For it's Tommy this, an' Tommy that, an` Chuck him out, the brute!But it's " Saviour of 'is country " when the guns begin to shoot
[In response to a BTL question last week]
Yes, paying for an insurance policy is always annoying when there's not a cloud in the sky: but there's always regrets when the rain sets in. So now the cry goes up: why do we have so little gas storage? Why did the government allow the Rough storage facility to close? Why are we so much worse off than the Europeans?
The answer, ladies and gentlemen, is the usual convoluted story. Rough (a partly-depleted gas reservoir in the southern North Sea) was cannily sold by its American owners to the old British Gas (when still a monopoly / monopsony) for conversion to a storage facility. They spent an epic amount of money on it, and were very proud of it when it came on stream. But there's a very strong case that they never actually needed in those days (1980s), such was the strength and diversity and flexibility and reliability of North Sea gas production straight from the fields. However, monopolies of that kind are run by engineers, whose solution to every question is "build more stuff", especially when they can just dump the cost on captive customers. And so they did, gold-plating and all. How we all laughed.
Two changes of hands later and it's back with Centrica, one of the several linear descendents of the old BG. Rough is huge, & what we call "seasonal storage", i.e. 180 days to fill it, 180 days to blow it down (rather than smaller fast-cycle: perhaps 30 days to fill and 10 days to blow down). It found its place in the early years of this century as a perfectly commercial asset, making its way in the very liquid, dynamic gas market that developed in the last half of the 1990s and hasn't (yet) looked back - indeed, it's spread to the whole of Europe.
Where they still, however, do some things a bit differently, most notably in Italy. Some history: with the exception of the Dutch, they've all been uncomfortably dependent on Russian gas for many decades - enough to make anyone invest in a good bit of storage. In most countries it is operated more-or-less commercially, with the glaring exception of Italy (also a big importer from, errr, North Africa) where the government mandates in detail the maintenance of extremely costly, and most would say excessive, gas storage inventories, and won't allow the storage facilities to be operated commercially at all. As insurance policies go, this one is very costly indeed. The French used to be similar, but not for quite a while now.
Because ... we now have a thriving and very efficient integrated European gas market, embedded in an increasingly efficient global gas market mediated by shipborne LNG - so folks can choose their supply-security measures from a range of alternatives: physical storage; virtual storage; call options; flex contracts etc etc. They all have their pros and cons: I could draw you a nice table in powerpoint®. So when Rough suffered a couple of explosions and became "too costly to repair" (and after Centrica's pleading for a special subsidy fell on deaf ears) it was allowed to fall idle. (Though not abandoned, because Centrica dreams of getting a big subsidy to restore it / convert it to CO2 storage / convert it to hydrogen storage / convert it to a theme park / anything, really ... except shell out for actual, final abandonment.)
Behind this lay an important factor: the price spreads (seasonal, and general volatility) that drive the value of a storage-option were in the doldrums, and remained that way for the best part of a decade. Centrica wasn't the only European operator closing storage facilities during that period, by any means.
The decision was perfectly fair, commercially; and not particularly negligent of the government of the day, either. Because, even now there's little concern we will run out of physical molecules of gas, from a variety of sources: it's just the price that folk don't like. But hey, markets are like that when there's an Actual Shortage; and more storage in the North Sea would barely be noticed against the global price-spike we are now suffering.
HOWEVER: it's fair to say that at times like these, the whole "efficiency / rely on an effective market" vs "self-sufficiency / don't trust the market" debate gets revisited with a vengeance, and rightly so. Because There's No Right Answer! There are some well-tried quant methodologies to deploy, and they illuminate the issue: but as ever it all hinges on the assumptions. People who are anyway self-sufficient tend to lord it over the rest and claim their position is the moral high ground. People who could never remotely be self sufficient (e.g in Belgium, where there is no indigenous gas whatsoever) are, faute de mieux, rather keen believers in open markets. I once had a very interesting discussion with a Chinese person (a commissar with a commercial delegation) who, on receiving a presentation about cross-border gas and electricity interconnectors in Europe, commented sniffily that it was a very bad thing for a country to be reliant on imports for gas and electricity. I politely remarked that yes, it was a debating point for several nations, not least those who import almost all of, *ahem*, their oil .... I digress.
This is indeed a debate we return to periodically here, not least with our good friend Sackerson. And we've discussed Rough specifically, too. There have always been fair points on both sides. Personally, I'm way up the open-market end of the spectrum. But it's a continuum, and if you can ever identify clearly enough that the risks are increasing (volatility is generally a good metric) then you can justify a higher insurance premium - be that in the form of storage, call options etc etc. Since it's been going that way since Jan of this year (I first wrote about it here in Feb), you may be sure all the capable players have been doing just that. And, by the way, there's no obvious reason why volatility should be going away any time soon, and plenty of reasons why it should stay high.