by Izabella Kaminska
Friday, 11
November 2022
Analysis
10:13

The trouble with Rishi Sunak’s LNG deal

The pact with the US on supply of natural gas isn't all it seems
by Izabella Kaminska
Is he full of gas? Credit: Getty

Following the UN’s COP27 climate summit, UK Prime Minister Rishi Sunak is set to announce a deal for the UK to purchase 10bcm [billion cubic metres] of liquefied natural gas, or LNG, from the United States. This would represent roughly half of the UK’s LNG import requirements. It’s been pitched as an ingenious political trade move, but whether the deal will actually improve Britain’s energy security is another matter.

Cutting a supply deal is all very well, but guaranteed supply volumes are meaningless without guaranteed prices. To date, we’ve heard barely anything about how much this supply guarantee will cost us or on what terms the contracts have been struck.

Then there’s the fact that the government doesn’t control the companies it has to rely on to execute these deals. In a liberal free market, all the sellers and buyers involved will continue to be non-government entities. That means they should, barring some major financial repression, be free to make their own commercial choices. What we should really be asking Sunak is what happens if the likes of Centrica, a private company, are not willing or able to purchase certain volumes at certain times, perhaps because of oversupply? 

Additionally, long term contracted deals don’t just work one way. Today’s first dibs on scarce supply at a discount price risks becoming a forced purchase of highly expensive gas should the market be better supplied than expected.

To guarantee the deal, therefore, all the respective governments involved would have to use legal means to force publicly listed companies to abide by prices that aren’t always favourable to them. This involves repressing sellers when supplies are tight and penalising buyers when supplies are plentiful. 

Since commodity markets move too quickly for courts to intervene in such a scenario, in an unexpected glut UK companies would have no choice but to set heavy price discounts that incentivise storage at sea, at a cost to themselves.

Nor is such an imbalance a far-fetched scenario. Earlier this year the National Grid announced an import restriction for technical reasons. This caused LNG vessels to be diverted to alternative destinations, mainly continental Europe. The UK’s highly limited storage capacity, which runs at 5% of Germany’s, has also forced British players to redirect cargoes over the summer months, a time when storage is usually being filled.

The acute lack of storage throughout the European continent can be explained by the substitution of dependable pipelined Russian gas for that shipped as LNG. This is now resulting in LNG ships sitting offshore waiting to discharge in countries like Spain, and incurring further costs in the process. Storage costs on a vessel are a multiple of land based storage and that has to be paid by either the taxpayer subsidising the cost or the seller discounting the price.

Needless hoarding at sea of supply that could otherwise be used by other nations will, ironically, likely force China to burn more coal to compensate. This would be a total contradiction of the objectives of COP27 in the first place. Do we shun Qatari imports in times of distress? What are the consequences to our previously reliable suppliers?

If our prime minister really wanted to help improve energy security, he would be better off committing to increasing our storage capacity and creating a strategic natural gas reserve akin to the US SPR. Unfortunately, the time for that was in 2020, when commodity prices were low and financing costs negligible. Restarting the Rough storage site, which was decommissioned in 2017, on a marginal basis will certainly help, but its capacity is ultimately non-material. Much more expansion is needed. That’s why news that Qatar is planning to invest millions to expand the UK’s Milford Haven facilities is far more important.

Which brings us to 2023. While the start of the winter heating season has been mild, it will inevitably get colder. People will turn the heating on, even if the thermostat is down and jumpers are employed. This will cause Europe’s inventory to decline to near-empty levels like it does every year even with ongoing LNG resupply because we will be consuming more quickly than resupplying. That’s when we will have to think about other ways to keep the lights on. With or without Sunak’s prospective deal, the risk of consumer rationing has not gone away.

Izabella Kaminska is the former editor of FT Alphaville and founder of The Blind Spot.

Join the discussion


To join the discussion, get the free daily email and read more articles like this, sign up.

It's simple, quick and free.

Sign me up
Subscribe
Notify of
guest
11 Comments
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
Jeff Andrews
Jeff Andrews
23 days ago

As long as ‘it hurts Putin and the Russians’, that’s all that counts. And not getting gas from right under our feet, and achieving net zero! Putting the great back into Britain, go Rishi!

William Shaw
William Shaw
22 days ago

I’m beginning to think that the government should hire a private company to run the country. They could then sack all civil servants and defund all NGO’s. A private company with a long term contract would think further ahead than the next by-election and might make a few sensible investment decisions… unlike the government.
Ministers can keep an eye on the company running the country (but have very limited powers to intervene) and MP’s should be reduced to advocating for local, constituency, issues.

Last edited 22 days ago by William Shaw
Rocky Martiano
Rocky Martiano
22 days ago
Reply to  William Shaw

What a great idea. The ultimate outsourcing.

Mark Kerridge
Mark Kerridge
21 days ago
Reply to  William Shaw

Sure. Whoever has heard pf private companies prioritising short term shareholder value over long term investment.. That never happens.

j watson
j watson
21 days ago
Reply to  William Shaw

The private sector that reduced gas storage in the UK for profit margins? One has to assume your suggestion tongue in cheek.

Greta Hirschman
Greta Hirschman
23 days ago

So, the UK should increase its LNG storage capacity before the war in Ukraine ends. Further to that, we should accept more investments from Qatar.
Any other great ideas?

chris Barton
chris Barton
20 days ago

stop getting involved in wars we don’t need to?

David Donohue
David Donohue
22 days ago

The point of storage is quite valid. Provides the operator with pricing power.

PRASENJIT CHAKRABORTY
PRASENJIT CHAKRABORTY
23 days ago

Well i call this jump the gun journalism… the writer herself claims details are not public but criticised the decision in a 1000 word article… bravo.!!!,

Matt M
Matt M
22 days ago

I don’t know why you got so many down votes. I also dislike articles that make statements based on forecasts based on incomplete data. The writer could just have waited a few days for the details and then analysed the likely impact.
Same with these insta-pundits on the mid-terms. Lets wait until the counting is over before suggesting solutions.

chris Barton
chris Barton
20 days ago

Any of the hawks on here clocked why the Americans were so keen for ENEGRY sanctions? (its not for poor little Ukraine’s sake)