LONDON/NEW YORK (Reuters) - Britain’s Centrica PLC signed a long-term deal to import U.S. natural gas on Monday, the first pact of its kind for the island nation as it weathers a winter energy crisis.
The 20-year deal with U.S. exporter Cheniere Energy Inc will supply enough liquefied natural gas (LNG) to heat 1.8 million British homes starting in 2018, and comes as domestic gas production continues to decline while U.S. output hits record highs.
Reuters reported earlier in March that Centrica, Britain’s biggest household energy supplier, was in talks with Cheniere to secure the country’s first long-term LNG import deal in a bid to guarantee supplies and tame price spikes.
The issue of gas imports has come to the fore this month as late winter cold reduced stockpiles to around a 10th of their capacity, sparking fears of supply restrictions as forecasts show wintry weather continuing into early April.
Prime Minister David Cameron, under pressure to bolster Britain’s vulnerable energy import infrastructure, welcomed the Centrica deal, which will diversify the country’s energy mix away from dependency on a small group of existing gas suppliers and will give Britain its first taste of cheap U.S. shale gas.
“Future gas supplies from the U.S. will help diversify our energy mix and provide British consumers with a new long-term, secure and affordable source of fuel,” Cameron said in a statement on Monday.
Booming natural gas production from U.S. shale deposits has unlocked a plentiful source of cheap gas that producers want to liquefy for export to higher paying markets overseas. Gas prices in the UK are on average three times higher than in the United States at $10 per million British thermal units (mmBtu), although last week’s UK price spikes saw that premium widen dramatically.
Britain already receives gas from a range of countries including Norway, the Netherlands and Qatar. But it depends increasingly on LNG from Qatar to plug its growing energy supply deficit. High prices in Asia have diverted supplies originally earmarked for Britain to Japan and South Korea, depleting strategic stockpiles and sending British prices to record highs as the cold weather hit.
Shipments of LNG can have a major effect on British gas prices at times of tight demand. Gas prices fell by up to 20 percent on Monday, relieved by the expected arrival of two Qatari shipments this week.
However, Qatar and other established exporters refuse to commit long-term supply on anything but prices linked to relatively expensive crude oil, while Centrica has sought market prices. Centrica was forced to settle for a three-year LNG supply agreement with Qatar in 2011 after talks to secure a 20-year contract fell through.
Despite the deal, Qatari volumes of LNG to Britain plunged by 68 percent in January from a year earlier, according to shipping consultancy Waterborne.
Centrica said it would purchase about 1.75 million tonnes per year (mtpa) of LNG from Centrica’s Sabine Pass plant in Louisiana, the price of which will be linked to U.S. gas prices.
The contract is for an initial 20-year period, with the option for a 10-year extension. The target date for first delivery is September 2018.
Under the terms of the deal, Centrica will retain destination rights for the U.S. cargoes, meaning it could divert them to other markets during times of low UK demand or high prices elsewhere.
Reporting by Oleg Vukmanovic and Lorraine Turner in London and Edward McAllister in New York; editing by Kate Holton, Keiron Henderson and Peter Galloway