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LNG and gas prices

We hear about LNG often in the news, but what is it?

Liquified natural gas, known as LNG, is natural gas that has been cooled down to liquid form.

It is cooled for the benefit of safety, ease of transportation and non-pressurized storage. Because some natural gas resources are in remote locations, transporting gas long distances can be both costly and impractical, which is why the LNG process is so useful.

Cooling gas down to –260° F (–162° C), changes its state from a gas into a liquid that is 1/600th of its original volume. This significant reduction allows it to be shipped safely and efficiently around the world aboard specially designed LNG vessels.

Once a ship arrives at its destination, LNG is transferred to a re-gasification plant where it is heated and returned it to a gaseous state. From then, it is distributed through pipelines for use by homes and businesses in the same way as any other form of natural gas.

LNG imports to the UK

In order for LNG gas to be received by a country, it must be docked at an LNG terminal and unfortunately there are very few of these terminals in areas where they are most needed – North Europe. One way around that problem is for the LNG to be imported to the UK and distributed throughout northern Europe through existing pipelines.

In the UK we have three LNG terminals. However, there are only two main pipelines in the UK that are used to pump gas back into Europe, and they have been operating at maximum levels, pumping gas as fast as they can, but not fast enough. So, in effect, the UK has lots of gas coming in, but not enough of it can get out through to Europe.

The result of this is the UK day ahead market for wholesale gas (what you would pay today for gas used tomorrow), being lower than it has been for 18 months.

What is the catch and why are gas prices still high when looking at supply contract options?

Well, energy companies base their prices on futures markets (years ahead), rather than day ahead. So, although day ahead gas prices are at the lowest they have been in months, when you look at futures markets, prices are still extremely high with no sign of any real change.