21 Oct 2016 07:00
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR).
21 October 2016
InfraStrata plc
("InfraStrata" or the "Company")
CPR of the gas storage market and economic model for Islandmagee
InfraStrata plc (AIM:INFA), the gas storage company focussed on the UK, is pleased to announce the publication of a competent person report (the "Report") on the gas storage market in the UK and a review of the revenue assumptions for InfraStrata's economic model of the Islandmagee gas storage project (the "Project") by The Energy Contract Company ("ECC"), a leading commercial consultancy in the global oil and gas industry.
The full report titled "The gas storage market in the UK and review of revenue assumptions in economic model for the Islandmagee gas storage project" will be available shortly on the Company's website, www.infrastrata.co.uk, with a summary of its findings below.
The revenue model for the Project was based on assumptions of volatility and summer-winter price spreads by Baringa Partners ("Baringa"), an independent business and technology consultancy, for InfraStrata. ECC concluded that the underlying assumptions in the Baringa model are reasonable.
This revenue model formed the basis for InfraStrata determining the Project's cashflow over a 20 year period. InfraStrata's economic model assumes a capital expense and pre-operations operating expense of £308m in aggregate, utilising 65% debt. InfraStrata has estimated the net present value (NPV) of the Project to be £67m at an 8% discount rate and £38m at a 10% discount rate. ECC has not reviewed these NPV estimates.
The report was commissioned as part of the Company's strategy to seek funding arrangements to sit alongside a grant of up to €4.024m from the EU in order to commence a Front-End Engineering Design (FEED) and commercialisation process by year end, and in order to proceed to a Final Investment Decision (FID) for the Project in late 2017.
Commenting, Andrew Hindle, CEO of InfraStrata said:
"With the majority of UK gas storage in two ageing facilities, the Board of InfraStrata considers it imperative for new investment in modern flexible facilities in the UK in order to meet the gas demands of the future. Gas is assuming an important role in supporting renewable generation in the UK, whilst it continues to heat the nation, provide energy for cooking and contributes to wider lower carbon transportation in the form of Compressed Natural Gas (CNG) and Liquefied Natural Gas (LNG). The Report convincingly confirms our beliefs.
The Report by ECC is third party confirmation for what are attractive revenue assumptions for the Project and these revenues demonstrate the potential value of the project."
The executive summary points in the Report are as follows:
· Most gas sold in the UK is used for space heating, so demand has always varied significantly from day to day, due to temperature variations. In future these short term variations in demand should become significantly greater. UK Government energy policy now emphasises the need to replace power generation from fossil fuels with electricity generated from renewable sources, such as wind. As wind does not blow every day, gas fired generation will have to make up the deficit. Short term gas demand levels will therefore vary increasingly, depending on whether the wind is blowing or not.
· Many of the traditional means of meeting peak gas demand such as swing from offshore fields and interruptible gas sales contracts have almost disappeared now, but have been replaced by other sources of peak supply, such as pipeline gas imports from the rest of Europe and LNG imports. However, there are some drawbacks to reliance on these sources in future. Historic data shows gas suppliers in the rest of Europe are reluctant to supply the UK in cold winter conditions, if it means that they might be short of gas themselves. There are also problems with LNG as a source of peak gas, as the long-time lags for the delivery of LNG cargoes mean that it is difficult for LNG producers and traders to react to high prices in the UK market, which might have collapsed by the time a cargo arrives in the UK.
· In the rest of Europe the traditional means of supplying supplementary gas to meet peak demand was to use gas storage, although this was always less common in the UK. Gas storage levels in the UK are very low compared to the rest of Europe. Average storage capacity is only equivalent to 6.4% of annual demand in the UK compared to 25-35% in the other major markets in Europe.
· The problem in the UK has been exacerbated by recent technical problems on the Rough storage facility, which has severely restricted injection this summer. There have also been problems on the Hornsea storage facility. Both of these facilities, which account for almost 75% of UK gas storage capacity, are now over 30 years old and their continuing availability in the longer term must be subject to some doubt.
· The cessation of injection at Rough this summer seems to have led to a surge in price volatility from late August onwards. From October 2013 to July 2016 the Short term Gas Volatility Index averaged 34%. However in the last month or so this has more than trebled to 126%. This surge in volatility has potentially great significance for the Islandmagee project. Salt cavern storage projects such as Islandmagee depend on short term volatility to enable the users to gain from injecting gas on low price days and producing later on when prices have risen. The greater the volatility the more profitable the project.
· Overall the conclusion is that due to the increased use of renewable generation, gas demand will become even more variable on a short term basis in future. The existing means of meeting this variation in demand may well be inadequate in future, so price volatility is likely to increase in future and could increase significantly.
The Front End Engineering & Design (FEED) and Insitu Downhole Testing programme for the Islandmagee gas storage project is co-financed by the European Union's Connecting Europe Facility.
Disclaimer releasing the European Union from any liability in terms of the content of the dissemination materials:"The sole responsibility of this publication lies with the author. The European Union is not responsible for any use that may be made of the information contained therein."
For further information please contact:
InfraStrata plc
Andrew Hindle, Chief Executive Officer 020 8332 1200
Stewart McGarrity, Finance Director
Nominated Adviser and Broker - Allenby Capital Limited
Jeremy Porter / Alex Brearley / Liz Kirchner 020 3328 5656
Financial PR - Camarco
Billy Clegg / Gordon Poole 020 3757 4980
Notes to Editors:
Background on InfraStrata plc
InfraStrata is an independent petroleum exploration and gas storage company focused on Northern Ireland.
Further information is available on the Company's website www.infrastrata.co.uk.
Background on the Islandmagee Storage Project
The Islandmagee gas storage project company, Islandmagee Storage Limited ("IMSL"), is owned 90% by a wholly owned subsidiary of InfraStrata plc and 10% by a wholly owned subsidiary of Mutual Energy Limited. The project is a proposed salt cavern gas storage facility located on Islandmagee in County Antrim, Northern Ireland. Work commenced in 2007 with the acquisition of 3D seismic data to image the Permian salt in the Larne Lough area. During 2012, planning permission was granted for the project and a gas storage licence was issued by the Utility Regulator. In October 2013, the gas storage project was granted a 'Project of Common Interest' ("PCI") status by the European Commission. In 2015 a well was drilled to core the salt and confirm the technical feasibility of the project, supported in part by the Commission. The final stage before a Final Investment Decision will be the Front-End Engineering Design and Commercialisation of the project, planned to be completed by end 2017.
Further information is available on the project company's website www.islandmageestorage.com.