Kate Mackenzie Are the UK natural gas supply fears warranted?

Fears about the UK’s natural gas supplies are not going anywhere, despite some strong arguments that they may be a little overblown thanks to the cold snap.

The composition of the UK’s gas supply has been changing for many years as domestic production dwindles. On the one hand, gas production around the world is forecast to ramp up sharply over the next few years, but the global gas market is not yet a fungible one, though it’s heading in that direction. Will the brave new world of expanding LNG production and new pipelines help or hinder the UK (and the rest of western Europe) in securing gas? 

While new terminals in particular seemed to help keep most UK users supplied during the cold snap, there are some worrying signs that Britain can’t be complacent about where its gas is coming from: LNG tankers, unlike pipelines, can deliver to anyone with a terminal. And, while plans for the EU-friendly Nabucco pipeline still face numerous hurdles, a new pipeline opened last month carrying natural gas directly from central Asia to China – underlining that geographical proximity to these gas-rich regions is no guarantee that European countries will be able to secure their supplies.

On the other hand, if natural gas does move towards becoming a global, fungible market through LNG transport expansion in particular, it’s not necessarily going to hurt anyone: in fact, it could look a lot like oil. And no-one worries about China taking everyone else’s oil supplies. Well, at least not in the same terms that fears about natural gas security supplies are described.

Meanwhile as my colleague Ed Crooks writes today, the UK energy regulator Ofgem is more concerned about the situation than the country’s government, which figures that demand for gas will ease along with efforts to reduce CO2 emissions. Ofgem is concerned by the security of supply issues outlined above, and that demand for more natural gas as a bridging fuel for another 10 – 15 years as old power plants close and new lower-carbon sources such as wind turbines, nuclear power plants and CCS-equipped coal-fired plants come online.

Big energy users in the UK are certainly worried about natural gas supply, even if there are some good arguments why they shouldn’t. Two big energy user groups wrote a letter published in today’s FT, dismissing the argument that supply disruptions seen last week affected only those on interruptible contracts. They write:

The bottom line is that the UK energy system was unable to meet the needs of all consumers. Had no, or not enough, interruptible contracts been in place and generators not been able to switch to coal, customers on firm contracts would have been facing cut-offs.

They add that the UK’s increasing reliance on foreign gas often imported through long and complex supply chains renders the country’s industries vulnerable to disruption.

Related links:

Looking on the bright side of the LNG glut (FT Energy Source, 22/04/09)
Majors continue LNG investments with eye on niche market (FT Energy Source, 06/05/09)
LNG transatlantic arbitrage in action (FT Alphaville, 01/12/09)