How the global market is pushing up UK gas prices
- 19 Feb 2013, 17:00
- Ros Donald
UK energy bills are set to go up by 2020 as the
country becomes more dependent on imported gas, says energy
regulator Ofgem. So how are international gas markets shaping
up in future, and how will they affect what we pay for gas in the
Since 2004, the UK has been a net importer of natural
gas, meaning the country's domestic supplies can no longer meet
demand. Head of Ofgem Alastair Buchanan
wrote in the Telegraph today that
the amount of of UK power generation from gas may have to go
up around 30 per cent by 2020 to fill the gap left as the country
decommissions old coal power stations. And increasing exposure to
global gas markets means the price we pay for energy is likely to
The UK and international gas
Over the last decade, the amount of gas the UK
imports from other countries has steadily increased. According to
an Ofgem report
last November, the country now
gets much of its gas from Norway, Europe, Russia, and liquid
natural gas (LNG) imports from places like Qatar, the world's
Norwegian and Russian gas comes to the UK by
pipeline. LNG, meanwhile, is compressed and transported to the UK
by tanker. Both types of gas are used in the same way - piped into
homes, or used to power electricity plant, for example.
Source: National Grid
According to a 2012
report by BP, LNG imports made up about
a quarter of total UK gas consumption in 2011, making the UK
the world's third biggest importer that year. On high demand
days in winter, Ofgem said in its report that LNG supply
overtook pipeline imports. This doesn't look like it's going to end
any time soon - Ofgem expects gas supplies from European countries
like Norway to decline in coming years.
But this situation could have important consequences.
Ofgem warns that the UK's level of dependence on LNG makes it
vulnerable to shifts in supply and demand, as well as shocks in
supply countries. For example, of the UK's LNG imports in 2011, 87
per cent came from Qatar, which is a lot of gas from one
The UK's lack of gas storage means it is even more
exposed to potential shocks and price spikes, the Ofgem 2011
report says. The UK has less gas storage relative to our
consumption than any other major
European economy and less of its gas is purchased
under long term contracts, it adds.
Tighter markets and the gas
According to Ofgem, increased global competition
looks set to clash uncomfortably with increasingly sparse domestic
supplies in the UK. Buchanan writes in the Telegraph today:
"[J]ust when we need more gas, world
demand for gas is set to rise while our own supplies are predicted
to fall by another 25pc by 2020."
He explains that several factors are expected to
tighten the availability of gas worldwide. For example, Russia's
Shtokman field was cancelled last year.
The project - located in the Russian Arctic - was set to be the
country's flagship shale gas production scheme. But costs spiralled
out of control, European gas demand dipped due to the financial
crisis, and US domestic gas prices dipped due to the shale gas
But the most important trend in energy consumption
will happen elsewhere. Asia is set to become the fastest-growing
gas consumer. Buchanan says China's consumption alone will grow at
20 per cent per year.
So what does all this mean for UK gas prices?
Buchanan notes that while these combined demand spikes don't look
set to be sustained, they look set to strike in the run-up to 2020
- just "when we need gas for our power stations at record
Buchanan points out that the UK's need for more LNG
will mean it is exposed to Asian LNG prices, which "drive long-term
contract prices" and are around 60 per cent higher than UK gas
prices." So without measures to reduce dependence on gas, higher
prices are inevitable.
While gas prices elsewhere appear to be rising, the
US is experiencing
low prices due to the rise in domestic
shale gas exploitation.
Some commentators have been arguing that the shale
effect could do the same for global gas prices. But Buchanan
"It is true that the US has
transformed its energy market thanks to shale, but in our
time-frame, when Britain will rely on gas for its power stations,
this is not going to happen on any significant scale either here or
elsewhere in Europe."
Buchanan says even if the US allows exports, it will
still cost about as much as we pay now for winter gas - around £390
of the average gas bill, according to
Ofgem's latest figures.
So while there is plenty of gas out there, the
question is how much of that will be available over the next five
years - and how much the UK will have to pay to ensure it doesn't
go to one of the country's increasingly attractive