In the latest of records to fall within the wholesale market for European natural gas, Belgium's Zeebrugge spot basis spread to the UK has reached its highest-ever level, triggering the greatest gas export the UK has ever seen. Symptomatic of Continental European influence on this summer's record-breaking bull run, the spot basis spread swelled as Europe gasped for extra injection volume ahead of winter delivery, which begins in under two days time. Belgium's Zeebrugge physical trading hub closed Sept. 28 at a 30 pence/therm premium to the British NBP for day-ahead delivery on gas day Sept. 29, according to the Platts Market on Close assessment process. Nomination data from Platts Analytics for Sept. 29 confirmed the effect this had on UK exports to the Continent, with all pipeline deliveries from the country to the EU scheduled to deliver 73.61 million cu m/d of volume through the Belgian IUK, Dutch BBL and Irish Moffat pipeline interconnectors. The UK has experienced a sudden glut of natural gas following the completion of this year's pandemic-delayed Norwegian summer maintenance schedule, with exports to the UK topping 100 million cu m/d for the first time since May. Without no other demand center with which to utilize these volumes, the NBP spot remained subdued compared to its Continental counterparts, who saw spot prices continue to soar further as the rush to inject goes right to the wire.
Indeed, without any other alternative itself and a planned reduction in Russian flows due in October, Continental European shippers turned in their droves to the UK as their last resort for injection feedstock. Such has been the surge in interest in relatively, if not absolutely, cheap gas in the UK from Europe, spot export capacity on the IUK pipeline between the UK and Belgium has been completely sold out for the last four gas days, data from the operator showed. Partly helping the record high in export was the reverse functionality of the Dutch BBL pipeline, which became bi-directional in later summer 2019. Assisting the basis spread between Belgium and the UK was the expiry of most long-term transportation contracts on the IUK pipeline in September 2018, meaning that shippers wishing to use the pipeline would need to purchase capacity to do so, as well as paying transportation fees in origin, destination and pipeline networks. This increase in cost was exacerbated further by the October 2020 abolition of the "shorthaul" transit tariff in the UK, which shippers used to utilize in order to drastically reduce costs in using continental transport by supplying it with gas sourced from entry locations, rather than the NBP. Shippers would, therefore, need to realize a much larger locational arbitrage between the two countries in order to cover the costs of transit, although a 30 p/th differential is somewhat inflated compared to these costs.
Neither way
In terms of absolute spread value, the Zeebrugge spot basis has been as wide as 30.75 p/th in the negative, meaning the NBP would have been the premium hub and flows in the other direction would have been initiated. It achieved this in Winter 2005, amid a similar NBP price environment, but prior to the commissioning of the Dutch BBL and Norwegian Langeled export pipelines. In either direction, the Zeebrugge basis has seldom come close to these levels, given the greater interconnection between the UK, Norway and Continental Europe, underlining the extraordinary circumstance the European gas market finds itself in today. October is set to see a reduction in European imports from Russia, as capacity booking on the Yamal transit into Germany are barely a third of what they are now, and the second phase of the Russia-Ukraine accord prescribes a lower capacity volume this year compared to the last, with both well short of overall technical capability. It appears that this potential deficit is unlikely to be resolved by UK flows to the continent, with just 270,000 cu m/d of additional UK export capacity booked on the IUK for most days in October so far. A total of 11.8 million cu m/d has been sold for transit on gas days between Oct. 2-3, effectively a weekend contract. There are reports that the UK could see a surge in LNG arrivals from October, as a result of hedging behavior on winter contracts and a purposeful bidding-up to this end. This could stimulate further interest in spot capacity going forward should it compress the NBP prices in the same way. As things stand, however, shippers may be reluctant to flow in either direction, as continental Europe's injection season comes to an end, and it could seek to retain every last molecule of gas for itself.