LONDON (Reuters) - Britain faces difficulties finding new natural gas supply sources to meet its rising import needs as global price variations and new gas discoveries favour sending the gas to Asia instead of Europe.
Britain has become increasingly dependent on pipeline imports from Norway as well as shipments of liquefied natural gas (LNG) from Qatar as its own North Sea gas supplies dwindle rapidly.
But with Norway at its production limit and Qatar preferring to send its cargoes to Asia, where customers pay almost twice as much for gas as European buyers, Britain is becoming vulnerable to supply squeezes, as seen earlier in March.
“A supply vulnerability underlying this price spike has been in development since 2011 as LNG imports have declined as a result of new supply contracts from Qatar to Asia which have begun delivery this year,” Deutsche Bank said in a report on Friday.
“The supply challenge is made more difficult by a 17 percent decline in UK production in the past twelve months,” it added.
To address this problem the British government and the country’s leading energy firms are seeking ways to forge new partnerships with gas export nations, but analysts see few viable options as most new gas discoveries are either earmarked for higher-paying Asian customers or are far from becoming operational.
“UK imports of LNG have been pulled away by spot demand in Asia and South America and new contractual obligations to Asia,” Deutsche Bank said.
Although in the long-term there seems to be no shortage of gas as unconventional resources, such as shale gas, are being explored around the globe, the outlook for the rest of this decade is tight.
Britain’s natural gas imports from outside the North Sea will surpass domestic production by 2015, Reuters research shows.
Most new gas reserves that are expected to come to the market before the end of the decade, such as in Australia and potentially East Africa, are situated in regions that will make it easier to ship the gas to Asia than to Britain.
New gas sources within Europe, such as the Arctic or eastern Mediterranean, are decades away from large-scale production.
The only major new supply option in the next years may be North America, where the shale boom is unlocking vast reserves.
So far 16 LNG export projects have been proposed to U.S. regulators, although only Cheniere’s Sabine Pass terminal has been approved for U.S. LNG exports.
Britain’s Centrica is already in talks to get gas from Cheniere, which has a licence to export from 2015, but analysts say that Britain will only get leftovers as Asian buyers have already signed up most capacity.
“The main potential markets for U.S. LNG exports are Asian countries, where natural gas prices are far higher than in the U.S,” French investment bank Natixis said, but added that European markets would also be targeted.
Again, the reason for the preference to sell to Asia is price.
Cheniere will sell its gas at a 15 percent premium to U.S. Henry Hub spot gas prices, along with a fixed capacity charge of $2.25-$3.00 per million British thermal units (mmBtu), excluding liquefaction and shipping fees.
At current price levels of $3.5 per mmBtu for U.S. gas, that would allow Cheniere’s gas to be sold into Britain slightly below typical prices of around $10 per mmBtu for UK spot gas.
Should American prices rise to $5 or more, analysts say that it could not be sold to Europe at competitive levels, leaving only the higher priced Asian market where gas can fetch up to $20 per mmBtu.
With such limited new import options, some are resting their hopes on developing Britain’s domestic shale gas resources.
But here, too, most analysts and even politicians are keen to dampen expectations.
Shale exploration company Cuadrilla Resources has put its UK shale gas reserve estimate at a massive 200 trillion cubic feet, but the British Geological Survey (BGS) estimates onshore shale reserves at a mere 5.3 trillion cubic feet, enough to meet Britain’s gas consumption for one and a half years.
British energy secretary Ed Davey has said that despite his government’s support for developing a British shale gas industry, it would take many years before substantial exploration in the UK would take place, and that the new supplies would not be sufficient to bring an era of cheap gas.
Editing by Keiron Henderson