The Value of an Energy Asset Is Deteriorating Underneath Europe

(Bloomberg) - For decades, one of the most profitable parts of Europe’s energy industry was giant, underground reservoirs used to store billions of dollars worth of natural gas. Traders stockpile fuel there during the summer to sell in winter, when the continent’s consumers need to heat their homes.

The trade isn’t working anymore.

As the world finds itself with an increasing oversupply of natural gas, the gap between summer and winter prices has narrowed, making the storage business much less lucrative.

That’s caused RWE AG and SSE Plc to write down the value of gas storage sites by about $200 million each in the first quarter. Other operators from Statoil ASA to Wingas GmbH say they may exit the industry if the slump continues. That could be a problem because storage isn’t just about profits from trading - it also provides security against sudden spikes in demand or unexpected supply constraints.

“It’s a worrying trend,” Marco Alvera, chief executive officer of Snam SpA, Europe’s largest gas infrastructure company, said in an interview in London. “The benefits for a country to having storage are very significant.”

In almost all of Europe, the underlying economics of storage hasn’t changed in at least 60 years. The sites - which include salt caverns, depleted gas fields and aquifers - have also served as a backup in times of shortfall.

Europe has experienced shortages twice in the last decade during freezing temperatures because of disputes between Ukraine and Russia, the European Union’s largest outside supplier. There also has been a permanent reduction in output from Europe’s largest gas field Groningen, in the Netherlands, after production was linked to tremors.

“The situation is such that if people don’t get paid for providing the security of supply, they may not continue to be willing to do that forever,” Klaus Schaefer, CEO of Uniper SE, which operates storage sites in Germany, Austria and the U.K., said in an interview in Amsterdam.

More than 3 percent of Europe’s gas storage has been mothballed since 2010 - the equivalent of 3 billion cubic meters (106 billion cubic feet) - as the spread tightened, including two facilities in 2016, according to Cedigaz, an industry research group, and storage operator Storengy SA.

Storage Losses

During the first quarter, three of the 10 largest gas storage operators in Europe, Snam’s Stogit unit, RWE and Abu Dhabi National Energy Co., recorded losses either specifically attributable to storage or to the unit that includes those operations. Executives of operators from Wingas to Storengy voiced concern during the past three months about the difficulties of running storage operations.

RWE recorded a $226 million (204 million euro) storage-related impairment in the first quarter, compounding a 59 percent first-quarter slump in profit for Germany’s biggest power producer. The loss was “due to changed price expectations,” Vera Buecker, a spokeswoman for the Essen, Germany-based utility said by phone.

SSE, which operates two sites in the U.K., said May 18 it had $200 million (151 million pounds) of exceptional charges attributable to storage in the three months through March, dragging down an adjusted pretax profit of 1.51 billion pounds. Last year, it mothballed 33 percent of its Hornsea gas facility.

Continuing Trend

The trend of shutting storage will continue because current storage prices no longer cover operating costs, Bertrand Fauchet, deputy CEO of Storengy, said in May at the Flame Gas Conference in Amsterdam.

Gas prices in Europe could fall about a third to as low as $2.90 a million British thermal units (22 pence a therm) in 2016, partly as a result of record flows from Norway and Russia, according to Bloomberg New Energy Finance. Expanding shipments of liquefied natural gas are also adding to an arsenal of supply network operators already have to manage winter shortfalls.


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Copyright 2016 Bloomberg News.

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