LONDON (Reuters) - British gas prices are likely to become more volatile and prone to spikes over the next few years after the UK has moved from self-sufficiency to increasing dependence on imports of liquefied natural gas (LNG) from Qatar.
The latest UK government data show Qatari LNG imports were equivalent to 52 percent of the gas consumed in households over the first nine months of 2011, up from 11 percent for 2009 as a whole. Qatari gas amounted to 28 percent of total consumption including industrial and power plant demand, up from 6 percent in 2009 as a whole.
Qatar also accounted for 85 percent of UK LNG supplies between January and November last year, with Nigeria a weak second at just 5 percent.
Britain’s gas market is exposed to diversions of Qatari ships to countries that pay more, to shipping restrictions or unplanned outages on production facilities.
“If Qatari LNG supply to Britain was cut off, UK gas prices would spike to oil-indexed levels to attract imports and possibly even higher to attract LNG from elsewhere,” one UK gas trader at a utility said.
An event considered routine in other markets - the news leak last summer of Qatar’s LNG autumn maintenance schedule for its LNG trains - had the power to push UK winter gas prices up 3 percent in a day.
British gas prices also soared in March last year when Japan, also a big LNG importer, was hit with the Fukushima nuclear crisis and started replacing nuclear capacity with additional gas imports.
By December, Japan’s imports from Qatar were double year-ago levels. The potential for a sustained increase in Japan’s need for more gas could divert LNG shipments destined for Europe and push up British gas prices again later this year.
“In my view the UK gas market has not priced that risk in, which is very apparent from the winter 2012 gas price onwards,” said a European gas trader at a UK trading house.
UK gas for winter 2012 is currently trading at 68.25 pence per therm, which is higher than the front-month price but around 11 percent below levels in March following Fukushima.
Traders say those winter prices could rise again as Japan competes for more supply.
“It depends on the Japanese nukes, and if these are not back in large numbers by winter 2012, we (Britain) may well need discretionary Russian volumes as LNG flows will likely be even less than this winter,” the European gas trader said.
Even more drastic, Britain is vulnerable to a crisis in the Middle East, such as the potential for Iran to carry out a threat to shut the Strait of Hormuz. Virtually all of Qatar’s LNG vessels need to pass through Hormuz and the Suez Canal to reach Britain.
“Qatar’s proximity to less stable nations and its reliance on delivering cargoes via the Strait of Hormuz and Suez Canal are of particular concern when considering the recent tensions with Iran,” said Paul Akass, European gas trader at Dutch utility Essent.
“My guess is, if real disruptions occurred, the initial reaction would be prices rising to all-time highs.”
The British government has acknowledged that Britain receives a lot of its gas from Qatar and that a potential closure of the Strait of Hormuz would threaten economic growth.
Such an event would have much less impact on other European countries such as Germany, which receive most of their gas supplies from Russia via pipeline.
Over the past two years, Qatar has proved a reliable trading partner, and the UK has become a vital market for Qatar to maintain its ranking as the world’s largest LNG exporter.
“I think Qatar wants to have a solid relationship with the UK to hold its position as the number one LNG supplier,” the UK gas trader said.
“However, I think any swing gas (spare LNG shipments) would go elsewhere unless we are willing to pay for it.”
The UK gas hub has become a balancing point between supply and demand for the global gas market, helping set spot prices.
Plentiful gas supplies in recent years have kept spot prices cheaper than most contracted prices for Russian pipeline gas, which are linked to oil prices.
British officials express little concern about the dependence on Qatar.
“In 2011 we imported LNG from eight countries, and the infrastructure exists to continue to import large volumes, should we need to,” Energy Minister Charles Hendry said in a speech last week.
Current alternative LNG suppliers such as Trinidad, Nigeria and Yemen, however, are also not tied into long-term delivery contracts to Britain and could ship to where prices are highest.
British month-ahead gas currently costs around 57 pence per therm, while Asian customers pay around 95 pence per therm (or $15 per mmBtu) for LNG, leaving suppliers with a hefty premium on Asian deliveries.
Years from now, Britain’s reliance on Qatar and spot gas prices could prove an advantage due to the potential for a global boom in shale gas and plans by companies in the United States and Australia to export LNG, starting as early as 2015.
Graphic on Qatar’s impact on UK gas price:
(Additional reporting by Henning Gloystein and Oleg Vukmanovic, editing by Jane Baird)
Clarifies in para 2 and bullet point of Feb. 2 story that Qatari LNG imports are 52 percent of gas consumed in households