The extended hard winter in Northern Europe has once again served to illustrate the degree to which the UK is import dependent in order to meet its energy needs. This is especially applicable with natural gas, an essential energy feedstock.
Import dependency for natural gas for the UK reached a tipping point in 2000 when production from the United Kingdom Continental Shelf (UKCS) peaked and has been in decline ever since. A snapshot of the UK’s import dependency in 2011 shows that of an annual demand of 98 billion cubic metres (bcm) 43bcm is sourced from the UKCS and the balance of 55bcm has to be imported or 56% of total demand. Unless there is a surprise find of natural gas in the UK sectors of the North Sea or the Atlantic off Shetland then the level of import dependency will continue to increase. It is forecast that by as early as 2015 the UK will need to import up to 80% of its natural gas requirements.
Of the total imports 48% came from Norway, The Netherlands 15%, the rest of the world 35% and Belgium 2%. Of the imports from the rest of the world as liquid natural gas (LNG) 27%, was sourced from Qatar. Other LNG suppliers from the rest of the world category were Egypt, Nigeria, Yemen, Norway and Algeria. This data was sourced from Department for Energy & Climate Change (DECC) Digest of Energy Statistics for 2011.
Supplies direct from Russia into the UK do not register in any of those quoted statistics.
The only nation that does supply the UK with natural gas that buys it direct from Russia is Belgium. Belgium has no domestic production and therefore has to import enough volume to meet both its own domestic demand and to re-export to nations such as the UK.
The exports from Belgium to the UK are made through a pipeline or interconnector that runs from Zeebrugge on the north coast of Belgium to the Bacton Gas Terminal on the north coast of Norfolk. For those interested in dimensions and volumes the pipeline is 235km long, with a diameter of 1016mm, the annual capacity to carry 25.5bcm and with a reverse flow capability so that the UK can export to Belgium if necessary. This one interconnector is part of a huge complex of pipelines that connect regions as far away as Siberia to the IrishRepublic.
One of the biggest concerns for any import dependent nation is that one of the nations it relies on for imports may for non-commercial reasons cut of supplies. This happened in 2006 with near catastrophic effect when in the middle of winter Russia cut supplies to the Ukraine ostensibly as a result of a dispute about costs and unpaid bills. The actual reason was that Russia through Gazprom was putting political pressure on the Ukraine to discourage its attempted alignment with the West. Fortunately the dispute was resolved within days and normal supplies were resumed without any breaks in economic activity in the affected markets.
In commodity markets there are two types of trades. There are ‘spot’ trades which mean that buyer and seller have agreed a delivery at a price as a one off deal. They are entered into for a supplier to offload surplus or for a buyer to compensate for a shortfall and are short term in their nature. ‘Contract’ trades are buy and sell trades that are set up in advance of delivery. For example, a company requiring a known volume of a commodity over a period of time can enter into a trade with a supplier to buy those volumes. With natural gas the wholesalers in the UK would arrange trades into the future with suppliers agreeing to buy a fixed volume of cubic metres per day, per week, per month with a pricing formula built into the agreement. In commodity trading a pricing formula pegs the price of the commodity being traded to a similar product or one that the product is derived from. In the case of natural gas contract prices tend to be pegged to the price of crude oil.
In late March 2013 the media was headlining about the UK running out of gas, the spot price spiking by 50% in one day. In addition to the increased demand for gas the interconnector from Belgium was taken out of action due to a pumping failure. Both of these events were cited as the reason for the price spike.
Free markets do have their own logic which is that price will always settle where supply and demand is balanced. In the case of the market for natural gas in late March 2013 it is very difficult to understand how the two events cited could be linked as a cause for the price spike in one day. Everyone involved in energy supply must be aware that demand for natural gas has been very strong this winter and therefore the suppliers to the UK market must have arranged contracts with their suppliers in Norway and The Netherlands for gas volumes over and above previously arranged contracts to ensure adequate supplies but buying on contract rather than spot to achieve a degree of certainty for pricing and delivery.
By the end of the day spot prices for natural gas had settled down but still showed a 25% increase.
Media carried stories about a ship from Qatar bound for the Caribbean being diverted to Milford Haven to meet demand in the UK. This ship was one of the largest of its kind in the world but its volume of LNG was only enough for six hours demand in the UK. This LNG facility can now handle two ships a week of this size but this is only the equivalent of 25 days demand per year.
The company responsible for the interconnector on 22nd March issued a statement that it was taken out of operation at 0732 that morning. During the day at regular intervals further statements were issued about progress towards a full repair and by 1502, less than eight hours after the initial shutdown, it was announced that normal flows would be resumed. This was achieved by 1530.
The UK only receives 2% of its natural gas through this pipeline so it is very difficult to comprehend how an interruption to this supply line could contribute to such a large impact on prices.
What the incidents of 22nd March 2013 also highlighted was more serious than prices being subjected to wild swings following market sentiment were the UK’s storage capacity and that possibly is where the biggest threat to energy security lies.
Currently the UK only has the capacity to store 15 days requirements of natural gas. Compare this to Germany, albeit more dependent on supplies from Russia than the UK is and without significant LNG port facilities, which has 122 days capacity with plans for building a further 30 days. That would then mean they could hold nearly half a year’s demand. France has 99 days storage capacity with plans for an extra 10 days to be built. In addition to the UK’s existing 15 days storage capacity there are plans to increase this by a further ten days giving an insignificant 25 days capacity when compared with her European partners.
The UK is increasingly import dependent for its natural gas supplies. Renewable energy sources are not an immediate solution to the risk inherent with import dependency. Shale gas produced domestically is not an immediate answer. There is no certainty that the USA will be willing to export its surplus shale gas to the UK. Supplies from Qatar may be diverted to other markets where the better prices can be attained for the suppliers. All of these uncertainties but Britain’s gas imports on to a ‘just in time’ system but sometimes ‘just in time’ might not be soon enough.
The UK’s largest storage facility is located in the North Sea. Additional facilities planned but held up due to economic circumstances are the Gateshead project near Barrow in Furness, Larne Lough in Northern Ireland and Portland in Dorset. Their combined cost exceeds £ 1bn which cannot be commercially funded in the present economic climate.
If there was a catastrophic breakdown or ‘choke’ in the supply chain caused by politics, market forces, technical failures or unforeseen weather patterns the UK economy could be brought to a disastrous halt until normal supplies were resumed. The cost of extra storage facility should be regarded as an insurance premium against this scenario whose probability of occurrence can only increase over time as supply and demand patterns for natural gas change.
Storage facilities, in a free market, may not fully ameliorate wild fluctuations in prices but by releasing supplies from storage will ensure the continuity of supplies to keep the economy going until whatever has caused the choke to happen to be repaired and normal supplies resumed. This situation needs long term strategic thinking as opposed to the short term opportunistic logic of the market.
(For commentary on current and planned storage facilities)
Re sources of Belgium’s imports of natural gas
(For the import stats for natural gas 2011)
(Timeline for closure and reopening of the interconnector)
(For technical data on the interconnector)