Forecasting the future of UK gas supplies

"A concern for gas security "

By: Nicholas Newman
Forecasting the future is always full of uncertainties, there are too many doubts such as Black Swan's, banana skins and acts of God that can make a forecast disastrously wide of the mark. Well despite all these afford mentioned uncertainties, a group of Britain’s leading industry gas experts were precisely trying to predict the future of gas supplies for the UK at the behest of OFGEM, at a seminar held on 2 February 2012 at London’s Institute of Mechanical Engineering. Amongst the questions asked were the following:

· Where will future gas supplies come from?

· Will there be sufficient gas around and how much will it cost?

· Does Britain need more gas storage capacity?

· How stable will gas prices be and how secure will gas supplies be?

· Is the UK becoming dangerously vulnerable to the dependence on imports of gas supplies from Qatar?

· Will America start export gas from 2014 onwards?

In the past the main concerns for Western Europe were doubts about the price, availability and security of supplies of Russian gas to the European Union. In the future, Howard Rogers at the Oxford Institute of Energy Studies suggested that other factors including:

· Future developments in American gas production, especially the growth in shale gas production,

· Asian and European competition for Qatari LNG gas deliveries, especially as Britain becomes increasingly reliant on gas shipped from Qatar.

· The timing of the start of US gas exports to Europe. Already, traders have factored the arrival of forward European gas prices, which at least in the short term should depress the cost of wholesale gas prices for a short while. Alistair Buchanan Chief Executive of OFGEM has suggested that by 2014, the United States will be ready to export its surplus shale gas production to Europe, once it's LNG import terminals on the East Coast and Gulf of Mexico have been converted to LNG export terminals, which include the proposed plants at Corpus Christi Texas and the Cove Point unit in Maryland. However, the prospect of US gas exports to Europe is still not yet a done deal with the current Obama administration, due to the American government’s own concerns to achieve long-term energy independence.

· However, Alistair Buchanan, noted that America’s ability to export gas, will also depends on how quickly U.S. regulators push for a switch from coal to gas power for electricity generation and how quickly its economy grows in the coming years.

While Anne-Sophie Corbeau at the International energy agency suggested other factors will have to be added into Britain's gas supply equation. These include:

· The security of gas supplies from the world's leading LNG gas exporter Qatar, given that its northern neighbour is Iran. The latest UK government figures suggests that Qatari LNG imports amounted to 52% of the total gas consumed in the first nine months of 2011; this is up from 11% in 2009 as a whole. The trouble Britain is that Qatar not only exports to Britain and other European states, but also to Asian states such as China, South Korea and Japan. We've already seen as a result the closure of several Japanese nuclear power plants a spike in the price of gas has as Japanese power produces and switched to imported gas to make up for the loss of nuclear power generating capacity. In future years we're likely to see growth in gas prices due to the increasing demand for gas Asian power generators as their economies continue to grow. This will mean Qatari gas become an increasingly expensive proposition for European gas consumers.

· The growth in Asian demand for gas imports and the impact that nuclear power station building programs such as in China are likely to have on the growth of demand for gas.

It is not surprising that Britain is looking desperately for alternative gas supplies, such as American shale gas exports, development of shale gas in Europe and even by the end of the decade imports of gas from Australia.

In addition, Poyry energy consultant and expert on shale gas Lucy Fields has pointed out that due to various difficult environmental, legal and geological factors, Europe is unlikely to experience a repeat of the American shale gas revolution. Instead, the arrival of shale gas production is likely to be more modest in impact. In addition, some expressed that once Australia's supergiant offshore gas fields become fully operational such as Wheatstone and Gorgan, Britain will be able to import LNG gas from there.

Lastly, this seminar total to the issue of what is energy security, Pierre Noël from Cambridge University’s Electrical Policy Research Group, defines energy supply security as the ability of the energy system to meet contracted final energy demand under a gas supply disruption, at peak time. However, risk adverse politicians tend to not trust the ability of the international markets to top up supplies as required. Also, for political and economic reasons, they are against sudden price spikes caused by disruption to supplies, even though economists will regard such market developments as an efficient method of rationing gas supplies. Instead, our political energy leaderships will seek methods to reduce the potential for such disruptions will have on gas supply availability. As a result, of the disruptions caused by though Russian Ukrainian gas disputes, European Union member states adjusted the market conditions in Europe to encourage greater cooperation between operators and increased capacity for storage, in order to insulate europe’s gas market against such emergencies. Such proactive action was much to the annoyance of Europe's gas suppliers such as Gazprom and Sonatrach, since such developments weakened such producer’s ability to influence the market.

In Britain, there has been much political concern that Britain has insufficient gas storage capacity. Though, many market operators would disagree. The UK’s current storage capacity amounts to only 14 days’ worth of gas supply—a dangerously low level compared with France which has 87 days’ worth of gas storage, Germany 69 and Italy 59, according to last December’s report by MPs on the Energy and Climate Change Committee. However, the reality is not as clear-cut as it initially appears. It has been argued by some energy analysts that the reason gas storage capacity has not been significantly increased in recent times are because of the following factors:

· Britain has massive gas import capacity, via its interconnector’s with the continent, especially the Norwegian gas fields.

· Also, due to developments at Milford Haven in Wales and, the United Kingdom has significant LNG import capacity.

· Further, there is sufficient capacity to cope with most peak time disruption scenarios in the years ahead.

· UK security of supply relies on its ability produce some gas itself and its ability to import gas from both European and global markets.

Unfortunately, in Europe's efforts to increase gas price competition by weakening the influence that oil price indexation has on Europe's wholesale gas prices. Europe is likely to face increased price and supply volatility as increasingly gas supplies will be obtained on the spot markets rather than through long-term contracts.

In order to improve their U.K.'s ability to withstand gas supply disruption the government has given the go-ahead for Gateway Storage Company to construct a new offshore gas storage facility, not far from Barrow in Furness in Lancashire. Once completed, the undersea caverns will have a working gas storage capacity of 1.52 billion standard cubic metres (~562 million therms), adding nearly 30% to the current UK gas storage capacity. Once this facility is completed in 2014, the United Kingdom should have a similar storage capacity for gas equal to that of Holland and in the longer term investors have plans to double the U.K.'s current storage capacity, equally that of either France or Germany.

This seminar was part of OFGEM's first major effort to gather industry views on the UK's gas supply prospects following the DECC request last year, an OFGEM spokesman said. However, what this seminar revealed was the major differences between gas producers, traders, consumers and regulators about the future course of UK gas supplies. It also revealed how black swans such as the arrival of the American shale gas revolution was unforeseen by many experts just a couple of years ago. Though, I suspect a future black swan will be the impact that the Arab Spring will have on Europe’s future gas supplies.In addition, the debate in the question-and-answer sessions revealed how successful acts of God such as European energy policy has been on affecting the growth in demand for gas and how the market can be made to operate to meet the greater good of the economy. As for banana skins, the un-intended consequences of the drive to the index gas prices from oil prices is a good example. In the long term, it looks like European gas prices will continue to increase, due to increased demand by European, Asian and American power generators. However, the real question is, where will Europe be obtaining its future gas supplies. I would not be surprised that the European Union will be developing new gas fields in the Arctic regions in the long term.

For details of the slides used in seminar see:

http://www.ofgem.gov.uk/About%20us/PwringEnergyDeb/Pages/PwringEnergyDeb.aspx