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UK Gas Resources are in a Precarious State

UK Gas resources are in a precarious state, with output falling faster than either the Department of Trade or the UK Offshore Operators Association had anticipated, according to a leading Scottish energy economist.

Tony Mackay, of Mackay Consultants, warns that official projections show UK production remaining in the range 85-100billion cu m per year for the three years, 2005-07, but the latest statistics show an annual decline of about 9%.

"If that continues, there will be serious supply shortages during the winter months," Mackay told Energy, adding that Britain's gas self-sufficiency effectively ceased last year and not this, as is commonly believed.

"There are major pipeline and LNG import projects under way, but most of them will not be in place until 2007 or 2008. The solution will probably be a substantial reduction in the use of gas for electricity generation and an increase in imports of coal. The implications for the UK's balance of payments are frightening."

The situation is so tight that UK North Sea operators have been warned by the Government that they must pull out all the stops in a bid to prevent gas shortages in Britain during the coming winter. They were told at a meeting with the Department of Trade & Industry late-June that maintenance shutdowns of the kind experienced last winter would not be tolerated.

A DTI spokesman said explicit instructions to operators in terms of shutdowns had not been given. However, it was conceded that the situation was tight.

He said: "As we approach what looks like a tighter winter than in previous years in terms of gas supply, every effort to maximise flows from the North Sea is needed and ministers are in contact with key operators to stress the importance of this."

Confirming the meeting, UKOOA director Steve Harris said operators had agreed to do everything in their power to assure reliable supplies throughout the coming winter.

The biggest problem is with dry gas as this is the fastest depleting part of the UK resource. Dry gas is essential when it comes to managing supplies to the market. So-called "associated" gas cannot be turned on and off as this would impact oil and condensate fields where maintaining liquids output is the priority.

Forward prices are soaring in Britain and industry consumers can expect to pay almost twice as much for their gas this winter as their French counterparts and 2.5 times as much as German industrial users.

A year ago, UK industry was paying 30-35p per therm when renewing annual contracts. Now, they're paying about 60p.

Last month, the forward price for gas for delivery in Q1 2006 almost hit £1 per therm - three times the price for gas mid-month.

Consumers are already experiencing steep increases. UK gas and electricity have doubled in price over the past 18 months, compared with 15% in Germany and 40% in France.

This is an aspect that Energy Minister Malcolm Wicks will almost certainly be watching closely as he is an expert on the subject of fuel poverty among Britain's disadvantaged.

The UK's hasty transition to a free market based on short-term contracts (effectively, just in time) is one reason for the mess; another is the 1990s "dash for gas" by the power-generation sector. A third is the tardiness of operators to undo the padlocks on their treasuries and release funds for new and brownfield developments following the late-1997 through 1999 oil market slump.

Editorial Notes: Serious coverage from an established industry insider in a mainstream newspaper - doesn't sound like Peter Fosters 'deranged chorus'.-LJ

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