Keeping a weather eye on the gas market

Janet Wood explores some of the natural phenomena that influence gas demand and supply 

 

Sometimes a glance out of the window will give you some clues as to gas demand. It’s simple enough to assume that on a cold gloomy winter’s day – especially one with little wind – you and your neighbours will be calling on gas both for heat and electricity.

That simple assumption obscures a complex interaction with weather systems, from the local to the global scale.

The close link between global weather conditions and meeting our power and heat needs has become very visible as we build renewable systems, but it has always been an important influence on energy flows and markets.

Our global weather system is currently emerging from a ‘La Nina’ event, something that typically raises gas demand both in Northeastern USA and Canada, and in parts of Asia. When that happens, UK prices may rise, because power providers here because a large part of our gas comes from the global market. With heavy US demand, we effectively have to ‘outbid’ users in Asia for LNG cargoes.

What is it about the weather that gas players need to know? Some background on global weather patterns is interesting here.

 

In the background: El Nino Southern Oscillation

The biggest global weather pattern, despite its name, is El Nino (or ‘Little boy’). Although it was initially named by fishermen in Peru, it is closely watched by meteorologists around the world. The fishermen had observed that every few years the fish headed elsewhere – most noticeably during the Christmas period – because sea currents bearing nutrients had changed and the fish had followed them.

Along with its counterpart, and this year’s event, ‘Little Girl’ (‘La Nina’), El Nino is now known as the El Niño-Southern Oscillation. The pair are opposite phases of a natural pattern of variation in water flows across the Pacific Ocean. Meterologists refer to El Nino as the ‘warm phase’ and La Nina as the ‘cool phase’ with intervening years known as ‘neutral phase’.

During El Nino years, surface winds across the Pacific Ocean in the tropics (ie in a belt around the equator) are weaker. As a result, ocean temperatures in the central and eastern tropical Pacific Ocean are warmer than average and that changes rainfall patterns across and around the globe’s largest ocean.The opposite applies during La Nina, when surface winds in the region are stronger than usual, and most of the tropical Pacific Ocean is cooler than average.

This shift in turn disrupts other atmospheric circulation patterns that take air to the north or south (often referred to as jet streams). By this route ENSO affects temperature and precipitation across other parts of the world. Its influence is strongest during the northern winter.

The pattern is fairly consistent over the long term (El Nino was observed and named in the 1600s), but it is variable. In general, the warmest year of any decade will be an El Nino year, the coldest a La Nina one. Put another way, the events occur on average every two to seven years, with El Nino more frequent than La Nina, and although they generally last less than a year they can persist for longer.

 

On the watch

Meteorologists keep a close watch on ENSO conditions to try to predict them as far in advance as possible, assess how severe they will be and estimate how long they will last.

But they are predicting just a season or a few months ahead, and assessing the severity of the effect is a matter of weeks or even days, rather than offering long term certainty.
The entire global gas industry watches those forecasts very closely as ENSO events develop, because it is a major driver of the season’s gas market.

 

Why it matters

In an El Nino event, dry regions of Peru, Chile, Mexico, and the southwestern USA see much more rain and snow – and more need for heating – while Japan experiences a warmer than average winter.

In contrast, a La Nina event brings colder weather to western Canada and Alaska, and parts of Asia also expect snow and ice. The effects reach as far as east Africa and southeastern China, which are both drier in La Nina years.

The oscillation presents another hazard. El Nino events tend to foster the formation of tropical storms in the east and central Pacific, which may disrupt shipping towards Asia.  But La Nina weather conditions prompt a substantially higher frequency of hailstorms and especially tornadoes from the Atlantic and Caribbean, which move towards the  southern and southeastern parts of the USA – often referred to as ‘Tornado Alley’ – potentially affecting the gulf region that hosts major gas export/import infrastructure.

 

What’s more…

Although it is the biggest weather oscillation, ENSO is not the only regular change in global weather patterns, as energy moves around within the atmospheric system. Another, the Madden-Julian Oscillation, sees tropical rainfall move as wind patterns vary over the Indian and Pacific Ocean.

Such smaller oscillations can either redouble the effect of ENSO or moderate it. For example, the MJO creates favourable conditions for tropical cyclone activity, while the enhanced or supressed rainfall can affect the timing of monsoons.

And finally, some of the ENSO’s weather outcomes affect gas directly, while others are indirect.

