ANALYSIS - Recession, Cheap Coal To Cut UK Winter Gas Demand
Date: 18-Nov-08
Country: UK
Author: Nao Nakanishi
LONDON - A global recession and cheaper coal are likely to cut Britain's demand for natural gas this winter, possibly speeding up the fall in gas prices which have so far lagged behind the slump in oil markets.
There has been no significant decline in gas demand yet, industry officials and analysts say, but expect it to drop in coming months as the economic downturn and higher retail gas and power prices encourage consumers and industry to save energy.
"As consumer demand for goods turn down, we will see a lower level of gas demand ... We may see further reduction in terms of prices," said James Hanks from John Hall Associates, adding he had started to see evidence of big gas consumers looking to buy less fuel this winter.
"That may have to do more with prices," he said.
British gas prices for the first quarter of 2009 have dropped by about 40 percent since July to around 65 pence per therm, but are still 30 percent higher than where Q1 2008 was traded a year ago.
This compares with a fall in oil prices of more than 60 percent from a record above $147 in July to $55 a barrel now.
"It hasn't really followed oil down as you would expect," said Eddie Proffitt, gas group chairman from Major Energy Users Council Ltd.
"I would expect when recession starts to bite worldwide, there might be less demand for products like LNG and that will allow more to come to this country and therefore depress prices."
So far this winter two LNG cargoes have come to Britain, despite earlier expectations that none might arrive because Asian consumers were willing to pay more.
Asian demand has fallen markedly in the last few weeks, making more cargoes available to European buyers.
COAL, NEW PLANTS
The recession has already started to erode power demand, with Britain's grid operator National Grid on Thursday reducing its forecast for Britain's peak electricity demand this winter because of a drop in industrial use.
Of Britain's 2007 gas consumption of 39.5 billion therms, or 1,000 terawatt hours, industrial and commercial users such as ceramics and chemical sectors, accounted for about 35 percent.
The power sector accounted for 25 percent and householders used the remaining 40 percent for heating and cooking.
"The primary issue for gas demand going forward, (is that) most of the demand growth is anticipated from power generation sector," said another private analyst, who declined to be named.
"Obviously in the event of economic slowdown, there will be less demand for energy and therefore less demand for new power stations to be built ... From that standpoint, there's a question of how low demand from power stations can actually go."
In addition to a downturn in demand for electricity, analysts said the sharp drop in coal prices and carbon emissions was encouraging power generators to burn more coal than gas, which is also eating into gas demand.
"With the big fall in coal prices, we are going to see a shift towards coal generation this winter in the UK away from gas, which means less use of gas," said Fabien Roques from Cambridge Energy Research Associates (CERA).
"As a result, demand for gas could be significantly lower. And of course, it could have a big impact on prices," Roques, CERA's associate director for European Gas and Power said.
Data compiled by Reuters showed gas promised larger profits for prompt contracts, coal offered more profits for forward contracts, including December.
For December baseload electricity, for example, profits from gas was about 20 pounds ($29.62) per megawatt hour, compared with coal at 30 pounds, even after generators pay for the permits to produce more carbon dioxide they need to burn coal. For peakload the gap is smaller at about 10 pounds.
Gas demand from Britain's power sector will rise in the longer term, analysts and industry officials said, as many of the country's coal and nuclear plants are replaced by gas-fired power stations over the next decade.
Gas-fired plants require less capital investment and are quicker to build than nuclear, while the future of coal-fired generation in Europe is uncertain because of increasingly strict controls over carbon dioxide emissions and pollution.
(Reporting by Nao Nakanishi; editing by Daniel Fineren)