UK wholesale gas prices have been at a premium to the US market; however, this has failed to encourage LNG shippers, which have diverted tankers away from the UK. Cargo needs, capacity planning and concerns about the security of supply should be raised, given that market fundamentals are not at work. A supply failure, albeit temporary, must be corrected for the market to function efficiently.
Wholesale gas prices in the UK have continued to rise in response to an unexpected cold spell for this time of year. A significant development through H1 2008 was UK commodity gas prices trading higher than in the US market, and the subsequent decision to divert liquefied natural gas (LNG) supplies away from the premium buyer. UK authorities should revisit the security of gas supply debate and, ideally, should prepare contingencies for the failure of LNG deliveries in response to a shortfall in domestic gas balances during peak periods.
With the National Balancing Point (NBP) trading at around half a dollar higher than the Henry Hub (the US equivalent of the NBP), for the summer 2008 period as quoted on the NYMEX, and around $3 more on average for winter 2008-09, the signals are unambiguous. However, the supply-side response has been minimal at best. Since the start of winter 2007-08 (October 1, 2007) there have been only 10 deliveries to the UK out of a possible 21 or 22 cargoes (approximately 45%-48% less than expected). The basic economics of LNG shipping should prevent such a misallocation of resources, which implies that the opportunity cost of supplying markets in preference to the UK will be the revenues forgone with high NBP prices (i.e. the differential between the NBP and the next highest price of wholesale gas). This is potentially a substantial sum of funds, given the attractive arbitrage opportunity.
Given that LNG imports have been widely publicized to mitigate gas supply bottlenecks and volatility, it is apparent that economics is not the only driver behind LNG deliveries. The UK's vulnerability as a major player on the LNG buy-side has been exposed; moreover, the long-term risk management of the UK's future gas and power generation needs have been questioned.
Strength in overseas demand, ironically with less transparent indicators, and exchange rate differentials, have clearly come into play from competing LNG consumers such as Japan, Turkey, France and Spain. However, the UK's main concern should be to establish strategic energy supply solutions that are not solely driven by market forces or wider political factors that may have induced the UK's LNG marginalization.