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Introduction

As international oil companies turn away from large and expensive oil projects in favour of other developments, there is increasing interest in natural gas. In Europe, there is particular interest in schemes aimed at supplying the UK, where the phasing-out of coal from the electricity generating mix, combined with falling British production of gas, provides an opportunity to develop a number of new gas production schemes.

In 2015, the British government announced that it would phase-out coal-fired electricity generation by 2025. Last year, it accounted for about 9% of UK generation and this year’s total could well be lower, with about 40% of the UK’s  power now comes from gas. A number of nuclear reactors are also due to be decommissioned between now and 2030. Part of the loss of coal and nuclear capacity will have to be made-up from more gas generation. The UK, however, is a net importer of gas and its production is in long-term natural decline.

Sources of UK Natural Gas
Sources of UK Natural Gas

Power dynamics

The UK’s decision to phase out coal-fired power by 2025 has elevated the importance of gas in its energy matrix. The elimination of coal means gas will be the only base-load conventional power option available to act as a backup to the country’s sizeable renewable fleet.

Gas-fired generation will also enjoy a favourable position in future UK power capacity auctions, in which renewable energy suppliers might not participate.

Shifting dynamics in the nuclear power sector could also be a win for gas. If Hinkley Point is  scaled back or delayed, gas fired capacity would be likely to step in and make up in generating shortfall.

Brexit

The UK’s decision to exit the EU in a referendum in May 2016 is also likely to have an impact on demand. The flow from mainland Europe is vital for balancing the British market, especially as UK North Sea output falls and low prices and political wavering deter extensive exploitation of shale reserves.

However, the UK can no longer assume that gas supply will be guaranteed via the UK-Belgium Interconnector (IUK) post-Brexit, and even if it was, new tariffs or pricing formulas would most likely have to be applied.

The solutions to the problems posed by the status of IUK are twofold. First, the UK could build more gas storage capacity. Second, it could look to import more LNG.

In practice, it is likely that both will happen. Until now, gas storage has largely been a secondary part of the market, mainly owing to the safety net provided by IUK. But with the risk that the inter-connector might not be as reliable in future, gas storage has become a more strategic concern.

European reliance on Russian Gas

New Gas supplies

Some of the additional flows could also come from waters off the UK, where there is some potential for new finds in the under explored area to the west of the Shetland Islands; but the chances of a really large find there at present look slim. The UK is therefore going to require increasing volumes of imports.

One possible supplier, perhaps on a large scale, is Russia; but any additional Russian supplies would have to come via the pipeline systems of the EU, and it is not clear what form of energy relationship the UK will have with the EU once it has left it. A further complication is the bad political relations between the EU and Russia over Ukraine, added to which is the stated desire of the EU’s Commission to reduce the role of Russia in the EU’s energy mix. One way in which this could affect increasing imports of Russian gas by the UK is if the UK wanted to take gas from the proposed Nord Stream 2 pipeline.

EU opposition

The plans for Nord Stream 2 have aroused opposition from several EU members in Eastern Europe, particularly Poland, which want the EU to reduce its reliance on Russian imports. In this they have the backing of the EU Commission, which has sought to ban the pipeline on the grounds that it would be contrary to the rules of the EU’s internal energy market by preventing the EU from diversifying its sources of supply.

Nord Stream 2 continues to be backed by countries further west, including Germany, where the country’s energy regulator has recently ruled that the line is not subject to the EU’s energy laws. It had earlier been proposed that the UK would take gas from Nord Stream 2 via existing pipelines crossing Germany and the Netherlands. At present, though, the fate of the scheme is uncertain, and in a recent move, the Danish government has indicated that it has reservations about the pipeline.

EU Gas Reserves
EU Gas Reserves

Is Norway the answer?

All of this could prompt the UK to look elsewhere for additional supplies of gas, and one likely source is Norway, which has the triple advantage of being close at hand, of having existing pipeline connections with the UK, and of not being in the EU. Norway has the largest proven reserves in Western Europe as well as being the largest exporter.

Norway’s production, however, is almost certainly at its peak. Some of its older fields are already in decline and, while several new ones are due on-stream in the near future, more will be needed, especially after 2020. These are likely to be remote and high cost fields in Arctic waters, such as the Barents and Norwegian Seas, and they may do little more than prolong the present plateau in Norwegian output.

In that case, the Nord Stream 2 project may yet have an important part to play if the UK is to increase its off-take from Norway. Some of Norway’s other European customers will have to import more Russian gas in order to allow the Norwegians to sell more to the UK: a development that the EU Commission will not exactly be enthusiastic to see.

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References
  1. Oil and Energy Trends – Volume 42, Issue 5
  2. http://newsbase.com/commentary/bullish-outlook-uk-gas-market

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