Memorandum by the Energy Information Centre
1. EIC is writing in response to the Trade
and Industry Select Committee's request for submissions pertaining
to "the implications of increasing dependence on gas imports",
as detailed in Question 3 of the Government's Energy Review. EIC
welcomes the opportunity to respond to this request, and would
be happy to discuss this with you in depth at a future date if
2. As the UK's leading independent consultancy
to industrial, commercial and public sector energy users, EIC
was established in 1975 and currently represents over 600 industrial
and commercial customersincluding 40% of the FTSE-100 companies.
3. The decline of the UK's indigenous gas
production is now seen as inevitable, with output from the UK
Continental Shelf (UKCS) past its peak, and the country having
become a net importer of gas in 2004 for the first time since
4. However, unlike in previous years, the
UK is experiencing a structural shift in its energy balance andassuming
that the country wishes to continue using gas on its current scaleincreased
import dependence seems inevitable. As such, if we accept this
viewpoint, then the key issue is how the UK manages the situation
to ensure that it is not unduly disadvantaged.
5. The gas dispute between Russia and the
Ukraine has highlighted the extent to which dependence on a single
source of gas can prove to be a major disadvantage. In this regard,
the UK is fortunate in that its imports of gas will be sourced
from a range of nations. However, the press hysteria surrounding
the consequences of the Russia-Ukraine dispute almost completely
overlooked the fact that the UK receives no gas directly from
Russia, and only a small percentage of its gas indirectly from
6. Unfortunately, this has not prevented
media and political commentators from making the customary unjustified
comments about relying on supplies from "politically unstable"
nations. This draws attention away from the greater issue of ensuring
that any import infrastructure is adequately utilised, and that
measures must be in place on a national and European level to
guarantee that this is the case. At face value, a greater number
of supply sources should imply greater supply security.
7. Looking at pipeline infrastructure to
begin with, the existing Bacton-Zeebrugge Interconnector will
have its reverse flowor UK importcapacity increased
in two stages by the end of 2006. At present, the pipeline has
a forward flow (UK export) capacity of 20 billion cubic metres
per year (bcm/yr), and a reverse flow capacity of 16.5 bcm/yr.
However, an increase in the number of compressors at Zeebrugge
by pipeline operators, Interconnector UK, will see the UK's import
capacity increased to 23.5 bcm/yr by December 2006.
8. Looking further ahead, the next pipeline
development on the starting grid will be the Bacton-Balgzand Line
(BBL), which will provide imports to the UK from the Dutch gas
market. Designed with an import capacity of 16 bcm/yr, the pipeline
is being developed by Dutch company Gasunie with a projected start
date of Q406, although it will reportedly take until Q107 for
the pipeline to reach full capacity. The pipeline operators have
already indicated that they will undertake the auction for pipeline
capacity in April, while rumours of the possibility of bi-directional
9. Due online in late 2007, the Langeled
pipeline from the Norwegian Continental Shelf (NCS) to the Easington
terminal will provide 25 bcm/yr of gas to the UK from the Ormen
Lange field, which is located of the northeast coast of Norway.
This development is currently the world's longest undersea gas
pipeline, approximately 1,200 kilometres longand will be
constructed in three stages.
10. Gas from the Ormen Lange field will
actually be transported to processing facilities at Nyhamma in
Norway, which will also serve as the Norwegian link of the Langeled
pipeline. Langeled itself will be constructed in two phases. The
first stage of the transit process is from Nyhamma to the Sleipner
field in the North Sea, although this will actually be completed
lasthaving an expected completion date of autumn 2007.
11. The second phase of the transportation
process, which is currently well under construction, will tie
in the Sleipner field to the Easington gas terminal on the North
Sea coast. This is due online in autumn 2006, and will actually
allow some flows into the UK from existing infrastructure ahead
of first flows from Ormen Lange itself in late 2007. Estimates
of flows from Ormen Lange are in the region of 20 to 25 bcm/yr.
12. The completion of the Langeled pipeline
will boost the UK's imports from Norway from their current levels,
as the existing Vesterled pipeline into St Fergus provides 13
bcm/yr of supplies from the NCS. In addition, 2007 will see the
start of flows through the new Tampen Link that will connect Norway's
Statfjord field to the UK's FLAGS pipeline infrastructure. Some
estimates have flows through the Tampen link of approximately
10 bcm/yr, although others show less than half that figure.
13. However, the UK is also assuming more
of a role in the global energy sector with its increasing reliance
on liquefied natural gas (LNG), opening energy prices in the UK
to a whole new set of price drivers.
14. The first of the UK's LNG terminals
is already up and running, and has been a valuable contributor
to the country's supply-demand balance this winter. The Isle of
Grain, which has been converted by National Grid from its original
use as a peak storage facility, is located on the Thames Estuary.
