Negative UK Gas Prices Slammed By Participants

LONDON Oct 4, 2006 (Dow Jones Newswires)

U.K. gas market participants slammed the market Tuesday after the within-day gas contract fell to minus 5 pence a therm, as certain producers proved unable to turn down supply and U.K demand was capped by mild-weather.

"We shouldn't see a market trade in negative," one U.K.-based gas trader said at Tuesday's market close. "We should have been able to cope with it," he added of the day's abundant gas supply. In a bizarre twist of market dynamics, gas producers have had to pay buyers to take gas off their hands.

Over-supply through much of the morning was pinned by some market participants on the Langeled pipeline carrying Norwegian gas to the U.K. It came online carrying commercial flows on Oct. 1. New real-time 12-minutely flow data figures available on the National Grid Web site indicated Langeled flowed at an average daily rate of around 42 mcm, making it the second largest single contributor of gas to the system after Total SA's (TOT) St. Fergus terminal, which flowed at as much as 63.27 mcm/d before turning down to around 58 mcm/d by 1700 GMT.

Others preferred to blame associated gas flows - produced at the same time as oil from some fields - for the deluge of supply. "If you can sell the crude for $60 a barrel, you don't shut off the field even though you're paying to get rid of the gas," one market source said. And the involvement of gas sub-terminals in the E.U. emissions trading scheme makes 'selling' the gas at -4 p/th more feasible than flaring, he added.

Whatever the cause, participants were united on one fact: "This is unprecedented. It's a reflection of the inflexibility in the system for a number of years," one U.K.-based gas trader said, before ceding, "that flexibility is now changing."

Early Tuesday the system was 30 mcm long until producers curtailed flows from other fields, and National Grid took balancing action in the form of cutting back interruptible gas import capacity at import terminals at Teesside and Easington. Firm capacity remained intact, a spokeswoman for National Grid said.

Meanwhile Langeled flows showed no sign of easing intra-day. One gas market source suggested that the pipe was still flowing earlier test volumes, which could take a significant length of time to land at the U.K. beach from their source, the Sleipner gas processing platform in the Norwegian North Sea.

Ordinarily, October demand levels might have helped absorb the extra Norwegian supply - which market participants have worried all year might not arrive on time - but unseasonably mild temperatures have placed a ceiling on how much gas the U.K. is consuming.

"Demand's not going to get where it needs to be," a trader attached to a Scottish utility said. "It's too early in the year for LDZ demand to have much of an impact," he added. The U.K. local distribution zone incorporates all U.K. domestic and industrial uptake.

Tuesday's demand was pegged at 255 mcm at 1727 GMT, up from earlier predictions of 237 mcm by the grid operator National Grid plc (NGG).

Other sources of demand, the U.K.- Belgian interconnector which is currently exporting to the continent, and U.K. domestic storage facilities were meager, the first flowing at a no more than 4 mcm daily rate, and storage very close to capacity. "It's unheard of, there is simply nowhere to put the gas," another U.K. gas trader noted.

On the other side of the North Sea, Norwegian analysts suggested that tanking U.K. gas prices had contributed to falling oil producers' stocks, in an already bearish market. Statoil and Norsk Hydro stocks slipped to NOK149.5 and NOK129.25 respectively, or 3.5% and 3.1% day-on-day.

Both firms have both been heavily involved in Langeled's development and operation and the associated Ormen Lange gas field project, Statoil taking operational responsibility for the pipe and expected to be the biggest shipper of gas through the pipe.

"A lot of people are factoring (U.K. gas prices) in" to the share prices, Norwegian equity analyst Bruce Diesen at Terra Securities ASA said Tuesday.

"A few quarters ago, Norsk Hydro surprised with positive results because they were able to sell more gas than expected to U.K. markets at high prices," he noted.

Although specific Langeled shipper flows are unavailable, Statoil's experience Tuesday was far removed from that positive stock scenario having likely lost money on bringing gas to the U.K. since the weekend.

Langeled's arrival, long-feted as one of the supply saviors of the supposedly tight U.K. gas market, has "been a disappointment" so far, Diesen said.

Exceptionally moderate demand levels, high seasonal temperatures and the fact that production tends to ramp up from Oct. 1 with the start of the new gas year were "a bit of a freakish combination" a trader concludes.

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