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InfraStrata and Vitol sign binding term sheet for gas storage capacity offtake

Published by , Editorial Assistant
Hydrocarbon Engineering,

InfraStrata Plc, the UK quoted company focused on the development of natural gas storage capacity, is pleased to announce that its subsidiary, Islandmagee Energy Ltd, has signed a binding term sheet with Vitol SA to enter into a gas storage agreement (GSA) for long-term storage capacity offtake at the company’s proposed gas storage facility in Islandmagee, Northern Ireland.

Vitol’s primary business is energy trading and it trades over 7.4 million bpd of crude oil and products. The firm is privately owned with 40 offices globally with its largest operations in Bahrain, Geneva, Houston, London, Rotterdam and Singapore.

Under the term sheet, Vitol will, on an exclusive basis and subject to conditions precedent and final agreement, enter into a 12-year gas storage agreement with Islandmagee Energy Ltd to utilise the capacity of all seven gas storage caverns proposed at the Facility, totalling 500 million m3. Construction of the caverns is planned to commence in late 2019 (subject to funding) and first gas is then expected to be injected under the GSA in the 4Q22, with full commercial operations planned to commence in storage year 2023 – 24 (which runs from 1 April each year).

The storage capacity charge that has been agreed between Vitol and InfraStrata will incorporate a multi-layer optimisation structure absorbing the intrinsic and extrinsic pricing elements of the UK gas markets that are available to a storage operator. In addition, given the high-performance characteristics of the Facility, it will be able to capture significant incremental value generated by sudden movement events (SUMO events) as well as to help balance the overall UK gas network. SUMO events typically occur during periods of high volatility, when the gas networks are stressed either by over- or under-supplies relative to demand.

InfraStrata has carried out extensive modelling work over the past few months which indicates that had the facility been in operation for the past ten years, the effective storage capacity charge would have averaged in the region of 28 – 38 pence per therm annually as the storage operator’s (currently Islandmagee Energy Ltd) share of the overall revenues. Once the entire working volume of 500 million m3 is made available to Vitol, this would translate into projected annual revenues of between £50 million and £65 million at project level before operating, maintenance and other costs. This level of a storage capacity fee structure is in keeping with InfraStrata’s expectations of its brand new, state-of-the-art fast cycle facility.

The term sheet has an initial term of 12 months and thereafter can be extended for successive periods of 6 months by written agreement between both parties. The term sheet outlines the principal terms of the proposed GSA, which both parties will now proceed to negotiate and aim to finalise as soon as possible.

Michael Curran, Head of Gas Trading Vitol commented: “This store will provide reliable, flexible and long-term solutions to our regional and global client base. Gas is an essential complement to wind and solar and, as the energy mix evolves, we anticipate its role will grow. We are very pleased in this first step of our relationship with InfraStrata and will look to partner with them on suitable projects in future.”

John Wood, CEO of InfraStrata added: “We are extremely happy to welcome Vitol on board as the exclusive offtake partner for our Islandmagee gas storage project. We have spent considerable time working with Vitol to ensure that the agreement reached has a positive outcome for both parties. Whilst subject to final contract, this is the first commercial gas storage deal that has been entered into in the UK for several years, clearly demonstrating the market demand for this type of storage facility. We are excited and look forward to working in conjunction with Vitol for many years to come.”

Having now underpinned the Facility’s future revenue stream, subject to execution of the GSA, the Company will continue to focus on completing discussions and agreeing terms with EPC contractors and potential equity and debt partners to provide funding at the project level to enable a final investment decision (FID) for construction of the facility to be made. As per the Company’s announcement on 9 May 2019, the term sheet for seven caverns means that FID for phase 2 (caverns 3 to 7) will be advanced by approximately 12 months from 4Q20 to 4Q19, with the knock-on effect that FID for phase 1 (caverns 1 and 2) is expected to also be taken in 4Q19.

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