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An Examination of Natural Gas Supply and Pricing in the United Kingdom
November 1, 2006
Michael AngiolilloZachary SimpsonKristen SmithDavid Williams
Executive Summary
UK: From Net Exporter to Net Importer
Demand Up: Power Generation Supply Down: North Sea Decline Issue: Security of Supply Recommendation: Encourage
Development and Construction of LNG Regas, Nuclear and Wind Energy, and Gas Storage
Agenda
Description of UK Natural Gas Infrastructure
History Natural Gas Demand and Usage in the UK
History of Natural Gas Market Structure in the UK
From Exporter to Importer Supply Issues and Risks
• Transportation• Storage• LNG
Recommendations
UK Natural Gas Supply Chain
•Supply from offshore wells
•Transported to UK via pipeline
•Minimal Storage (North Sea is the storage)
•Primary Users: Industry, Domestic, Power Generation
UK Natural Gas Infrastructure
1. LNG Import Terminal
2. United Kingdom Continental Shelf
3. Largest storage facility (85% of UK storage)
4. LNG Storage Facilities
5. Belgium Interconnector
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2
3
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History of NG in UK - Demand
1970s: Natural Gas found at UK’s Continental Shelf
British Petroleum: http://www.the-eic.com/events
History of NG in UK - Demand
Gas Begins to Replace Coal in Industries and Homes Abundance from UKCS Gas fired power plants replace coal Carbon Dioxide Emissions lowered under
Earth Summit in Rio and Kyoto Protocal
History of NG in UK - Demand
DTI: Our Energy Challenge; http://www.dti.gov.uk/files/file25079.pdf
History of NG in UK - Demand
DTI: Our Energy Challenge; http://www.dti.gov.uk/files/file25079.pdf
Today: Coal= 39%, Gas= 33%, Nuclear= 19%, Renewable= 6%
History of NG in UK - Demand
Relationship between Gas and Coal
DTI: Our Energy Challenge; http://www.dti.gov.uk/files/file25079.pdf
History of NG Market in UK
Gas Act of 1948 Nationalized Gas Market
Gas Act of 1986 Privatized Gas Market- British Gas Co. Created Ofgas Regulatory Body- Office of Gas Supply
1996: British Gas demerges to form British Gas plc and Centrica Increased Competition
Currently: National Grid Transco Co. controls majority of pipelines and suppliers may choose their provider
History of NG Market in UK
Ofgem Present Regulatory Body after Ofgas and
Offer Merger Regulates pipelines and electricity wires Protects customers
History of NG Market in UK
White Papers of 2003 Cut emissions of carbon dioxide by 60%
by 2050, Ensure that every home is adequately
and affordably heated Maintain the reliability of energy supplies Promote a competitive energy market in
the UK and beyond
From Exporter to Importer
Large Reserves in the United Kingdom Continental Shelf promoted self-sufficiency for past 20 years.
Natural Gas production peaks in 2000 at 108 billion cubic meters.
Production set to decline rapidly following 2008. Demand continues to rise at roughly 1% per year.
Projected Supply Gap
Supply Issues
Creation of infrastructure to meet future import demand.
Promote diversification to avoid risk of single supply route interruptions.
UK Import Plan Pipeline Imports Increased Number of Storage Facilities Liquefied Natural Gas Import Terminals
NG via Existing Pipelines
The Norway-UK Vesterled connects UK markets to Heimdal Riser Platform in the Norwegian Sector. Capacity of 4-10 bcms annually.
The Belgium-UK Interconnector operates as a bidirectional link between UK and continental Europe. Capacity after compression facilities 25 bcms.
Norway-UK Langeled
Constructed to link the Ormen Lange Field to UK import terminal of Easington.
Pipeline will be 1,200 km when completed.
Currently testing this pipeline, expected full-scale usage slated to begin October 2007.
Added import capacity will represent between 20-25% of UK natural gas demand.
Source: http://www.offshore.no/nyheter/sak.asp?Id=10744
Balgzand-UK Pipeline (BBL)
Construction by Dutch Gasunie. Extends 230 km worth of pipeline from
Balgzand to Bacton. Expected completion 2007. Depending on the number of compressors,
pipeline could increase imports between 10-17 bcms annually.
North European Gas Pipeline
Construction primarily by Gazprom.
Will traverse former Soviet states and enter EU markets in Germany.
Will be longer than 2,000 km upon completion.
Adds 19-30 bcm annually to EU markets.
Source: http://www.hydrocarbons-technology.com/projects/negp/negp1.html
Potential Pipeline Risks
Fairly Regional Heavy reliance could increase risks associated
with supply failure and competition between neighboring markets.
Routes of Future Pipeline Imports Tampering with trans-boundary pipelines. Russia/Ukraine incident.
Storage Capacity
Functions as a “buffer” to smooth out potential demand supply problems.
UK has previously relied on domestic reserves in UKCS to serve this purpose.
Most European Countries maintain storage capacity to serve 80 days.
UK has previously only stored to meet 13 days.
Construction of New Storage
Humbly Grove in Hampshire Facility became operational in 2005. Storage capacity of 0.28 bcm.
Aldbrough in Yorkshire Underground storage facility to be fully functional
between 2007-09. Storage capacity of 0.42 bcm.
LNG in the United Kingdom
In 1964, the UK became one of the first importers of LNG from Algeria
Continued into the 1970’s until production from the North Sea increased
No new regasification terminals until 2005
LNG in the United Kingdom
2005 – Isle of Grain terminal opened Annual capacity of 4.5 bcm Planned expansion to 13 bcm by 2008
Two more terminals under construction Total additional capacity of 36 bcm by 2010
Isle of Grain terminal idle for much of 2005 due to higher gas prices in US and Spain
Recommendations
Continue to focus on LNG importation Will be primary source of gas in the future
Success in Japan Imports 97% of its natural gas, all from
LNG Largest importer of LNG in the world
Recommendations
Increase use of renewable energy sources UK has over one third of Europe’s entire
potential for wind energy Denmark generating over 17% of its
electricity from renewables Current goal is to increase generation of
electricity from renewables from 4.7% to 10% by 2010
Recommendations
Reconsider use of nuclear energy Deemphasized by Energy Policy Act of
2004 Not considered to be financially feasible
at this time France generating 78% of its electricity
from nuclear power
Recommendations
Develop strategic gas reserves Currently only has capacity for 13 day
supply Other European nations that have
traditionally relied on gas imports have on average 80 days worth of strategic reserves
Further insulate itself from sudden changes in supply and demand