futures on Friday morning, the benchmark remains ahead of Asia’s liquefied natural gas.
Nathan Piper, head of oil and gas research at Investec anticipated that gas prices would remain high as economies recover from the pandemic.
He said: “We believe there is a high likelihood of both prolonged and even higher prices through winter with after-effects that could stretch beyond the next two years.”
The soaring prices reflect current market conditions across Europe, and follow continued geopolitical uncertainty and rising tensions over the 759-mile Nord Stream 2 pipeline which would double Russian gas exports into Germany.
The Kremlin-backed controversial gas project – which would supply 55 billion cubic metres of gas per year – has been completed but awaits approval from German regulators, who are yet to certify the pipeline due to concerns over its governance.
Earlier this week, the regulator announced that no decision on certifying the pipeline is expected in the first half of next year.
“There will be no decisions in the first half of 2022,” said Bundesnetzagentur (BNetzA) President Jochen Homann.
Russia has been accused of putting pressure on Europe by reducing supplies into the continent, in order to get Nord Stream 2 approved, which could reduce Ukraine’s influence in the region.
President Vladimir Putin has dismissed these claims as ‘politically motivated blather’.
Gazprom’s export growth decreased to less than five percent in recent months – although the energy giant insists it has honored all agreed contracts.
However, Germany has warned Russia the pipeline will be rejected if Russia invades Ukraine, with 120,000 troops currently positioned near its eastern border.
Investec believed these tensions would inevitably influence prices over winter – while the lack of Nord Stream 2 would continue to limit overall energy supplies.
Piper said: “We expect political tensions around the Nord Stream 2 start-up will increase as US and EU consider economic sanctions on Russia with repercussions on EU gas supply, increasing UK and EU gas price volatility.”
The analyst also suggested the continued rising costs would make it more difficult for the UK and EU to refill supplies with both countries suffering from decisions to reduce storage capacity as part of the transition to renewable sources.
The UK reportedly can only store gas seven days in advance since scrapping its largest rough storage site in Yokrshire.
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He said: “Continued higher gas prices will make refilling UK/EU gas storage facilities next summer challenging, and EU gas storage is already at multi-year lows. High gas prices this summer meant storage was low going into winter, while LNG continued to be exported to Asia. Next summer, the situation could be more acute.”
Soaring wholesale gas prices have already contributed to 25 UK energy firms ceasing trading over the past three months, with over four million customers directly affected.
By City AM
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It is a chess game between the EU and Russia which only Russia can win. The reason is that Russia holds all the cards. Neither Qatari, or American or Australian LNG nor Norway’s gas supplies can satisfy the EU gas needs. Only Russia can. Moreover, Russia could afford a delay in the certification of Nord Stream 2 since it is earning very handsome revenues from rising gas prices while Germany and the EU countries are paying through the nose.
However, a high ranking Russian official, Pavel Zavalny, the chairman of the Energy Committee at Russia’s lower house of parliament expects shipping natural gas to Germany via Nord Stream 2 gas pipeline to start in January. He argues that the EU wouldn’t want to drag its feet with the certification process with its gas storage levels so low.
So a quid pro quo of certification of Nord Stream 2 in return for major Russian gas supplies for Germany and the EU is emerging. If not, the Europeans will shiver this winter.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
1) The UK import more than half our gas - much of it from Norway, and a considerable amount from the Netherlands and Belgium. Nine percent of the UK’s gas is imported as liquid natural gas, mainly from Qatar.
2)Russia supplies less than 5% of the UK's gas.
3) The UK has scant storage facilities - it's been increasingly operating a "just-in-time model".
4) Prices have increased due to a combination of factors which began with a cold winter across Europe last year, high levels of demand coupled with lower wind and solar renewable energy outage and planned maintenance work has put pressures on supplies and seen wholesale gas prices soar.
Vagaries of the market? Problem of it's own making?