Mike Major makes the urgent case for more investment in UK gas storage facilities to prevent a volatile future.
Pressure is mounting for more investment in UK gas storage facilities to ensure integrity of supply. While the three week long contractual dispute between Russian and Ukraine over gas prices and transit fees at the start of the year may have been an isolated issue, it has certainly highlighted UK vulnerability to volatility in the gas market.
At the heart of the problem in the UK is the fact that our main reserves and supply of natural gas from the North Sea are declining, making the country more dependent on imports. By 2015, it is likely up to 80 per cent of the UK's gas supplies will be imported, compared with about 40 per cent now.
Currently Britain has just 15 days of gas storage against 99 days in France and 122 days in Germany, leaving it far more exposed to disruptions. Being the largest gas producer in the world, Russia holds a mighty power over Europe. Indeed, just turning the valves off on three pipelines could virtually switch off the European economy. Fig.1 highlights the extent to which the UK is lagging behind its neighbours in Europe in terms of both current and planned facilities. France, Germany, Spain and Italy all have higher current capacity than the UK's total projected capacity. So, even if all the currently planned projects go-ahead, the UK will still not enjoy the levels of security seen among other countries. Britain currently has the capacity to store 4.3 billion cubic metres with the majority of the total stored at the Centrica operated Rough facility in the North Sea, 18miles off the East Coast. We currently have stocks of 3.4 billion cubic metres.
In my opinion, figures for storage capacity in terms of number of days are conservative. Gas could be used up more quickly in extreme conditions such as unusually cold weather. Let us take a look at peak figures during the cold spell in January 2009 when demand reached 443 million cubic metres. During this time Britain's stores would have lasted only seven and a half days. While this scenario is very unlikely, it is not however, impossible.
Planned projects in the UK will provide a further 12 billion cubic metres of storage capacity. High profile projects include the Gateway gas storage project off the coast of Barrow-in-Furness which is due to be up and running by 2014 and will have offshore under seabed gas storage of 1.4 billion cubic metres, and the Larne Lough underground gas storage project in Northern Ireland. Fig.2 shows the UK landscape of gas storage projects.
Recession delays investment
Britain's plans to increase gas storage run the risk of being left in tatters by the credit crunch. If we are to effectively bolster Britain's energy security, then government and the energy industry need to act now to increase UK gas storage capacity. This means investment measures need to be put in place urgently to ensure at the very least that all of the planned gas storage projects come to fruition. In short, we need to act now to protect the businesses, jobs and families that would be damaged by a gas shortage, and to safeguard national power supplies.
Two major projects have already fallen victim to today's turbulent conditions. Stag Energy issued a warning earlier this year stating how the credit crunch is making it harder to raise the £600m for the Gateway project. And in November last year, storage developer Portland Gas halted plans to build a £500m, 1bn cubic metre facility in Dorset, due to the credit crunch. BNP Paribas are acting as project finance advisors and just recently £9 million funding has been raised primarily for the Portland project.
Schemes are not only being held up by financing problems, but also by difficulties obtaining planning permission from local authorities fearful of their environmental impact.
In these difficult market conditions, it has become ever more important from a funding perspective for developers to drive down the cost of ownership and maintenance of gas storage infrastructure. A number of the EIC's members are actively involved in providing the products and services to support the development of gas storage infrastructure and are pioneering advances in key technologies.
Technology and engineering specialist Emerson is working on a number of UK gas storage projects. According to David Newman, Director, Oil and Gas Sales & Marketing, the company's key focus is to help drive down the cost of ownership while at the same time increasing the value of ownership. Newman claims that by using technology available today such as wireless technology and instrumentation and control system technology, companies can save up to 20 per cent on their capital expenditure costs and decrease project times by up 30 per cent by driving down installation times. Operational cost savings can also be realised by using innovative remote monitoring and automated diagnostic solutions. Such reductions to capital and operational expenditure clearly make gas storage projects more economically viable during times when funding is proving to be a barrier and the need to demonstrate capital savings and justify the total cost of ownership is of upmost importance.
While there are a number of factors which are leading to increasing fears for Britain's vulnerability, some security is provided in uncertain conditions by investments in infrastructure to receive LNG (liquefied natural gas) shipments. In May this year, South Hook LNG terminal at Milford Haven, Wales, opened - the largest and most advanced LNG terminal in Europe. Once up and running at least two LNG ships should be arriving at the facility each week, providing a significant boost to the UK's gas supplies. While developments like this will help us to better weather uncertainties generated by such disputes as the recent Russian gas row with the Ukraine, there will always be a risk that LNG ships get re-routed to more lucrative International markets.
Britain's shortage of gas storage capacity not only leaves us vulnerable to shortages in power supply, but is also driving up wholesale prices, leaving businesses and consumers facing higher bills in the future, energy analysts have warned. Boosting the total storage capacity would cut the premium on stored gas and cut Britain's reliance on imports during periods when prices are at their highest.
In conclusion, Britain faces a very real risk of an energy crunch in the coming years if planned projects fail to get the green light due to funding and planning issues.
Mike Major is chief executive officer of Energy Industries Council (EIC), London, UK. www.the-eic.com.