LONDON (Reuters) - Centrica Plc, Britain’s biggest gas supplier, said it had shelved its planned Caythorpe gas storage project in northern England due to regulatory uncertainty and reduced profitability.
Centrica, which owns British Gas and Britain’s biggest gas storage site Rough, had planned to build the 200 million cubic metre (mcm) storage site in East Yorkshire.
But the company shelved the plans after the profitability of gas storage projects was affected by shrinking premiums of winter gas prices over summer contracts and by the threat that UK energy regulator Ofgem might not grant the company exclusive access rights to the facility.
“We had been led to believe that we would get an exemption on third-party access rules, but more recently Ofgem have told us that they are minded to consult on that,” said Finance Director Nick Luff on Wednesday.
“As a result of the regulatory uncertainty this creates for the project, we have decided not to proceed at the current time,” the company said in its latest results statement.
Centrica’s Rough facility under the North Sea off the east coast of England, with a capacity of 3,300 mcm, has played a key role over the last few years in storing on gas in summer, when demand and prices tend to be low, and then using it to top up supplies when heating demand surges in cold weather.
But liquefied natural gas (LNG) is now playing an increasing role in supply of Britain’s gas and has helped reduce the seasonality of prices. More LNG tends to be delivered in winter and less in summer.
Until Britain hugely increased its LNG import capacity in 2009, demand for gas storage space was strong.
But UK gas prices have been higher in summer 2010 than they were for much of last winter, squeezing potential profits from gas storage for next winter.
“The differential between summer and winter gas prices has narrowed significantly, currently impacting both the level of underlying returns achievable from the Rough facility and also the economics of our three potential new gas storage projects,” Centrica said.
The company added it would decide on whether to go ahead with its 1,700 mcm Baird and 500 mcm Bains offshore storage projects in 2011.
Although spot prices have eased over the last week on news that Qatari LNG plants had reopened following summer maintenance, prices are still higher than they were during most of last winter.
Additional reporting by Victoria Bryan, editing by Jane Baird