Oil & Gas UK Economic Report 2014

demand, progressive renegotiation of long- term, oil-indexed import contracts and the recent strengthening of sterling. This demand-led weakness in NBP and continental hub prices has been all the more remarkable because it has occurred against a background of conflict in Ukraine, growing tension between Russia and western nations, and a tightening of economic sanctions against Russia (but not specifically against its gas industry). Russia supplies about one quarter of the gas consumed in Europe, about half of which is delivered by pipeline through Ukraine. Fears of an interruption to Russian gas supplies, reminiscent of the two-week disruption in

annual figure (in both nominal and real terms) since the emergence of the NBP hub market in the mid-1990s. The brief spike in NBP prices in each of the two previous winters had raised fears of a repeat in the winter of 2013-14, but the mild weather confounded expectations, depressing demand throughout Europe and leaving gas stocks in underground storage unusually high at the end of March 2014. As a result, prompt hub prices have fallen to their lowest for four years. Day ahead gas at the NBP dipped below 40 p/th during June and July 2014 and the forward price for winter 2014 2 gas fell below 60 p/th under the influence of weak European

Figure 3: Daily National Balancing Point Prices from January 2010 to June 2014

100

90

80

70

60

50

40

30

Day Ahead Front Summer Front Winter

20

10 National Balancing Point Price (pence/therm)

0

Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Source: ICIS Heren

2 ‘Winter’ in this context refers to the six-month period from October to the following March, in this case from October 2014 to March 2015 inclusive. The forward price is, therefore, the amount agreed in advance to be paid for gas to be delivered during this six-month period.

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ECONOMIC REPORT 2014