March 8, 2012 / 6:06 PM / 5 years ago

UK faces total winter LNG cut-off risk - Merrill

* UK next winter gas price to hit 90 pence/therm

* Asian LNG prices to hit $18/mmBtu this summer

* European LNG supply to fall over coming months

LONDON, March 8 (Reuters) - Britain risks a total cut-off in liquefied natural gas (LNG) supply next winter as the world's biggest producer Qatar skirts Europe in favour of more lucrative exports to Asia, Merrill Lynch Bank of America analysts said in a research note on Thursday.

With Asian demand surging, mass diversions could trigger severe gas shortages in the UK and set wholesale gas prices soaring some 25 percent to 90 pence per therm, the analysts wrote.

Britain's dependency on seaborne gas imports has grown in the past two years, making up about a quarter of total supply in 2011 as North Sea reserves declined by 10 percent year on year.

"Unfortunately, this marginal source of gas supply (LNG) for Europe is now also contracting," lead author Sabine Schels said in the note.

"In fact, it is not implausible that UK LNG imports fall to zero by the end of 2012 especially if none of Japan's nuclear power plants are re-started this year," she said.

The UK became a net importer of gas for the first time in 2011, including pipeline imports from Norway, the Netherlands and Belgium, as well as seaborne LNG.

Norway, which holds a 15-18 percent market share of UK gas supply via sub-sea pipelines, is the country's biggest pipeline supplier.

ASIA PRICES

The bank expects Asian LNG prices will bounce back to $18 per million British thermal units in the summer - about double European prices - supported by strong demand as Japan continues to face nuclear outages and China and India raise imports.

Europe will be powerless to compete for cargoes given the steep price premium in Asia, the note said.

"Qatar has consciously sent tankers to Asia which provides better netbacks (prices), thus increasing the risk of gas shortages in Europe," it said.

With demand rising strongly in key consuming countries like Japan, China and Korea, and with Indonesia and Malaysia joining the club of LNG importers, we estimate that UK LNG imports could fall below 25 mcm/d over the next few months, the bank said.

That will lead to significantly higher gas prices next winter, when demand peaks, it said.

At the same time Merrill Lynch expects European gas demand to rebound in 2012, despite predicting a second eurozone recession in the same timeframe.

European gas demand declined nearly 10 percent last year partly because funding difficulties arising from euro zone debt fears idled large swathes of industrial capacity.

JAPAN REACTORS OFFLINE

sustained surge in Japanese gas demand this year forms the backbone of the bank's analysis, counting on a prolonged outage period being imposed on the country's nuclear reactors amid stiff opposition to reopening idled plants.

Japan's reactor meltdowns at the Fukushima nuclear plant triggered by a deadly earthquake and tsunami on March 11 last year shook the nuclear world and raised a question mark over whether atomic energy is safe to rely on.

All of the country's 54 reactors are expected to be off line by the end of April. Japan turned to LNG imports to replace electricity it generated from nuclear power, importing a record 78.4 million tons of LNG in 2011, up 12 percent over the previous year.

"However, if none of the capacity was to be re-started, a serious risk, Japanese LNG import demand could increase by a total of 11.0 million mt to 89.4 million mt in 2012," the note said.

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