London, 23 September (Argus) — The UK's Centrica will not proceed with its proposed 3.1bn m³ Baird gas storage facility in the UK southern North Sea, and has put its 145mn m³ project at Caythorpe in east Yorkshire “on hold indefinitely”.
The decision follows the Department of Energy and Climate Change's (Decc) announcement on 4 September that it would not subsidise investment in new gas storage facilities.
Centrica's decision was taken “in light of weak economics for storage projects and the announcement by the UK government on 4 September ruling out intervention in the market to encourage additional gas storage capacity to be built”, the firm said.
The company said in July that Baird may only be economically viable with government support, while several other developers had previously indicated that final investment decisions would be contingent on government intervention in light of weakening long-range storage economics. Centrica anticipates a write-down of approximately £240mn ($385mn) as a result of its decision to abandon the project.
Narrowing spreads between summer and winter prices in recent years have rendered the economics of long-range storage projects more challenging. Some developers have indicated a growing preference towards mid-range, fast-cycle sites, where inventories can be emptied and replenished at a much quicker pace than their long-range counterparts, so as to respond more rapidly to price fluctuations and reduce the impact of compressed summer-winter spreads.
Summer-winter spreads need to be 25-30p/th to justify building new long-range storage, Centrica said earlier this year, but they have been far narrower in recent years.
The summer 2014 contract closed at a discount of just 7.65p/th to the first-quarter 2015 contract on 20 September. And this year, the summer 2013 contract expired just 7.35p/th below the first-quarter 2014 contract, despite heavily depleted storage inventories during an exceptionally cold spring.
By contrast, the corresponding spread in 2012 was 16.2p/th, while over the preceding two years it was 10-11p/th. The summer contract last expired at a discount of more than 25p/th to the subsequent first-quarter contract in 2009, when it expired at 25.6p/th.
It remains to be seen whether Decc's announcement will curtail the number of projects that begin commercial operations following Centrica's abandonment of Baird. Some had already considered re-submitting their long-range storage proposals as mid-range facilities even prior to the government's decision not to subsidise projects.
The need for new long-range storage capacity in the UK has been contested by some market participants, who have argued that an increasingly integrated gas storage market in northwest Europe has lessened requirements for domestic storage facilities in the UK, and that continent-wide security of deliverability is the more pressing concern.
Most storage is greatly underutilised even during prolonged, unseasonably cold conditions, and regulators should look to optimise capacity utilisation across Europe rather than focus narrowly on domestic supply security, Shell's head of business development for northwest Europe, Thorsten Dinkela, said in June.
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