UK overseas gas imports to surge to $11 billion by 2015

LONDON Wed Sep 19, 2012 11:36am BST

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LONDON (Reuters) - Britain's natural gas imports from outside the North Sea will surpass domestic production by 2015 and add more than $11 billion to import costs as domestic supplies dwindle and Norway increasingly struggles to fill the gap, Reuters research shows.

Estimates show that Britain's own gas supplies will fall from around 43 billion cubic metres (bcm) per year today to around 16 bcm in 2030 if they continue their average annual 5 percent decline since peaking in 2000, while demand is set to hold steady between 85 and 95 bcm.

Britain was a net exporter of gas until 2004, but a steady decline in output over the last few years has made it more reliant on imports, which have so far mostly come from Norway and, increasingly, Qatar.

Analysts forecast that Norway's exports to the UK will grow at 1 percent a year, increasing its supplies from today's 25.5 bcm to just over 30 bcm by 2030.

Reuters research shows that the ongoing decline in Britain's domestic production means that the UK will need to roughly double its imports from alternative gas sources by 2030, raising them by 2.25 percent a year from about 25 bcm now to almost 50 bcm, in order to meet its annual gas demand.

The Reuters figures are projections based on current trends.

That means non-Norwegian imports will have to surpass domestic natural gas production of around 35 bcm per year by 2015/2016, at a cost of more than $11.5 billion per year based on current market prices for European imports of liquefied natural gas (LNG), or over $14 billion for Russian pipeline gas to Europe, according to Reuters research.

While analysts say that Britain has the infrastructure to cope with higher imports, they warn that higher imports will have a strong impact on the price the UK pays for gas because the jump in overseas supplies will expose it to price competition around the globe.

"The UK gas price will be driven by the marginal cost of imported supply," said David Stokes, Director at Energy Consultancy Timera Energy.

"The infrastructure (to deal with rising import needs) is there, so the task is to find gas at the right price," said Bjorn Brochmann, Director of Gas Analysis at Thomson Reuters Point Carbon.

Although Brochmann said that gas prices could also drop in the longer-term should a shale oil and gas boom flood global markets with new supplies, most analysts say that LNG prices, as well as pipeline supply prices, are set to rise in coming years as demand begins to outpace new supply additions.

European spot LNG cargoes currently cost around $9 per million British thermal units (mmBtu), compared with $13 per mmBtu in Asia, and the International Energy Agency (IEA) says that rising import demand in Europe could lift prices closer to $11 per mmBtu later this decade.

Russian pipeline gas currently costs around $410 per thousand cubic metres, but rising spot LNG or oil markets would also lift its pipeline prices.

NORWAY CAN'T FILL THE GAP

The data also shows that Norwegian gas supplies will not be able to meet falling British demand any more by the turn of the decade.

The only feasible way to replace Norwegian and British gas is to begin importing more Russian gas through interconnectors with continental Europe, or to increase LNG imports from the Middle East, Africa and, perhaps, the United States.

Qatar, the world's biggest LNG exporter, already supplies Britain with some 25 bcm of gas per year, but a moratorium on export expansion until 2015 means that its supplies will stagnate, and that Britain will have to compete with Asian and other European utilities for its cargoes.

But there is also the possibility to step up imports from continental Europe, which would effectively mean importing Russian gas to Britain.

UK SHALE TO THE RESCUE?

Some analysts say that exploration of Britain's unconventional shale gas reserves could come to the rescue of dwindling conventional domestic natural gas reserves.

In the United States, a shale gas boom has resulted in a sharp rise in U.S. natural gas production, leading to a collapse in domestic natural gas prices and to the possibility of U.S. LNG exports by 2015.

In Britain, shale gas company Cuadrilla Resources has said its site near Blackpool has enough gas to cover UK demand for generations, although experts have cast doubt on the claims.

"UK shale gas has the potential to make a useful contribution but it's certainly not going to be possible to exploit enough to offset dwindling North Sea supply," Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, told Reuters.

In Poland, which geologists initially said had some of Europe's biggest shale gas reserves, estimates had to be slashed by 90 percent this year after early research had proved too optimistic.

Shale gas production, known as fracking, is a controversial issue. It requires the use of large amounts of water and chemicals, and environmental groups as well as large parts of the public oppose using the technology in western Europe, where population density is much higher than in North America.

France and Bulgaria have banned shale gas exploration, and in Britain the technology has yet to receive full government approval.

In the long-term, and to avoid the public debate fracking causes onshore, some geologists also say that fracking could move offshore, where vast reserves are seen in the North Sea.

This, however, would require an oil price of far above $200 per barrel to be a profitable industry, so analysts say it will remain a back-up option against an oil price shock rather than a viable option of gas supply in the mid-term future.

(Additional reporting by Susanna Twidale and Dmitri Zhdannikov; Editing by Hugh Lawson)

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