UK Gas Storage Projects Suffer Serious Setbacks

Hopes for further expansion of gas storage facilities needed to help the UK weather the vagaries of global energy markets received a blow yesterday when two projects suffered serious setbacks.

While construction began on an E.ON facility in Holford, Cheshire that will be able to hold 165 million cubic metres of gas – about half the country's daily demand – two other companies planning storage projects acknowledged significant delays in developing the schemes.

Portland Gas's Dorset scheme, which had been expected to open in the second half of 2011, is being held up by problems securing financing. The facility was now unlikely to open before March 2012, the company said, sending its shares down by nearly 39 per cent.

Andrew Hindle, the Portland Gas chief executive, said: "The global credit crunch has all but closed off the likelihood of achieving [the 2011] target for the time being and this factor, combined with cutbacks in longer-term capex spend by industry participants in the sector, has meant that halting the current joint venture funding process is in the best interests of all shareholders." Encore Oil is also struggling.

The AIM-listed company may have to redesign its North Sea project after preliminary tests showed the plan was more complex than expected.

At E.ON's development, meanwhile, the "solution mining" process that has started at all eight caverns in the project will see seven billions gallons of water pumped into underground salt deposits to create massive underground spaces which can then be used to hold gas.

Britain once relied on the North Sea for all its gas requirements and was insulated from the volatility of global prices. But as domestic stocks depleted, reliance on international supplies and exposure to price fluctuations increased. Since January 2007, spot prices have gone from 40p per therm to an all-time high of 100p per therm in the summer.

More stored gas would allow suppliers to smooth out the price fluctuations by buying and storing gas when it was cheap. Dr Paul Golby, the chief executive of E.ON UK, said: "We're aware that our customers have seen large price increases in recent months and it's only by investing hundreds of millions of pounds in projects such as [Holford] that we can hope to keep energy as affordable as possible."

Author: Jo Amey