LONDON (Reuters) - Britain is suffering the ill effects of its second-tier status among natural gas importers as wild price spikes expose the risks posed by relying on scant storage and leftover supply from Norway and Qatar.
Revealing how close to the wind Britain is playing the market, this month's late blast of winter cold coupled with limited imports has triggered price spikes of up to 50 percent in a single day.
A core problem is that suppliers Norway and Qatar can simply earn more by selling to other customers, leaving Britain to rely on whatever leftovers remain.
The squeeze comes, as it has this month, when cold weather spurs higher demand from continental European customers for Norway's gas while high Asian demand draws Qatari tankers eastward.
"Britain is a residual market to Norwegian gas supplies and gets what is left over from continental Europe, which receives its supplies in long-term contracts and therefore has priority," Bjorn Brochmann, global head of gas market analysis at Point Carbon, said.
Britain receives most of its Norwegian gas supplies under spot market terms, priced off its National Balancing Point (NBP).
The situation is similar for Qatar, the world's top supplier of liquefied natural gas, which prefers to send the majority of its cargoes to Asia.
Buyers there, such as Japan and South Korea, typically pay around $3-10 per million British thermal unit (mmBtU) more than those in Britain.
Japan's needs have risen since the Fukushima nuclear accident in March 2011, and South Korea relies almost entirely on imports to meet its energy needs.
"A supply vulnerability has been in development since 2011 as LNG imports have declined as a result of outages of nuclear capacity in Japan and major new supply contracts from Qatar to Asia which have begun delivery this year," Deutsche Bank said in a report.
While Russia's Gazprom (GAZP.MM) is Europe's biggest supplier of gas, little of it reaches Britain.
"We think these (price) spikes show that the spot market has largely exhausted non-Gazprom supply options," Citi analysts said.
Britain's inability to deal with periods of high gas demand have been brought into focus before, but the situation worsened this month. Prices repeatedly spiked during unusually cold weather and tight supplies from Norway and Qatar.
"The UK gas market has yet again been exposed to its deep-rooted supply problem," Bank of America Merrill Lynch said in a research note.
On the supply side, the British government and leading energy companies are looking for new overseas supply, but success has been limited.
U.S. exports, which are expected to begin in 2015 or 2016, are expected to be moderate for the first few years, and most of those cargoes are expected to go to Asia.
Other Atlantic basin exporters, such as Nigeria, Algeria or Trinidad and Tobago, have either limited additional supplies available or are also eyeing Asia and Latin America.
A net exporter of gas until 2004, Britain's sourcing problems are being exacerbated by a steep fall in its own natural gas reserves and its scant gas storage capacity.
"The supply challenge is made more difficult by a 17 percent decline in UK continental shelf production in the past 12 months," Deutsche Bank analysts said.
Even if the UK begins shale gas exploration, which has transformed the U.S. gas market, little change is expected.
Energy Secretary Ed Davey has said that despite government backing for shale development, substantial exploration in the UK would take years and offer insufficient supply to usher in an era of cheap gas.
Britain is expected to need to double its imports from alternative gas sources outside Norway and Qatar by 2030, to almost 50 billion cubic metres (bcm) a year, compared with a total annual consumption of around 90 bcm.
The country's scant gas storage capacity can be seen in a comparison with European peers - its full gas storage tanks able to meet around 15 days of peak gas demand versus over 100 days in Germany or France.
That storage has helped continental Europe avert the sharp spikes suffered by the British gas market during the region's recent cold snap. (see charts)
The blast of winter cold has left Britain's gas storage sites almost 90 percent depleted, compared with 70 percent in Germany, 65 percent in the Netherlands, and 75 percent in Belgium, according to Gas Infrastructure Europe.
"What is needed to counter volatility from supply shocks is shorter-term deliverability, such as from fast-cycle storage capacity," said Olly Spinks, director at Timera Energy consultants, referring to smaller storage sites that can release gas quickly.
Reporting by Henning Gloystein; editing by Jason Neely