15. Owned and operated by Grain LNG, the
facility has a capacity of 3.3 million tonnes of LNG per annum
(mtpa)equivalent to approximately 4.5 bcm/yrin the
first stage of its development. This first phase of capacity has
already been sold by auction to a joint venture established by
BP and the Algerian company, Sonatrach, for a period of 20 years.
As a result, the companies have exclusive rights for the unloading
and storage of LNG of this capacity, and its subsequent regasification,
for this period. The second phase of the project, due online in
2008, is for a further 8.5 bcm/yr of capacity. This has also been
sold by a similar process to Centrica, Gaz de France and Sonatrach,
on a similar long-term basis.
16. The next two LNG projects are due onstream
in 2007 or 2008, and are both located at Milford Haven in Wales.
The Dragon LNG project is a joint venture between the Dutch company
Petroplus, the UK's BG Group, and the Malaysian company, Petronas.
As with the Grain site, the project at Waterston has been converted
from a pre-existing facility, in this instance a former oil refinery.
The project will have a capacity of six bcm/yr, which is split
equally between BG Group and Petronas. The South Hook LNG project
is being developed by ExxonMobil and Qatar Petroleum, and will
also be on the site of a converted oil refinery. With a capacity
in its first phase of 10.5 bcm/yr, first deliveries are provisionally
expected in late 2007. A second phase, also with a capacity of
10.5 bcm/yr is due online in 2009 or 2010.
17. It is the prospect of such large volumes
of gas coming into the UK that has led to speculation that the
country will face a gas "bubble" in the years to come,
resulting in prices falling to the comparatively low levels of
two or three years ago. However, such a viewpoint may be over-optimistic,
as such a fall in prices would actually discourage imports into
the UK. This implies the need for an equilibrium price that encourages
imports, but does not result in such an influx of gas that prices
slump. Therefore, a decrease in price over time is to be expected,
although perhaps not to the extent predicted by some commentators.
18. A different perspective is that the
imports are more likely to mitigate further price increases, rather
than lead to a fall in prices per se, and that the UK gas market
will achievefor want of a better terman import-dependent
equilibrium gas price.
19. Therefore, the distinction needs to
be made between the possibility of a gas bubble, and a bubble
in import capacitywhich the UK could face if all of the
planned projects come onstream on schedule, and with the volumes
predicted. Indeed, while it is highly unlikely that gas will flow
to the maximum allowed by the import developments, consumers should
be able take comfort that only a fraction of the increase in capacity
is needed to meet the UK's forecast growth in gas demand.
20. However, while the UK looks set to remain
a net exporter of gas through the summer months, it is critical
to note that gas flows through almost all of the planned import
projects can be diverted to alternative delivery points, or the
volumes supplied can be cut in response to demand and price movements
in other markets.
21. Likewise, the comparative lack of deregulation
in Continental European energy markets means that there is no
guarantee that flows will respond to the possibility of arbitrage
between UK and Zeebrugge.
22. This is the lesson that the UK has learned
the hard way in the past few monthsinfrastructure does
not guarantee imports. There was a climate of relative optimism
in the summer of 2005 regarding gas imports, although this hasfor
the most partdisappeared into the "black hole"
(to use Ofgem's analogy) of the Interconnector.
23. While some participants in the industry
will claim that import flows did indeed respond to price in mid-February
when the Centrica-operated Rough storage facility was taken out
of action by a fire, there are grounds to suggest that this was
due more to the timing of the incident rather than price signals.
24. From the start of 2006 to 15 February,
imports into the UK through the Interconnector flowed at an average
of around 55% of the pipeline's 48 mcm per day capacity. However,
following the closure of Rough, this has risen to more than 80%.
At the same time, the absence of Rough from the market meant that
the Day-ahead price for gas in the UK had risen well above the
pre-closure levels, leading some commentators to suggest that
increased prices had induced gas to be imported.
25. In the second half of February, the
Day-ahead price of gas in the UK has averaged approximately 75
pence per therm. However, over the period 21 November to 5 December
inclusive, the corresponding Day-Ahead price was almost 120 pence
per therm but Interconnector imports were closer to 52% on average.
26. In this instance, gas flows clearly
did not respond to price, and this was most likely due to the
fact that it was too early in the winter for continental utilities
to consider selling their gas from storage given their own security
of supply obligations. In February, with the worst of the winter
behind them, these companies would be more willing to sell their
27. This reflects the differing treatment
of gas storage assets in the UK compared with Continental Europein
the UK they are operated as commercial businesses, while on the
Continent they are operated largely as strategic reserve assets.
The issue of unbundling of the ownership and control of these
assets is one that will be addressed by the European Commission
in its price probe, as is the issue of flows through the Interconnector.
28. However, the issue of Interconnector
capacity is one that must be addressed on the domestic front,
given the UK's import dependence. In recent months, "secure"
supplies of gas have seemingly become synonymous with "local"
supplies of gas.
