Lloyd’s List: LNG a Sure Fix to UK’s Looming Gas Crunch

“Energy security fears raised just as North Sea gas supplies decline : By Michael D. Tusiani “IN RECENT years, as the European Union was debating ways to decrease its dependence on Russian gas imports, the UK has had the enviable position of staying largely on the sidelines because of its own North Sea production. Then, as bitter cold temperatures recently hit the UK, and concerns suddenly arose about the adequacy of its gas supply infrastructure, it consequently acted as a wake-up call to bring energy security back to the forefront of parliament’s agenda. In the midst of traditional supply showing its limitations this past winter, liquefied natural gas has risen to the occasion, highlighting its importance as a critical component of the UK’s energy mix. As cold temperatures and snow battered the country, the timing of temporary interruptions of gas deliveries via the Langeled pipeline could not have come at a worse period. Langeled, which delivers gas from Norway, can supply about 30% of the UK’s gas demand. The combination of increased need, due to the cold weather and temporary halt of Norwegian supplies, caused system operator National Grid to declare four of the five ever issued Gas Balancing Alerts in just a matter of weeks. This served as an early warning of a problem. The nation’s North Sea gas production has been falling by about 8% each year, causing a growing reliance on deliveries from abroad. This downtrend, which is unlikely to be reversed, has only accentuated the dependence on Norwegian supplies. National Grid found that, for the first time, imports have met over half of the nation’s gas needs in November, with this percentage likely to increase with time. With the global recession slashing gas demand by 8% last year, the issue of energy security was put on the back burner as UK leaders scrambled to save its financial system. Regardless, as the economy recovers and industrial demand increases, the UK must now confront the reality that diversification and flexibility of gas supply must be placed at the forefront of its energy policy. Solutions will include expanding storage capacity — which currently only accounts for 4% of annual consumption, compared to 23% in Germany and 27% in France — and diversifying import options, largely LNG. Recent government approval for Stag Energy to build its £600m ($915m) Gateway storage facility in Barrow-in-Furness on the Irish Sea is a step in the right direction. This project, due to be completed in 2014, is the first to be licensed under the 1998 Energy Act. This law allows central authorities to overrule local opposition and approve projects deemed to be in the national interest. While not always welcomed by local residents, LNG facilities are already making critical contributions to the country’s energy supply mix. Major advances have been made during the past year with the commissioning of two new LNG import terminals — South Hook and Dragon LNG — at Milford Haven, Wales, and with the expansion at the Isle of Grain terminal near London. Last year, cargoes delivered from as far away as Australia met nearly 13% of total gas demand. Some argue that renewables and nuclear should be the path to energy independence. Offshore wind developments, spearheaded by the Brown government, will depend on long-term subsidies and still fail to provide the UK with reliable baseload energy supply. New nuclear capacity, which would provide baseload energy, will not be ready until 2018 at the earliest, even with the current fast track plans for 10 sites. The January chill provided urgency to the gas and electricity regulator Ofgem’s recently published Project Discovery, which forecasts the need for an additional £200bn investment to replace the nation’s ageing nuclear and coal-fired power plants. The study offers broad reform scenarios and endorses greater government intervention to reach this target. Ofgem has gone so far as to suggest the creation of a “central energy buyer” to co-ordinate the procurement of new energy supplies as well as investments in power and gas infrastructure. The suggestion of any return to a government interventionist model runs starkly counter to the market liberalisation shared by all post-Thatcher administrations, which served the British consumer well over the past several decades. However, such talk could gain momentum among politicians, as evidenced by Energy Minister Ed Millband’s recent comment that “for the longer term, Britain will need a more interventionist energy policy”. With UK elections looming and an economy still sputtering behind its EU peers, January gas price spikes and interrupted deliveries to industrial users have added yet another intractable issue to the minds of UK voters. Whoever occupies Downing Street in June would be wise to acknowledge that energy security is already more than just a mere concern for the “rest of Europe”. Acceptance of a free market and LNG as a major part of the country’s energy future would be a vital step in the right direction. Michael Tusiani is chairman and chief executive of Poten & Partners. He is also a Senior Fellow at Columbia University’s Center for Energy, Marine Transportation and Public Policy.”