6 Min Read
LONDON/FRANKFURT (Reuters) - European utilities are losing billions of euros from gas storage facilities, potentially triggering site closures and divestments in a market suffering from oversupply and weak demand.
Around 5 percent of European storage capacity has been closed this decade and other sites are at risk of closure because weak gas price spreads do not allow operators to cover their fixed costs.
"A number of European storage operators are currently assessing asset economics given the weakness in seasonal price spreads," said David Stokes, director of consultancy Timera Energy.
At the heart of the problem lies oversupply of gas, which has undermined a business model of storing gas in the summer and selling it at a profit in the winter, when more heating is required.
Across the European Union, there is around 90 billion cubic meters of gas storage capacity, which can meet more than a quarter of total EU daily demand.
But analysts say storage tariffs currently charged by utilities range between about 6 to 10 euros ($6 to $10) per megawatt hour (MWh) a year.
That is much higher than the price gap between the Dutch Winter 2017 contract TRNLTTFSc2 and the Summer 2017 price TRNLTTFSc1 which is currently around 1.10 euros/MWh.
"The tariffs currently charged are way out of the market. Commercially, it is looking quite difficult to make any money in storage," said Graham Freedman, principal analyst at Wood Mackenzie.
Energy groups including German utilities RWE (RWEG.DE) and Uniper (UN01.DE), British energy suppliers Centrica (CNA.L), EDF Energy (EDF.PA) and Austrian oil and gas firm OMV (OMVV.VI) have had to take impairment charges on their storage assets totaling billions of euros.
"Small facilities have been closed and mothballed, in Germany and France in particular. I would expect that trend to continue," Freedman added.
Less gas storage capacity could increase dependency on energy imports, boosting wholesale market volatility and consumer gas prices.
EU storage levels by the end of March are likely to be around 25 billion cubic meters (bcm), 16 bcm lower than the same period last year, consultancy Energy Aspects said, suggesting a significant decline in demand.
RWE booked an impairment of 204 million euros ($215 million) on its gas storage assets between January and September last year, citing a change in price expectations and "out-of-the-money long-term gas storage contracts".
Likewise, German gas group VNG [VNG.UL] took a 377 million euro charge on exploration and production and storage assets in 2015, pointing to a "drastic loss in value".
Last month Centrica's storage division posted its first ever operating loss of 52 million pounds ($63 million) in 2016 due to reduced operations at its site in Rough, Britain's largest gas storage facility.
Well pressure problems have prompted an assessment of Rough as a physical asset and its commercial viability, with a report due by the end of June.
Peer SSE (SSE.L) had a 151 million pound impairment on its gas storage assets in its last full-year results (2015/16). It has mothballed a third of the gas withdrawal capacity of its Hornsea site.
"The environment is still very challenging, both as a result of the seasonal spreads and long-term volatility being seen in the market," an SSE spokeswoman said.
The U.K. winter-summer price spread is currently around 5 pence per therm, down from 50 p/therm 10 years ago.
Rather than shutting sites down, some operators could keep them open in the hope that seasonal price spreads improve and allow them to recover their fixed costs. They could also try to sell them.
Uniper, which took a 1.1 billion euro impairment on its gas storage assets in 2016, managed to sell two such assets to Czech oil and gas firm MND Group last year, and is examining whether to sell or close further sites.
A spokeswoman for MND's German storage unit said further acquisitions depended on what was being offered on the market, adding MND was currently not working on any concrete deals.
Potentially, Russian oil and gas major Gazprom (GAZP.MM) could be looking for large storage sites because it will need extra facilities to store gas if Russian gas continues to bypass Ukraine, an industry source said.
"Mostly, we have been building (storage) recently rather than acquiring. So, if there are interesting options, we do not rule out new projects," a Gazprom spokesman told Reuters.
However, spreads are not expected to recover in the next few years. European gas supplies are increasingly well-connected and from diverse sources, which reduces the commercial attractions of storage.
That is the main reason why oil and gas firm DEA [RWEDE.UL], owned by Russian tycoon Mikhail Fridman, has frozen plans to sell its gas storage activities in Germany, a person with knowledge of the matter said.
"I don't think these assets are marketable at the moment," the person said.
DEA was not immediately available for comment.
Additional reporting by Vladimir Soldatkin in Moscow; Editing by Ruth Pitchford