The UK gas balance has reached a deadlock for the summer, according to Wood Mackenzie. It said: “Resilient UK production, Norwegian imports and baseload LNG imports are overwhelming the market with supply. And with lockdown placing huge pressure on electricity and fuel markets, demand will be weak throughout the summer.”

Hadrien Collineau, a Senior Analyst with Wood Mackenzie’s gas team, said: “The industry and power sectors account for most of the UK’s summer gas demand. And both of those sectors have been hit hard by the lockdown. Although restrictions will start to ease, it will be a slow process. Gas demand will take time to recover.”

Additionally, the UK has very limited storage capacity for injections and is approaching the limits on its ability to export volumes into neighbouring markets, which isn’t helping the situation. 

Collineau added: “With most lockdown measures continuing throughout May, we expect that demand will come in 18% below its five-year average. Demand will remain weak through the summer, regularly testing a floor of just 3 billion m3 per month.

“However, UK gas production has been resilient, exceeding 2019 levels year-to-date by 3%. Importantly, UK production at risk from low NBP prices is minimal, as sustained price levels below US$1.5/million Btu would be necessary to shut in production.”

He added that exports are reaching their limits. Space in the Irish market is very limited. Meanwhile, the UK is making use of its export capacity to Continental Europe through the two pipelines – IUK and BBL – that connect UK to Belgium and the Netherlands, respectively.

“Indeed, many fields with higher operating costs are mature and closer to cessation of production. Earlier shut-in would bring forward high decommissioning costs – something to be avoided in the current cash-constrained environment. For less mature fields, companies will consider the balance between the costs of restarting production vs the costs of maintaining gas flow.

“While UK producers are suffering from low gas prices, we don’t expect any material production shut-ins. Operators are likely to delay non-essential spring and summer maintenance where possible. This could add volumes to the market through to July, but potentially ease the pressure in late-summer.”

He said the UK’s export capacity to continental Europe via the IUK and BBL are booked at 65 per cent and 100 per cent capacity, respectively, for May, and at 48 per cent and 100 per cent for June, respectively: “We expect this level of utilisation to be sustained through summer, providing a minimum 1.7 billion m3/month of takeaway capacity.”

The total export capacity to continental Europe is 2.3 billion m3/month. But he said a larger NBP discount to TTF would be needed to spur higher flows: “Typically flowing towards the UK during winters, these pipelines offer a safety valve into Europe during periods of oversupply. In April, utilisation averaged 30% and 75% on the IUK and BBL, respectively.”

He said Norwegian piped suppliers are adapting to a changing market. Its gas exports to the UK dropped by more than half in April in response to the limited market space. But the low levels of Norwegian imports through summer will not drop lower than 1 billion m3/month, it is believed. 

“But LNG has shifted in the opposite direction,” Collineau added. “Utilisation at the UK’s South Hook terminal has ramped up significantly as it absorbs more Qatari LNG that cannot find a home in premium Asian markets.”

He added that gas storage could be full by early June: “The UK’s largest and only long-range storage facility, Rough, closed in June 2017. The field contained over two-thirds of the UK’s total storage volumes. Without it, it is more difficult for the UK to meet peak winter demand. It also makes it more difficult to absorb excess volumes through the summer months.

“And as we approach this year’s summer season, storage is already very limited, with inventories more than 60% full. With only 600 million m3 of space for storage injections this summer, there’s a risk that storage could be full by early June.

“With UK summer demand expected to be lower than average and with limits on storage capacity, it’s clear that there is very little space for any additional supplies. LNG exporters hoping to place cargoes into the UK market have the most to lose. There simply won’t be any more space.”

The UK’s effective regasification capacity will be capped at 2 billion m3/month through the summer as a result – or just under 50 per cent of total UK regasification capacity. Or to put it another way, LNG exporters scrabbling for market are approaching another brick wall.

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22nd May 2020