Scarcity in supply and escalating gas prices in the UK have caused a crisis that threatens the futures of small energy firms, industry and households. Our Senior Commercial Advisor David Ridge breaks down the details of how this gas supply shortage has come to pass, and highlights the importance of good planning and preparation for the future.
Gas supply to the UK
The ‘dash for gas’ in the 1990s was partly political and partly economic, but it laid the foundation for the UK’s reliance on its North Sea infrastructure and, as North Sea volumes declined and could not be replaced by new discoveries, imported gas. Some of this imported gas comes in the form of LNG from the likes of Trinidad into one of three onshore sites: the Isle of Grain in Kent and South Hook and Dragon at Milford Haven, both in Pembrokeshire. These sites can provide up to 50% of the UK’s gas requirements but this is a flexible number as LNG is traded on international markets. The gas that cannot be provided by domestic production and LNG comes through a variety of pipelines. Two of these, Langeled and Vesterled, tap into Norwegian fields; two more tap into the European gas market through the UK-Belgium interconnector and the UK-Netherlands pipeline. Europe is in turn supplied from a number of gas hubs, primary amongst them being Norway, North Africa and Russia, providing variety and security of supply. Excess gas can be stored and extracted to smooth out troughs in supply or peaks in price, and the UK has both offshore and onshore storage capacity.
So what has gone wrong and caused the gas supply crunch?
Simply, a number of things happening at the same time.
- The 2020-2021 winter was colder than expected and this depleted the UK’s stored gas reserves.
- As economies recovered from the Covid slowdown they needed more energy, and Asian countries have been outbidding European companies for LNG cargoes.
- Some North Sea fields have been undergoing planned maintenance. The electricity interconnector between France and the UK has failed and needs to be repaired.
- Alternative energy has failed to bridge the gap, with calm weather reducing the amount of wind power generated. The situation may have been exacerbated by mischief-making: the EU has accused Russia’s Gazprom of deliberately cutting supplies, an allegation that Russia denies.
What about gas prices?
The immediate effect has been a hike in gas prices, as a result of which consumers are facing increased household bills (European taxes and levies that average 30% and which can be as high as nearly 70% do not help). Where companies cannot entirely pass on the higher costs to their customers, such as is the case in the UK with its price cap , they are finding themselves in the position of paying more for their product that they can sell it for. Small companies and those with insufficient cash flow, buffering may go under. The UK Government has already said it will not bail them out.
Higher costs have validated the law of unintended consequences. Natural gas is a main constituent in the manufacture of fertilizers in a process that produces CO2 as a by-product. As natural gas became more expensive, fertilizer plants have closed temporarily and, as a knock-on effect, stopped producing CO2. This is a gas that appears intrinsic to a number of processes, from meat production to fresh food packaging, to putting the fizz in beer through to, at the other end of the scale, enabling the global transport of low-temperature Covid-19 Pfizer vaccines.
What’s the solution?
These issues should resolve themselves. North Sea fields will come back on stream. The electricity interconnector will be fixed. Norway has apparently agreed to help by increasing supply. Dire predictions of a foodless Christmas may yet be avoided. But this may be a warning of the planning we need to do as we seek to change an estimated 10 million internal combustion engine cars for electric vehicles in the UK alone, and may lead us backwards into reliance on ‘dirtier’ fuels (coal, oil) if we do not have a system able to deal with these natural gas pinch points.
About the Author
Dr. David Mestres Ridge worked first for Total Oil Marine (1998-2000) and then as an independent M&A and business development advisor to oil companies active in the North Sea and North Africa (2000-2006). Between 2006 and 2008 he was a Vice-President at the Royal Bank of Canada, first in the Global Investment Banking Oil and Gas team and then in the Equity Research team. In 2008-2009 he briefly managed Petrodel Resources, a company active in Tanzania. In 2009-2010 he worked with Black Marlin Energy during its IPO on the Toronto Stock Exchange and from 2010 to 2021 with Swala Oil & Gas (Tanzania) Ltd, a company focussed on East Africa and listed on the Dar es Salaam Stock Exchange. Dr. Mestres Ridge has a BSc in Applied Geology form the University of Sunderland, an MSc in Mining Geology from the University of St. Andrews, a PhD in Chemical Engineering from Imperial College, an LLM from the University of Aberdeen and a GDL from London Metropolitan University. David provides advice on energy-sector A&D, business development, commercial asset management and financial asset and corporate valuations.
About Prospect Law
Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.