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When prophets of “Peak Oil” – the point when maximum extraction is reached, after which production will drop and eventually stop – warn that natural resources can disappear at a pace that will leave economies struggling to adapt, they are mocked by conventional wisdom in the energy industry.
Yet that pattern of rapid adjustment is exactly what has happened to Britain’s natural gas industry. The country has passed “peak gas” already.
As recently as 2004, the UK was self-sufficient in gas. By the end of the decade, in just 15 years time, it will probably be importing about three-quarters of its needs.
The sharp decline of Britain’s domestic production has as yet caused few problems, even though last year already about a third of gas consumption was imported.
Even so, there have been some significant changes in order to sustain energy supplies, as domestic production declines, and there will be even greater adjustments to come.
The question for policymakers is what is the right response to the prospect of rising dependence on imports.
Britain has received a lot of investment in gas import capacity over the past decade. Two new pipelines have been built – Langeled from Norway and BBL from the Netherlands – and the Interconnector pipeline from Belgium, originally conceived largely as an export route to continental Europe, was modified to allow greater imports.
Two terminals were also built for liquefied natural gas (LNG) imports, close to each other in south-west Wales – South Hook and Dragon LNG – and the Isle of Grain facility in the Thames Estuary was expanded.
The total effect was to create much more import capacity than Britain now needs, but over the coming decade those facilities will be increasingly heavily used.
It has also meant that the country is much more tightly connected to international gas markets: both the continental European market – which is heavily influenced by pipeline supplies from Russia, Norway and Algeria – and the global LNG market – which is shaped by demand in the US and Asia.
So far, this integration into global markets appears to have been working well. During the exceptionally cold winter across Europe, there was sporadic tightness in gas supplies, but this was entirely due to problems with regional networks, rather than shortages of gas across the country as a whole.
Wholesale prices have remained subdued, and are typically less than a third of their peak in 2008. The fall in US prices caused by the surge in gas production from unconventional sources such as shale rock appears to have put a cap on British prices. If the UK price rises too high, LNG cargoes that would have gone to America are diverted to Britain instead.
Many analysts have worried that the continental European market, which is less liquid, transparent and competitive than that of the UK, and is dominated by long-term contracts with prices linked to oil, might force up UK prices, as the oil price has recovered since February 2009.
Instead, the opposite appears to have been the case, with continental European companies such as Eon and GDF Suez using the availability of cheaper gas priced on the spot market in Britain as a bargaining tool against Gazprom, the Russian gas export monopoly, to force it to concede greater flexibility and lower prices in its contracts.
“The sudden emergence of shale gas as a global driver on gas supply and prices means that security of supply concerns are certainly dormant and possibly dead,” says Nick Grealy, an energy analyst who runs the No Hot Air website.
He adds: “If gas is the new game-changer in world energy, then much of UK energy policy must move with it. Coal carbon capture, and possibly nuclear generation and gas storage, the most expensive solutions to a problem we more than likely no longer have – that of gas scarcity – need to be updated to reflect reality, not paranoia.”
Others still worry about whether the global market will continue to provide the UK with the supplies it needs.
In a recent letter to the Financial Times, Malcolm Wicks, the former energy minister, warned of “security risks involved in growing import dependency” and urged government support for onshore wind farms and new nuclear plants.
However, without determined government intervention to change the energy market, security risks will inevitably increase.
David Odling of Oil & Gas UK, the industry association, points out that almost all the electricity generation capacity now under construction in Britain, and the majority of planned capacity, is either gas-fired or wind-powered, which will need the gas plants to back it up when the wind does not blow.
With a wave of old coal-fired plants set to shut down, gas-fired power is needed to fill the gap.
“If you want to replace coal power in a hurry, what else can do it, and keep the lights on, and cut carbon dioxide emissions, and be affordable?” he asks.
As a result, Oil & Gas UK expects total UK gas demand to remain roughly flat for the rest of the decade at least.
Industrial, commercial and residential demand may fall, as energy efficiency improves, driven by a European Union-wide policy, but demand for power generation will rise, leaving total consumption the same, with total imports rising as domestic production falls.
The country must hope that the optimists’ view of the global gas outlook is the right one.
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