UK energy supply has entered into terminal decline

In recent years, the UK has become increasingly dependent on natural gas as its primary energy source. This strategy may soon be found to be based upon poor assumptions/perceptions regarding development of domestic and neighbouring natural gas reserves and, in general, regional and global supply capabilities.

1. UK marketable nat gas production (also gross) peaked in 2000 close to 110 Gcm/a.
2. During the last three years, UK nat gas production has declined at an annual rate of 8 - 10 %, which many energy analysts expect will continue.
3. Nat gas constituted more than 38 % of the UK primary energy consumption in 2007.
4. Several analyses expect UK to import 80 % of their nat gas consumption by 2020.
5. UK was a net exporter of nat gas for a brief period.

In 2007, more than 38 % of the UK’s primary energy consumption came from nat gas. Of the EU/OECD countries, only Italy has a higher portion of nat gas consumption. In comparison, the USA gets 25 % of its primary energy consumption from natural gas; France, 15 %; and Germany, 24 %.

In general, high nat gas usage is primarily found among countries with huge nat gas reserves like Russia, where nat gas amounted to more than 57 % of primary energy production in 2007. Russia is the world’s largest exporter of nat gas and second largest exporter of oil, so this high domestic usage frees up oil for export. Since oil generates more income than nat gas, based on units of energy exported, this approach maximizes export revenue.

The UK and Continental Europe have both benefitted from the bidirectional Interconnector that since 1998 has allowed for increased flexibility in nat gas supplies. Due to the decline in UK indigenous supplies and a tighter supply situation on Continental Europe, the importance of the Interconnector is expected to slowly diminish unless future Russian supplies are shipped through the system to UK.

Nat gas production within EU was on a plateau from 1996 to 2004 and has now entered into terminal decline. Increased nat gas production from Norway (which is not a full EU member) has slowed the decline. The balance of consumption within EU has been secured through increasing imports, primarily from Russia, North Africa and LNG. The diagram above suggests that imports into EU will need to grow quickly, from 200 Gcm/a at present to projected 400 Gcm/a by 2020, to fill the rapidly growing gap between declining supplies and projected growth in consumption.

If projected growth in EU nat gas consumption by 2020 is to be met, it will be necessary to double present imports of 200 Gcm/a from Russia, North Africa and LNG, a challenging task. With the ongoing credit crisis still unfolding, an increase in imports that allows maintenance of present EU consumption levels may turn out to be a major accomplishment.

As of 2007, 25 % of EU’s nat gas consumption was imported from Russia. Russian nat gas exports to the EU grew substantially after the completion of pipelines between Western Siberia and Europe by the mid 80’s.

There are good reasons to believe that the Russians (meaning Gazprom) planned their exports to the EU based upon available official data and forecasts from amongst others, EU members and Norway. This is of course a sensible thing to do if the goal is to maximize the profits from the Russian resource base and to optimize the allocation of investment funds. Why invest in expansions of production and infrastructure, if these investments are likely to contribute to an oversupply and a subsequent downward pressure on prices?

Perhaps what is needed is an energy czar. I think it was Matt Simmons who first used the expression “energy czar”, perhaps with a hidden meaning that Russians leaders far better understand the strategic nature of energy than their western counterparts, even though their access to data is not as good.

In 1995 - 1998, the UK exported nat gas to Ireland. In 1998, the Interconnector, the bidirectional pipeline between Bacton in UK and Zeebrugge in Belgium, started to flow. After that, the UK became a moderate exporter of nat gas to Continental Europe.

EU production of natural gas has peaked, and is expected to decline. EU exclusive of UK nat gas production peaked in 1996. Since then, natural gas production has been in a general decline and is expected to continue to decline. Recently Dutch authorities confirmed that their nat gas production is set to decline. These milestones were passed without much attention. For the next several years, projected increases in Norwegian nat gas production are expected to partly offset declines in production in the EU, but the overall production trend is expected to remain downward.

UK has for some years had an important role in securing a unique flexibility with respect to the EU nat gas supply chain. The combined effect of the declining nat gas production in UK and the rest of the EU has already tightened the supply situation for EU (ref the recent price growth within the liberalized UK market), and has the potential to develop into a severe nat gas supply crunch. Such a supply crunch could have cascading effects, and may affect other energy systems. These interrelationships seem to be poorly understood among those responsible for developing energy supply strategies.

Source - The Oil Drum