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Dec Norwegian supply overtakes LNG, CCGT demand down 15% on month

London — UK imports of LNG may have permanently altered the fundamental natural gas supply picture in the country, an analysis of S&P Global Platts data has indicated, with 2019 regasification showing a dramatic 169% year-on-year increase, and consequently slashing average NBP spot prices by half.

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With considerable LNG regasification capacity, one of the highest annual natural gas demand requirements in the EU, a lack of long-term storage and extended means to export to mainland Europe, the UK is now a key target market for global LNG producers, and could have its annual supply mix changed should the 2019 trend be replicated in future years.

The UK's three active LNG terminals sent 17.74 Bcm into the country's natural gas grid in 2019,with even the most recent monthly information for December showing a 74% increase year on year; a promising sign of growth on top of the LNG wave that essentially changed the European gas dynamic from October 2018.

The effect of this change on pricing was equally profound, with spot contracts on the UK's National Balancing Point (NBP) virtual trading hub in December averaging 32.112 p/th -- a full 50% lower year on year; prices a year earlier still required a considerable premium required to attract LNG to the country.

High regasification also clawed its way into the December premium, with the average spot price down 13.87% month on month, notwithstanding the traditional bullish influence of higher demand in December compared with November, and losing value sharply from the December front-month expiry price of 40.80 p/th.

Month-ahead NBP contracts further reinforced this notion. Despite all of the risks associated with January delivery in mainland Europe, the UK showed a level of immunity by posting a front-month average of 36.88 p/th. This similarly reflected a 11.43% drop month on month, a 44.2% year-on-year fall, and an emphatic intra-month loss of just over 25% from the January front-month opening price toa 30.25 p/th expiry.

This compression of value had wider-reaching consequences, namely for pipeline imports of natural gas from the continent.

With 2019 representing the first calendar year after the termination of long-term transportation contracts on the bi-directional IUK interconnector between the UK and Belgium, annual deliveries to the former slumped 89% year on year to just 375 million cu m, as price differentials required to overcome the resulting rising cost of transportation fell were seldom realized.

In December, NBP premiums averaged just 0.279 p/th against the Belgian ZTP-Physical hub, and UKimports dropped 39% to just 22 million cu m. Dutch imports through the newly bi-directional BBL pipeline did not fare much better, with annual transport to the UK falling 39% year on year to 1.657 Bcm, while December deliveries in this direction fell 81% to just 82 million cu m.

However, with adversity came opportunity, and the interconnectors both enjoyed a rarity of December exports, delivering a combined total of 162 million cu m to the continent. Annual delivery to Belgium fell slightly to 4.322 Bcm, shrugging off the changes in allocated transportation rights, with Irish exports also approximating this value, and also benefiting from UK LNG imports to rise 24%year on year.

Inaugural physical reverse flows on the BBL pipeline from October culminated in 326 million cu m of exports for 2019, with allocations no longer restricted to virtual reverse flow nominations.

After a couple of months in the wilderness, monthly Norwegian production directed to the UK finally overtook LNG regasification once again. Aggregate deliveries in December amounted to 2.634 Bcm versus LNG's 2.537 Bcm send-out, and also held the advantage annually, with the NCS exporting 24.457 Bcm in 2019.

This, however, did little to mask the reality of the new environment, with both annual and monthly NCS volumes clearly down by a fifth year on year, as LNG gained considerable market share at its expense.

The demand side did not experience as radical a shift in fundamentals as supply, although December saw a 5% rise in aggregate demand to 9.235 Bcm, and conversely a 15% month-on-month drop in gas-to-power consumption, which was metered at 1.478 Bcm.

Greater installed wind capacity and output accounted for the majority of this CCGT shrinkage, although the resultant higher variance in off-take was largely offset by gas-fired generation taking on a more intensive balancing role in the UK power mix, with annual requirements largely unchanged at19.375 Bcm in 2019.

The prognosis for future LNG exports to the UK is incredibly favorable. With comparatively small storage capacity, fledgling January gas exports to the continent already evident, and a winter import dependency which arguably was (and still is) more economically satisfied with LNG, it would take an extraordinary pull from other parts of Europe, or indeed the wider world, to prise LNG away from the UK.

-- Neil Hunter, neil.hunter@spglobal.com

-- Edited by Jonathan Fox, jonathan.fox@spglobal.com