UK well placed to deal with potential Russian gas export cut

Tue Apr 15, 2014 11:11am EDT

* Supply risks for UK are from Norway, global LNG market

* Britain's gas production falling by 4.5 pct a year

* Import bill could rise to 16 bln stg/year next decade

* UK could run out of domestic gas by next decade

By Henning Gloystein and Nina Chestney

LONDON, April 15 (Reuters) - Britain is well placed to deal with the possibility of a Russian cutoff of gas to Europe during the Ukraine crisis, because it receives most of its imports from Norway and has significant domestic reserves.

As relations worsen between Kiev and Moscow, European gas customers fear that Russia could cut off exports to Ukraine, which is an important transit route for natural gas to the European Union.

Russia supplies around a third of Europe's gas, some 40 percent of which it ships through Ukraine. Gazprom has threatened to cut supplies if Ukraine continues to fail to pay its bills and has warned of a possible reduction in onward deliveries to Europe.

Although Britain does not import Russian gas directly, it does receive some gas from the continent, to which Russia exports over 160 billion cubic metres (bcm) of gas a year.

Britain's supply risks mainly involve a disruption to Norwegian gas supply or turmoil in the Middle East, which could affect imports of liquefied natural gas (LNG) from Qatar.

"The physical problem of interruptions at this time of year is low. We are in spring and going into summer, and we have low demand and a lot of gas in storage," Jonathan Stern, chairman of the Natural Gas Research Programme at the Oxford Institute for Energy Studies, told Reuters.

"A Norwegian disruption would be the biggest problem for the UK at present. We are receiving very little LNG from anywhere, because Asian prices are high, and they are taking all of the LNG out of Europe."

Another factor that will affect Britain's gas market for years to come is the drop in its domestic production by about two thirds from its peak in 2000 to 37 bcm a year now, less than half of annual demand.

The government hopes the decline will slow and that Britain will still produce 19 bcm of North Sea gas by 2030.

But if the decline does not slow, Britain will run out of home-produced gas by the early 2020s, doubling its current annual import bill of 8.48 billion pounds ($14.2 billion) to 16 billion pounds within a decade.

SUPPLY RISKS

Becoming an import-dependent country increases supply risks.

Britain's two single biggest suppliers are Norway, which pumps its gas through the North Sea via several pipelines, and LNG imports from overseas, mostly from Qatar.

Norway's exports to Britain are expected to remain stable at around 25-30 bcm for the next decade at least, but LNG sourcing, volumes and prices will vary widely as Britain competes with buyers in Asia and Latin America, where gas prices are higher than in Europe.

"Demand in Asia for LNG is high and still rising, despite high transportation costs. If the U.S. decides to increase its LNG exports, Europe will have to reach into its pocket to prevent all LNG from being shipped to Asia," said Hans van Cleef, a senior energy economist at ABN Amro.

STORAGE

The two main ways that Britain could improve its supplies would be to boost its own shale gas output and increase its storage capacity, allowing it to create a cushion against potential disruptions.

Because Britain in the past could rely on its own production, its gas storage sites, even when fully topped up, can meet only around two weeks' worth of demand. This compares with around 15 weeks in France or Germany, which have always relied largely on imported gas.

As Britain's resources dwindle, pressure has mounted to invest more in storage capacity, especially since 2013 when an unusually long winter almost depleted its stocks, causing extreme price spikes and fears of outages.

Despite these calls, British utility Centrica called off two gas storage projects last year after the government decided against subsidising such projects, saying it would cost around 750 million pounds over 10 years.

Britain is also in the early stages of exploring for shale gas, but most analysts expect annual production to remain below 10 bcm in the 2020s.

"Without shale, we are forecasting we will be importing 70 percent of our gas by 2025," Minister of State for Energy Michael Fallon said this month. ($1 = 0.5976 British Pounds) (editing by Jane Baird)

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