A blacked-out Britain?

While acknowledging some concerns, the energy review doesn’t really take us any further forward in relation to security of gas supply. It recognises that more commercial gas storage will need to be built and correctly identifies planning as the main problem to be overcome in delivering this. However, it denies the need for strategic storage — the most important aspect of gas security on which it should have focused.

The review reaffirms faith in the current commercial and regulatory framework and takes the view that strategic storage will undermine that framework. While this may be a perfectly respectable view to take in economic terms, it relegates security of supply to the policy back burner.

With large volumes of new Norwegian gas arriving in the UK this year, and increased capacity in the gas interconnectors from the Continent, supply shouldn’t be a problem for several years. The current supply/demand consensus is that we could see supply tighten again as early as 2011, or as late as 2015.

Much will depend on UK demand, particularly how many new gas-fired power plants will be built and by when; on the supply side it will depend particularly on whether the amount of Liquefied Natural Gas (LNG) that is expected really does get delivered to our shores, or whether higher prices divert it to the US and the Pacific Rim. Rather than using this breathing space to build storage before supply/demand tightness returns again in the 2010s, we are in danger of letting complacency rob us of an opportunity to adequately address gas security.

The energy review, and most of the discussion around it, deals with security of supply in terms of our level of dependence on imports and whether or not we will be importing from people we approve of. The preferred approach of policy-makers is to create diverse sources of gas and supply routes in order to reduce the potential for manipulation by an overly powerful exporter or cartel of exporters.

This approach is necessary, but it is not sufficient to guard against security risks. It provides protection against the possibility that foreign suppliers are building export infrastructure and developing gas fields so they can turn around in a few years and cut us off in order to demand from us some huge political or economic price.

 On the other hand, it may be that foreign suppliers are investing many billions of euros because they want to sell us their gas. In that situation, we should be more concerned with the condition of our gas infrastructure: it is old and much of it is becoming unreliable at a time when the UK is already dependent on gas for half of the energy we consume, excluding transport, and will become more dependent over the next decade.

The consequences of major supply or infrastructure failure for a country with this degree of dependence on gas are so devastating that it is unwise not to have at least a reasonable degree of insurance cover.

This insurance cover comes in two forms: commercial and strategic storage, which serve very different purposes. Commercial storage is provided by companies principally in order to cope with extremely cold weather — a one-in-50 winter — as well as minor infrastructure outages. It also has the effect of reducing price volatility —UK price rises during 2004-06 were caused by supply and demand approaching equilibrium. Higher levels of storage would have avoided the worst of the price spikes. At present, commercial storage is less than five per cent of the UK’s annual demand for 100 billion cubic metres (bcm) of gas; it needs to be at least 10bcm.

The current commercial and regulatory framework has clearly not delivered the storage that the UK needs. Ofgem and the DTI would argue against the proposition on the grounds that 8-9bcm of storage is either under construction or seeking planning permission.

But as the UK enters a period of gas surplus, companies planning investment in storage, which would have made a lot of money had their storage been available over the last few years, will inevitably be reviewing their investment plans. And by the time investment in storage once more looks like a good investment it will be too late to get it in place in time to meet the country’s needs.  

Strategic storage would protect us against infrastructure failure, acts of God, or the unlikely event that a supplier withholds supplies; in legal parlance force majeure events. Its role is not to offset a sudden rise in prices, but solely to cope with emergency events. We have had such storage for oil for some time — the 90-day oil stocks required to be held by members of the International Energy Agency (IEA). With very great differences in national circumstances, and with countries such as the UK and the Netherlands being substantial gas producers, it made no sense to specify similar reserve levels for gas.

However, a good rule of thumb for an appropriate level of strategic storage for the UK would be to cover large-scale failures of specific infrastructure for around 30 days. Strategic storage adequate to cope with the failure of the largest gas receiving terminals: St Fergus in north east Scotland and Bacton in East Anglia would be a good starting point for the planning process. An adequate amount of strategic storage for the UK could be around 10bcm, equal to the level of commercial storage, but located such as to be able to cope with disruptions in either the north or south of the country.

If plans were drawn up in 2007 strategic storage could be in place by 2014/15. But, with lead times for policy planning and implementation, there is a fairly narrow window and inaction for the next several years will delay this option and expose the country to significant security risks.

There are unlikely to be onshore structures of sufficient capacity for the volumes of strategic storage which will be needed and this will mean utilising offshore structures. It will be much cheaper to do this while offshore infrastructure remains extensive. We need to be identifying suitable fields for conversion now, not least because of decisions being made around decommissioning. Offshore storage will need to be in different geographical locations in order to reduce reliance on any single platform, pipeline or import terminal. The lesson of the Rough field has to be learnt where, in February 2006, nearly 80 per cent of our storage was knocked out for five months because of a fire on the platform that serves it.

Who pays for strategic reserves will be controversial. A possible approach would for government to require suppliers to have an obligation to have access to strategic storage. Government would have to define access in terms of volume and location: within the UK, offshore and abroad but deliverable to the UK within a certain number of hours or days.

Strategic reserves would need to be financed by the companies themselves as part of the cost of being a gas supplier; they would get a return on their investment in strategic storage of gas, though not an exciting one. Crucially, government would decide the conditions under which strategic storage would be released.

It appears that the forthcoming white paper will fail to address strategic storage because the energy review concluded that it would disturb the working of the current market framework. A different perspective might be that if the current market framework is unable to deal adequately with security risks, then it needs to be changed.

The main threats to gas security faced by the UK (and most other European countries) are connected with risks of failure of different types of infrastructure. We continue to ignore the lessons from the recent incident in Germany in November 2006 that resulted in rolling blackouts across large parts of continental Europe, from the Rough incident and other infrastructure failures around the world.

These were not caused by ‘nasty and unreliable foreigners’ but because of problems caused by technical failure or extreme weather events. Reporting on this type of energy risk is dull in comparison to the possibility of terrorist attacks or the likelihood of Russians engaging in energy blackmail.

Unfortunately they are most important energy security threat which the country faces and that the white paper must address.

Professor Jonathan Stern is Director of Gas Research at the Oxford Institute for Energy Studies.