29. Dismissing the economics of transport,
gas supplies transported long distances can be secure provided
that the contractual regimes are in place to ensure utilisation
30. This has been seen in the market this
winter at the Grain LNG terminal, with Ofgem threatening to revoke
the exclusivity arrangements for capacity held at the terminal
by BP and Sonatrach. Clearly, the nature of the LNG business means
that deliveries of cargoes to terminals such as Grain means that
they will never have the flexibility of pipeline deliveries, but
it does demonstrate the extent to which "use-it-or-lose-it"
capacity arrangements are an integral part of ensuring the optimal
utilisation of the UK's import infrastructure.
31. As such, the Governmenteither
through its presence in Europe, or on a national basisand
Ofgem need to ensure that those companies that wish to import
gas into the UK have the ability to do so. To achieve this, these
companies will need access to unutilised capacity at the country's
import terminals and its pipelinessomething that will become
a near prerequisite as the UK becomes more reliant on imported
32. There is nothing wrong in principle
with relying on imports, but the practice of the UK this winter
is such that customers have seen more of the negative side of
import dependence than the positives. This has led to UK businesses
facing exponential year-on-year increases in their energy bills,
jeopardising the health and the future of the economy.
33. While the attitude among some in Government
is that this has been a "successful" winter for the
UK gas network, businesses cannot continue to operate in the long-run
with energy prices at or near current levels.
34. Indeed, Ofgem has already warned that
industrial and domestic customers in the UK and Ireland could
end up paying at least an additional £3 billion to secure
gas over Winter 2006 if new and existing import infrastructure
is not fully utilised. The regulator has pointed out that if the
UK's import capacity is used next winter to the same extent that
it has been so far this winter, the effect on prices could be
35. If the UK's growing dependency on imports
has highlighted any one characteristic of the country's gas market,
it is its lack of gas storage. Given that the UK only has storage
capacity equivalent to around 4% of its annual demand, a greater
reliance on imports implies the need for a greater "safety
net"something that gas storage is well placed to provide.
36. The aforementioned problems experienced
by Roughthe UK's largest gas storage sitein February
reflect the extent to which the country is reliant on a single
site for its seasonal storage requirements. However, the increasing
need for fast-response storage sites is reflected in the number
of new projects that are in developmentunderpinned by the
sharp increase in the price of storage capacity over the past
37. Invariably, gas import projects will
not possess the same flexibility as the UK's own declining resources,
and it will fall to gas storage projects to make up this responsiveness.
However, recent problems experienced by Star Energy with its Welton
site reflect the difficulty that storage developers face in getting
new sites off the drawing board.
38. While the Government has required energy
supply security to be an integral consideration in the planning
process for any new energy developmentsuch as gas storage
or renewable projectsthe Welton issue highlights the extent
to which such delays could jeopardise the country's energy security.
39. Public safety is rightly a key factor
in any new energy development, but the "NIMBY-ism" of
wind farms now appears to have been joined by an undue level of
fear about storage in the wake of the Buncefield explosion and
40. Such issues only serve to highlight
the need for an informed and non-partisan discussion about gas
storage projects, and the need for Government to carefully consider
any application or appeal regarding gas storage.
41. The need for additional gas storage
resources was acutely highlighted following National Grid's decision
to call a Gas Balancing Alert (GBA) on Monday 13 March. Unplanned
maintenance on the NCS meant that import flows from Norway were
no longer a certainty, while a similar problem emerged with supplies
through the Interconnector following industrial action in France
that saw union members take control of gas storage and pipeline
42. These factors jeopardised supplies at
the same time that below seasonal normal temperatures increased
heating demand while maintenance at coal-fired generating stations
increased the demand for gas for power generating purposes.
43. Looking beyond the quadrupling of the
Within-day gas price as a result of GBA, if the UK had a greater
volume of storage capacity relative to annual demand as well as
a range of storage assets in the country's portfolio, it is questionable
whether the reaction (or over-reaction) from prices would have
been as great.
44. While the UK's storage capacity has
a long way to go before it reaches the level of some of its fellow
EU member statesFrance and Germany both have storage capacity
equivalent to around 20% of annual demand compared to the UK's
4%ensuring that a suitable framework exists for the development
of new storage sites is an essential element in the UK's increased
gas import dependency.
45. Although the possibility of strategic
gas storage has been raised, the funding and operation of such
an asset could be problematic despite its obvious benefit to the
gas network as a whole. Given that such an asset would have to
co-exist with storage facilities owned and operated as commercial
entities, it is unclear whether the construction of strategic
storage could hamper the growth in commercial storage assets.
This interaction is something that needs to be considered if strategic
gas storage is to be considered.
Head, Energy Markets
Research & Briefing (R&B)
16 March 2006