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UTILITY WEEK | 1ST - 7TH MAY 2015 | 29 Markets & Trading Analysis I t has been two years since the UK was subjected to near-record gas market prices aer a long, cold winter that all but depleted storage levels. But already a string of supply cuts and even lower levels of avail- able storage create further potential price shocks for the market this year. The UK faces an increased risk of vola- tility this winter, analysts have warned, because domestic storage facilities will be filled later than usual and will rely more heavily on Russian gas flows as European supply sources falter. "There is substantially more storage risk in the market than last year," accord- ing to a recent report on the UK's sum- mer outlook from Point Carbon analysts at Thomson Reuters. The UK government prides itself on the fact that the UK has diversified its sources of winter gas, which now include domestic storage, pipeline imports from the continent and more expensive liquefied natural gas. But recent gas production cuts in the Netherlands and unusually long mainte- nance periods in Norway, combined with constrained storage at the UK's main winter holding facility, have sparked concern about increased dependence across Europe on gas imported from Russia. Indeed, Russian gas imports into Europe are projected to double this year, but last week's announcement from Brussels that the EU will move ahead with a market abuse case against Russia's Gazprom have le many wondering whether the legal action may enflame an already tense relationship between the EU and its largest supplier of gas, just when the region is most vulnerable to disruption. Point Carbon analyst Oliver Sanderson tells Utility Week that Russian gas flows into Europe in the final quarter of last year were between 170 and 190 million cubic metres (mcm) a day but that 350 to 370 mcm a day will be needed this year through the summer and into early winter. "If these higher Russian volumes do not materialise, there is little other supply to draw on at current prices," Sanderson warns, adding that market prices across Europe would have to soar in order to attract LNG deliveries from the competitive global market. Although Russian gas flows have already picked up, they are lagging by almost 6 per cent despite no disruption. "Our expectation was for 340 mcm/day as of April rising to 360 mcm/day by the end of September. Flows rose to 310 mcm/day by mid March and are currently around 320 mcm/day," Sanderson says. The combination of possible Russian gas flow disruptions and an early start to colder weather could leave the UK more exposed to price shocks than most markets because its already low storage capacity has been depleted further. The UK has entered the summer season with the second lowest storage inventories on record and will face a 30 per cent reduc- tion in the amount that it can inject into win- ter holding facilities at least until October. Historically the UK relied on its own North Sea gas sources rather than investing in storage, so although many countries have 100 days of gas storage in place, the UK relies on just 15. But this week Centrica confirmed that its Rough gas storage facility, which holds about 70 per cent of the UK's domestic win- ter gas, will be reduced by as much as 30 per cent for at least six months while it carries out tests at the site. Even with an aggressive programme of injection to top up supplies used over the past winter, Point Carbon estimates that Rough may only reach 2.7 billion cubic metres (bcm) by the end of September, 15 per cent off the analysts' initial forecast for 3.2 bcm by the end of the season. At the same time, gas production from the UK's usual sources, Norway and the Nether- lands, are restricted, so the UK will have to rely more heavily on continental gas markets that in turn are more dependent on Russian gas supplies than they were last year. Recent falls in the price of Brent crude make importing gas from Russia cheaper because of the country's preferred method of oil-indexation, but importers have been delaying the amount they take through their contracts to wait for the full effect of weak Brent crude prices to become apparent. Analysts at Thomson Reuters' Point Car- bon warn that if political tensions between Russian and the EU reignite by October, the result could be a disruption to much-needed supplies and a steep premium to be paid by European gas users. UK faces gas price shocks Squeezed storage capacity, restricted production overseas and political tension between Russia and the EU mean gas prices could shoot up this year, as Jillian Ambrose discovers. Could the UK run out of gas this winter? For the UK to run out of gas as a result of the increased risk factors taking shape this year is unlikely and improbable. But the real risk is that the UK may be forced to pay a far higher price for its gas at a time when there is increased pressure on suppliers to keep costs low. Even at the end of the winter of 2012/13 when the UK's Rough storage facility was all but depleted, the UK was able to attract supplies through pipeline imports and LNG. The government was quick to downplay concern, saying there was no real threat to the UK of the pipes running dry. But to attract these gas sources while cold weather prevailed over much of Europe, the UK gas market saw prices rocket to near-record levels several times during March 2013 with higher residential tariffs following six months later. This round of retail price increases of course triggered the pledge from Ed Miliband at the September 2013 Labour party conference to intervene in the market through a price freeze, setting the tone for increased political scrutiny ever since. Other regulatory interventions included an investigation by the Energy and Climate Change select committee into whether the government should subside investment in greater storage capacity. The idea was deemed a 'waste of money' by Michael Fallon, energy minister at the time.