 Economics, Energy Policy & Gas Index
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Gas - The UK's Fuel of Choice
Natural gas is the UK’s largest source of primary energy, supplying over
40 percent of the country’s total energy needs. It is used both as a
domestic and industrial fuel, as well as for generating electricity, to
provide heat and power for our homes and industries, and as feedstock for
chemicals, pharmaceuticals and other products.
The UK is currently the world’s fourth largest producer of natural gas and
has
more than 200 offshore fields in production around Great Britain. The
greatest concentrations of gas are found in the southern sector of the North
Sea, but significant volumes are also produced from the central and northern
North Sea and the Irish Sea. Recent discoveries indicate that
further reserves could lie in the north east Atlantic to the west of
Shetland.
Gas was first discovered in the North Sea by BP at its West Sole field in
1965. Since then, a total of nearly 2,000 billion cubic metres of gas have
been recovered from the UK continental shelf, with 102 billion cubic
metres being produced in 2003. Gas accounted for about 45 per cent of
the total oil and gas volumes recovered in that year.
On balance, the UK currently produces more gas than it consumes over a
year and the country has been a net gas exporter since 1994. However, to
meet peak demand during the winter months, supplies from our fields are
supplemented by gas imports from Europe, as well as gas put into storage
during the summer months. This has been the case for several years.
Having access to our own gas reserves has contributed greatly to the UK’s
wealth. The industry has generated tens of thousands of jobs, as well as
investment and tax revenues worth many billions of pounds. It has enhanced
the UK’s self-sufficiency in energy and strengthened our security of energy
supply. Natural gas is non-toxic and highly energy efficient. It is a clean
fuel and its use in homes, shops and offices from the late 1960s onwards has
done much to improve the quality of the air we breathe, while its more
recent use for power generation has allowed this country to reduce its
greenhouse gas emissions – one of the few to do so.
It is believed that UK gas production peaked in 2000 and is now slowly
declining, although significant reserves remain still to be recovered. This
means that in the future, the UK will need to increase imports to
supplement domestic production. However, this should not be a cause for
concern as there are plentiful supplies of gas within economic transport
distance of the UK to meet our future demand, while supplies from our own
fields will still be able to meet at least 60 per cent of the country’s gas
needs at the end of the decade.
Click on the image below for an illustration showing how gas reaches the market and end user
Click on the image to see a larger version.
How much gas does the UK produce?
The amount of gas produced from the UK’s offshore fields is led by demand and varies with the seasons. For example, in the summer when we need less gas for heating and power, consumption is between 200 and 250 million cubic metres per day (mcm/d) while on an average winter’s day this will rise to around 350 mcm/d. On a very cold winter’s day, demand could climb to 400 - 450 mcm/d. Supplies from UK fields are then supplemented by gas put into storage during the summer months, and imports from the continent.
Click
here for the UK's principal oil and gas infrastructure routes (5MB pdf
file)
Courtesy of the DTI
We have been producing gas
from the North Sea since 1967 (and oil since 1975) and after nearly 40 years,
the basin is now regarded as “mature”. UK gas production peaked in 2000 (averaging
297 million cubic metres per day over the year) and is now slowly declining by
around 2% per annum.
This decline is entirely natural and is due to the geo-physical characteristics
of oil and gas reservoirs. Imagine a gas field is like an inflated bicycle tyre;
when you first remove the valve, air immediately rushes out. As the tyre deflates, the flow of air slows to a trickle until eventually you
have to squeeze it out. It’s the same with gas; when a field first starts producing, the pressure within the reservoir pushes the gas
quickly to the surface. As the gas is recovered and the field depletes over
time, the pressure in the reservoir drops and the flow begins to slacken. The
industry can maximise the amount of gas recovered by using technology to
maintain pressure in the reservoir, but this becomes more difficult the older
a field becomes.
When will North Sea gas run out?
While UK gas production
may have peaked, we are certainly not running out! Since the late sixties, we
have produced nearly 2,000 billion cubic metres of gas - but we believe that there
are up to 1,500 billion cubic metres still to be recovered, from existing fields and
reserves yet to be discovered. We will continue to produce significant volumes
for many years to come.
