I would like to take a moment to talk about the UK and our gas supplies for the coming winter 2005/06. The UK could experience a shortfall in gas supplies this winter due primarily to the rapidly declining extraction rate from indigenous reserves in the North Sea and the country's gas infrastructure which having been designed and built when gas was plentiful is based on a just in time delivery system from offshore fields.
Before we go any further we should look at the role natural gas plays in the UK energy mix. Figure 1 shows the UK primary energy consumption by fuel type. The dominance of natural gas is plain to see, a direct result of its historic cheap plentiful supply, clean burning and a privatised energy market.
Figure 1 UK Primary Energy Consumption 2003 (1)
Drilling down to look at purely the electricity supply produces Figure 2. Gas still dominates supply. The 37.5% of UK electricity supply produced from gas accounts for approximately 35% of the total gas shown in Figure 1. The bulk of gas is burned in domestic home heating, over 70% of which is gas fired.
Figure 2 UK Electricity Supply 2003 (2)
So gas is important to the UK, providing electricity and heating. Arguably we are even more dependent on gas than oil. I’m sure I could cut my oil use by half more comfortably than my gas consumption via electricity and heating.
UK gas originates almost entirely from the North Sea, with a small amount able to be imported through the interconnector with Belgium. The extraction rate from the North Sea peaked in 2000 and has been falling since, production last year was 12% down from the peak. This data is from the Department of Trade and Industry:
Total gas production in million cubic metres (3)
2000 114,557 mcm
2001 112,567 mcm -1.7
2002 109,816 mcm -2.4%
2003 108,088 mcm -1.6%
2004 100,966 mcm -6.6%
Before thinking about this coming winter we should look back at past winters. The Office of Gas and Electricity Markets (Ofgem) publishes reports on the markets before and after the winter period. From the last few reports I have discovered the following points:
The winter of 2004/05 was warm, the 6th warmest in the last 77 years, the highest daily demand for gas was down 5.6% on the year before and 7% down on the record reached in during the winter of 2002/03.
Despite demand being lower than the previous two years the incidence of supply interruption to customers rose 4-fold from the year before. 88% of this shipper interruption was to electricity generating Combined Cycle Gas Turbines (CCGTs), the rest to other industrial customers.
During the winter on-the-day gas prices peaked at £1.70/therm, significantly higher than the usual £0.30/therm however this price spike was not met with increased beach deliveries from gas fields or even with increased flow through the interconector since prices were also high on the continent.
The lack of beach deliveries is most concerning. Beach delivery describes gas coming to shore directly from the gas fields. Last winter this peaked at 331 million cubic meters per day whereas winter 2003/04 peaked at 338 mcm/d. This reduced flow was not expected and the lack of response to the extremely high prices suggests increased flow was impossible. Ofgem are predicting a maximum availability of beach gas for 2005/06 of 351 mcm/d, an increase on the two previous years. This prediction seems irresponsible in light of limited deliveries last year and depletion rapidly reducing supply. Ofgem are expecting peak daily flow rates to be 6% higher than last year at a time when annual production is falling.
Looking forward to the coming winter. Ofgem do their analysis based on average and severe winter conditions but how cold are average and severe conditions likely to be in the future?
This quote is from Ofgem’s 2005/06 outlook report (4):
There is now a substantial weight of evidence to suggest that climate change has resulted in a shift in average winter temperatures. Reflecting this, for the last three years we have used a 35-year weather trend as the basis of our analysis of average weather conditions, rather than using the 75 years from 1928/29, which form the basis of our severe winter analysis. Our latest analysis indicates that use of the 17 years weather data from 1987/88 has greater statistical validity, and we intend to move to this basis next year. However, there is no clear evidence that climate change has had an impact on severe conditions. Indeed, the coldest day since our records began in 1928/29 occurred as recently as the 1986/87 winter. Accordingly, our severe load duration curves are based on the 76-year weather history.
