UK Reliance on Langeled Pipeline Gives False Hope

OSLO, Aug 04, 2006, Dow Jones Newswires

The U.K. is relying on a new 20-billion-cubic-meter-a-year gas pipeline from Norway to help avert another supply squeeze this winter, but industry officials say that supply can't be guaranteed.

The Langeled pipeline, one of three key pipeline projects due to start operating this winter, will increase gas import capacity into the U.K. from Norway. U.K. Energy minister Malcolm Wicks has said the new pipeline will play an important role in warding off potential supply disruptions.

"Next winter is likely to remain tight," Wicks said at a conference earlier this year. "However there are additional infrastructure projects which are expected to commission during the course of next winter which should help to ease the situation."

Norwegian officials, however, said Norway won't be able to export more gas from the country than it did last year.

"There isn't any more gas available," said Kjell Varlo Larson, spokesman for Gassco, Norway's gas infrastructure operator. "It has to come from the existing sources, and last winter all the gas from the existing sources was used...We can't produce any more this year," he said.

Langeled is the new pipeline built to ship gas from Norsk Hydro ASA's (NHY) 400-billion-cubic-meter Ormen Lange field. While Langeled is supposed to be operational from this October, Ormen Lange isn't due online until October 2007. This means that extra gas from other Norwegian fields can theoretically flow through the southern leg of the pipeline this winter through the Sliepner hub. The new Norwegian pipe will allow the U.K. to import 68 million cubic meters of gas a day, roughly 16% of the U.K.'s daily peak gas demand.

The U.K. energy regulator, the Office for Gas and Electricity Markets (Ofgem), has warned that the U.K. might struggle to meet gas demand this winter, even with the three new projects. Besides Langeled, capacity at the existing U.K.-Belgium interconnector is being expanded and a new U.K.-Netherlands interconnector, called the BBL pipeline, is scheduled to come onstream in December.

Even U.K. gas grid operator National Grid PLC (NGG) has warned that it is unsure whether Norwegian gas producers could boost production to fill the pipeline. National Grid spokesman Chris Mostyn said that his company has launched a consultation with the gas industry to canvas views on how much gas might flow through the Langeled and other pipelines this winter. These views will be published in its final Winter Outlook report.

Ofgem spokesman Mark Wiltsher said, "although pipeline projects are on schedule...we are some months away from being finished and some degree of uncertainty remains over whether the pipeline capacity will be used."

Simon Blakey, head of European energy at the Cambridge Energy Research Association, agreed: "it is not clear how much gas will be available physically and commercially to fill the new capacity." He also said that November to January will be a "critical period with the most uncertainties," as less than 60% of the targeted 119 million cubic meters a day of new pipeline capacity is expected to be completed before December.

The U.K.'s largest retail gas supplier, Centrica PLC (CNA.LN), also expressed some concern over whether the Langeled pipeline would be fully used.

"In theory, if it's operating from autumn, it should help, but judging by the forward price, the market is taking a view about how much gas is expected to flow" into the U.K., Centrica spokesman Andrew Turpin said.

Prices for wholesale gas delivery this winter are trading around 69.70 pence a therm, up 4% from a year ago. Gas prices rose above GBP2.50 a therm last winter on a combination of a prolonged and severe cold spell and lower-than-expected gas flows through both the U.K.-Belgium interconnector and liquefied natural gas terminals.

Although technically, producers such as Statoil ASA (STO) and Norsk Hydro ASA (NHY) could increase production from several of their biggest fields, including the massive Troll field in the North Sea, license restrictions won't allow them to.

"It's not the pipeline capacity that regulates how much gas can be produced, it's regulated by what's considered sound resource management," said Tormod Slaatsveen, deputy director of the Norwegian Petroleum Directorate.

Statoil already requested an increase in Troll output to take advantage of the spare capacity before Ormen Lange field comes online, but the Norwegian Petroleum Directorate rejected its proposal.

Letting too much gas out of the field too quickly, the NPD said, reduces the pressure in the field's gas reservoir and can limit the total amount of oil and gas extracted over the lifetime of the field.

"The NPD likes to stretch out the resource as long as possible, even if it means selling it at half the price," said Enskilda Securities analyst Arnstein Wigestrand. "Whereas oil companies want to take advantage of the high prices."

Slaastveen says the NPD rejected Statoil's request "mainly to reduce the recovery risk."

Joergan Andersen, head of finance for Norsk Hydro's oil and energy segment, said the new capacity will give the company more flexibility and arbitrage opportunity between the continent and the U.K., "but we're still limited by production until Ormen Lange comes online."

Copyright (c) 2006 Dow Jones & Company, Inc.