However, demand for gas is rising, for both domestic and industrial use,
including power generation. This means that we will soon need to increase our gas imports and
we will make the transition from being net exporters of gas to net importers.
Where will the UK’s future gas supplies come from?
Potentially, the UK’s future gas supplies could come from many different sources. Around 70 percent of the world’s gas reserves are estimated to lie within 5,000 km of Europe. Supplies from our own gas fields are likely to be supplemented by increased gas imports from Norway, the Netherlands, the former Soviet Union and Algeria. We will also see imports of LNG from the Middle East, Africa and the Caribbean, where gas resources are plentiful.
See below for a map of where the UK’s future gas supplies could come from.
Will importing gas mean that our supplies will be less reliable?
Among the major western
economies, only the UK and Canada are currently self-sufficient in gas.
Europe currently imports just under half of its gas from outside the region and
Germany, for example, has reliably imported gas from Russia for more than 25 years. Nor
should we forget that during the 1980s, the UK imported around 25 percent of its
gas from Norway, and during the 1960s and 1970s, Algerian
LNG was imported at
Canvey Island on the River Thames. These Algerian supplies provided the very first natural gas to arrive in this country.
Sourcing gas from diverse suppliers helps to improve security of supply,
not threaten it, provided there is timely investment in the necessary
infrastructure with sufficient import capacity. The countries with gas to sell
need buyers just as much as the buyers need gas. So there is no reason to
believe that gas imports will be less reliable than the UK’s own
supplies.
What new gas
import routes are planned for the UK?
There are a number of projects underway to secure new import routes for gas into
Britain. These include expanding the capacity of the existing Interconnector gas
pipeline between Zeebrugge in Belgium and Bacton on the East Anglian coast, new
pipelines from the Netherlands and Norway and
LNG facilities on the Isle of Grain in Kent and at Milford Haven in Wales. There are also plans to create extra links in the northern North Sea between Norwegian fields and UK pipelines to bring more gas into St Fergus in northeastern Scotland.
Click here for further details of planned new import routes.
Equally important is
sufficient investment in the UK’s own domestic distribution system to ensure
efficient transportation of gas across the country to the end-user.
Until the new facilities come on stream from 2005 onwards, we can continue to
rely on supplies from our own gas fields, supplemented in periods of peak demand
by existing Norwegian imports via St Fergus and continental
supplies through the Zeebrugge to Bacton Interconnector.
Oil & Gas UK has produced a paper on UK Gas Security of Supply. Click here to download a copy.
Why are gas prices rising?
Underlying gas prices are
linked to oil prices in continental Europe and, because the British and European
markets are joined (via the Bacton Zeebrugge Interconnector), these feed through
into prices here in Britain. Rising oil prices have therefore pulled up gas
prices recently.
In this country, however, the market is anticipating a tighter supply-demand
balance this coming winter (2004-2005) and next, exacerbated by falling UK production and
this inevitably has an impact on market sentiment. This should only be of real
concern if we have an exceptionally cold winter, which has not happened for many
years. However, various new projects to deliver fresh supplies to the UK will
improve the supply position in future years, but none of these will be ready in
time for this winter.
In addition, energy markets are generally nervous world-wide, driven by
expanding demand especially in China, oil being in shorter supply in relation to
demand than for many a year, and political uncertainties in the Middle East and
elsewhere in the world. This nervousness and increasing demand are also reflected in the fact that, for
example, the price of coal has doubled this year.
Why are gas
prices linked to the oil price? Updated: October 2004
There are a number of historical and technical reasons, not least the fact that
oil and gas are often produced from the same reservoir and can substitute for
each other across a range of domestic and industrial uses. However, one of the
main reasons is that oil has been traded for longer than gas. Indeed, gas was
seen as a waste product initially and was simply burnt at the wellhead. When gas
was first used as a competing fuel, it was important that it remained
competitively priced for those customers switching from oil derivative products.
Indexing gas prices to those of oil therefore ensured that gas remained
competitive with its substitutes. It also ensured that there was not a
distortion in exploration and production activities, whereby investment was
diverted to pursuing only oil, but not gas (as happened in the UK in the late
1970s and early 1980s) or vice versa. Nonetheless, the value of gas is only
about two thirds of that of oil per unit of energy delivered.
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