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Wood Mackenzie: European gas storage operators under pressure

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Hydrocarbon Engineering,

New research from Wood Mackenzie’s Gas and LNG team claims that Europe has a fundamental problem of gas storage over-capacity.

The team’s Principal Analyst, Graham Freedman, notes that net capacity has grown by 18 billion m3 since 2010 to reach 106 billion m3 in 2017. At the same time, annual gas demand has fallen from 510 billion m3 in 2010 to approximately 430 billion m3 at present. As such, the number of days’ cover has increased from 62 to 91 over this relatively short period.

This surplus capacity has contributed significantly to low summer-winter price spreads across northwest Europe (typically €1 - 2/MWh), upon which many facilities rely on to generate income to cover their operating and maintenance costs.

Many companies are reporting significant losses in their storage operations, and Freedman believes that this is unlikely to improve in the near term as the market remains well supplied, providing competition to storage.

Wood Mackenzie's European gas team estimates that northwest Europe would need to remove approximately 25% of its storage capacity before sustainable summer-winter price spreads return to the market.

Freedman said: "As storage players evaluate the potential for closure in a bid to rationalise their business, the risk for security of supply will increase. A 25% decrease in storage capacity in northwest Europe would result in higher price spreads but will also result in politically unacceptably high winter prices in the event of an exceptionally cold winter.

"Some governments have acknowledged the issue, socialising some of the storage costs - Italy, for example. Others, such as Germany and the UK, hope the market will sort things out. A coordinated approach across the EU will be needed in order to reach a solution."

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