Ofgem have moved from calculating the average winter based on 75 years data to 35 years and then down to just 17 years. Of course less supply will be needed to meet the average winter if you redefine the average winter as being warmer. I think this is a dangerous case of moving the goal posts. Figure 3 shows the annual temperate deviation from the 1961-90 average. It is clear that the last 20 or so years have been historically warm but as far as Ofgem are concerned this short period now represents the new normal condition.
Figure 3 UK Temperature Annual Anomalies (5)
If winter 2005/06 is not extremely warm like last year then we can expect significant shortages. If it is as cold as 2003/04 demand could be 10% higher than last year (7% due to temperature and 3% due to two years demand growth) whilst supply could be lower than last year due to depletion.
A shortfall of over 10% would be catastrophic. The bulk of demand destruction must come from CCGTs since domestic customers can’t have their supply regulated on a day-by-day basis so a gas shortage manifests itself as an electricity shortage. Commercial customers lose gas, domestic customers lose electricity.
Looking further forward. UK natural gas reserves are approximately 600 bcm (billion cubic metres) and consumption is approximately 100 bcm per year. Domestic extraction rate is falling fast such that the UK is expected 50% depended on imports by 2010 and 80% dependent by 2020 (6).
The capacity to import anything like that volume doesn’t exist yet though it is planned and is being built. UK appetite for gas is immense, France uses ~50 bcm, Italy ~70 bcm, Germany ~90 bcm. To think we can export that appetite is short-sighted.
Imports at what cost? We have been paying little more than extraction costs for our indigenous supply. Importing gas will carry a premium due to infrastructure (new pipelines, LNG terminals, LNG tankers), profit for foreign government, profit for foreign company and a premium due to global competition.
Another problem is high level of seasonal demand and the lack of local storage in the UK. The gas infrastructure is built with a just-in-time mentality. This exposes us to interruption as imported gas can never be as reliable or react to rapid demand changes as well as our previous indigenous supply. The UK does not have strategic gas storage only ‘peak-shaving’ (top-up) facilities which supplement the normal amount of gas delivered to customers during peak-use periods. This contrasts with many European countries whose gas markets developed with import dependency and which have large strategic storage capacities, of up to 80 days’ on average. What little storage the UK does have is enough for 13 days however this isn't an additional 13 days emergency supply, it is used every winter during peak-use periods.
Figure 4 is lifted from The Future of UK Gas Supplies (6) published by the Parliamentary Office of Science and Technology and illustrates the scale of the UK gas shortage. Note the magnitude of the supply gap compared with the total consumption of our European neighbours and of the unproved-possible portion.
Figure 4 UK Annual Gas Extraction and Demand (6)
Whilst thinking about the rapidly depleting natural gas reserves in the North Sea and the electricity generation challenge that presents we should also mention nuclear power. Going back to Figure 2 we can see that 22.4% of the UK electricity supply is provided from nuclear power. This figure is set to fall rapidly as the ageing fleet is decommissioned. Figure 5 shows the nuclear decommissioning schedule:
Figure 5 UK Nuclear Decommission Schedule (7)
Seven closed by 2010 (-31% capacity)
All but three closed by 2014 (-70% capacity)
One remaining past 2023 (-90% capacity)
Within nine years we lose 70% of the capacity which is currently responsible for 22% of our supply.
Not only is the UK losing indigenous natural gas supplies but also nuclear generating capacity.
1 DTI Digest of UK Energy Statistics (DUKES 2004), Primary energy consumption (DUKES 1.1.1)
2 DTI Digest of UK Energy Statistics (DUKES 2004), Commodity Balances Table 5.1
3 DTI Oil and Gas Statistics
4 National Grid Transco: A Consultation on Winter 2005/06
5 The Met Office Hadley Centre
6 The Future of UK Gas Supplies, Parliamentary Office of Science and Technology
7 DTI Nuclear power generation development and the UK industry