One example is the US’s ‘green gas’ (plant-based ethanol) industry. An El Nino event that increases rainfall in the USA lifts yields across the country’s ‘corn belt’ and boosts production. A La Nina, in contrast, tends to leave the region short of water and yields are lower.

In Japan, meanwhile, less gas demand for heating is not the only outcome of El Nina years. With no snow, the winter economy is depressed – and the pattern of demand changes – as keen skiers stay at home.

 

Disrupted delivery

LNG companies and gas pipeline operators also have to be aware of the weather trend. LNG ships are filled and emptied from terminals located on wide bodies of water, including those in or adjacent to the US’s ‘tornado alley’ in the southwestern USA .

Offshore terminals have to ensure staff safety, close down and evacuate when a storm is in the offing – but they also have to minimise downtime, so prediction is important.

For their part, onshore terminals have to be equally prepared, because tropical weather systems can bring swells and high winds that can make it risky to manuever LNG tankers. So a La Nina winter carries further risk of interruptions in US gas shipments.

 

Wrapping up warm

Gas and energy industry players have various options to protect themselves against the effects of adverse weather and the ENSO children. LNG terminal operators in the Gulf facing a La Nina year, with more frequent tornadoes and hurricanes will be ready to reduce production, fix down equipment and, where necessary, evacuate personnel to ride out the storms.

For traders, however, financial protection is more likely to come from the markets.

There has always been an opportunity to have some protection from major weather events using insurance. But that is ‘all or nothing’ – it pays out in the event of catastrophe. More flexible solutions were needed.

It was around 25 years ago, according to the Chicago Mercantile Exchange (CME), that traders began to have access to futures contracts for weather. They allowed energy companies to set up a ‘hedge’ trade against adverse weather, generally reacting to temperatures that are higher or lower than expected in a specific location, and hence demand.

Standardised weather futures contracts based on weather indexes in ten US cities. They are now based around ‘heating degree days’ in the winter (when the temperature falls below 65degF) and  ‘cooling degree days’ in the summer (when the air conditioning load, and therefore electricity supply, is more important than heating). Traders can now access products based on Amsterdam, London and Tokyo, as well as ten US cities. CME said, “Proper use of temperature-related contracts not only enables utility firms to stabilize revenue streams but may also be used to provide at least a partial hedge to the cost side of the equation”.

As renewables represent more and more of our power generation capacity, hedging against daily changes in weather, as well as variations from longer term events like the ENSO, will become of direct importance to renewables traders and the products will be available to the gas industry as well .

 

Taking out the guesswork

While hedging helps minimise the financial effects of adverse weather, renewables is also driving more investment in weather forecasting and the gas industry can also benefit. More, cheaper, computing capacity allows for a better forecast – if not years ahead to predict the next El Nino, at least days and weeks to allow the energy industry to balance supply and demand more effectively. Accurate weather forecasts are also vital to help terminal operators coordinate tanker arrivals during tornado season.

UK electricity balancing provider Limejump recently discussed rapid developments in the world of machine learning and AI and it highlighted the application of DeepMind and Google machine learning algorithms to forecast renewables output. National Grid, the UK’s electricity and gas system operator, joined forces with the UK’s specialist in AI, The Alan Turing Institute, and improved solar power forecasting by 33%. Limejump says next on the list is tacking a tend to over-forecast electricity production from wind farms.

 

Where are we now?

This has been a La Nina winter. The UK’s short term weather patterns may be influenced by global weather oscillations, but its energy traders are looking further afield to try to predict market movements.

Severe Weather Europe believes the La Nina itis already past its coldest point, but says its influence can sometimes still be present for weeks or months after.It says colder weather is likely in western Europe with more rain or snow in the British Isles and Scandinavia.

The Japan Meteorological Agency agreed, saying that it expects colder than normal conditions in Northern and Western Japan, although with extra sunshine. Polynesia, China and the Philippines could be colder and wetter than average. US meteorologists, meanwhile, predict Canada and the  northern USA will be colder and wetter than average.

And looking further forward as we move into spring, those on the highest alert level in the coming months will be terminal operators in the US Gulf, where the remnants of La Nina could signal tornadoes.

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Further reading

Those intermittent power plants …

Climate and environment dominate WEF’s annual Global Risks Report

From the New Power archive: Long hot summer? How power assets are affected as ambient temperatures rise

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