Gas supply crisis may be in the pipeline for UK

HE MAY have had to dash into a side-room to evade the wrath of Greenpeace, but Tony Blair, the Prime Minister, finally blurted out the inevitable: an energy crisis is looming and it needs to be addressed.

Energy was "back on the agenda with a vengeance", he announced. "Round the world you can sense feverish rethinking. Energy prices have risen. Energy supply is under threat."

The debate will rage for many a month, and will most likely be dominated by the need or otherwise for nuclear power. But in the here and now, there is a more immediate crisis at hand. Out in the North Sea, there are thousands of engineers and technicians working 12-hour shifts to supply gas to the UK's homes and businesses. This year, the process leaves less margin for error than ever before.

However cold you think it is here, it is freezing out there. But there can be no shirking of duties. Each platform produces a tiny percentage of the current UK demand of 100 billion cubic metres of gas a year, a figure that is double the levels of 1990. Every single operation needs to function correctly.

The Department of Trade & Industry (DTI), which shares responsibility with regulator Ofgem for the security of the UK's gas supply, is keeping a close watch. "There has definitely been an effort to improve the information flow," says Richard Boddy - a Norwich-based operational superintendent at Exxon-Mobil. "They called here just last week."

The DTI's concern is that we are in the early stages of a chilly season hit by three major challenges - all emerging at the same time.

First, the UK has become a net importer of gas - increasingly relying on overseas production to meet domestic needs.

Second, gas prices have spiked to all-time highs at every hint of a temperature dip. Last week's cold snap saw the spot price hit 1.70 a therm - up from a broad average of just 25-30p days earlier.

Third, the news has been compounded by fears that we could be facing a so-called one-in-ten or even a one-in-50 winter - the coldest since 1962-63. If that happens, demand for gas will go through the roof.

The UK's loss of exporter status comes as a result of the maturing North Sea basin, which is unlikely to yield any more major oil and gas finds - despite industry reports of a near-record investment of 11 billion in 2005.

Unfortunately, the drop in home-grown supply has not coincided with a switch to a higher volume of imports. The Bacton interconnector in East Anglia is a fine example. It is currently subject to an upgrade that will double its capacity for imported gas, but is not set to be completed until next year.

In all, there are seven upgrades to pipelines, connectors and terminals underway around the UK - but none will be completed in time to ease the nerves for this winter's gas supply. The pipelines are set to be in place by 2007, while projects built to receive shipments of Liquid Natural Gas (LNG) - are aiming for 2008-12.

So, how did we mistime it so spectacularly? David Odling, gas and commercial issues manager at oil and gas body UKOOA, admits that the industry "should have known" of the problem around 1999 or 2000 - when UK production reached its peak.

But he adds: "The problem is that you sometimes can't see the top of the mountain until you are standing on top of it." He adds - reasonably - that the planning process in the UK has become so tortuous that it was impossible to rush through the projects.

Of course, the issue of supply will only become a crisis if there isn't enough gas to go round, and both industry and regulators are keen to assure us that this won't happen. The most reliable preventative measure is known as demand-side response (see below) - which can cut business demand for gas by up to 16 per cent.

But this safety net does not help to solve some of the other flaws in the gas supply system, ones harder to fix than simply increasing the capacity of pipelines. Storage remains a tricky problem, as does the state of the European market - which, as BP chief executive Lord Browne put it this week, remains "somewhat opaque".

Storage is highlighted by Ofgem as one of the key drivers of last week's high gas prices - more even than fears over security of supply. "The much colder weather than usual increased demand," it said, "which led to gas being taken out of storage earlier than normal.

"This is more expensive ... as storage operators will only sell stored gas if prices are at, or above, the levels that they would expect to receive if they sold it in January or February, the period when it is usually used."

Europe, which has singularly failed to liberalise its energy market in the same way that the UK has. This has allowed countries such as Spain to hoard an unknown amount of gas for its own consumers, keeping the price down in its own market.

Ofgem - which has appealed to Brussels to launch an inquiry into the issue - believes the position has led to unfair delivery of LNG to the converted Isle of Grain terminal.

The lack of volume into the terminal has led to much scratching of heads, as technically more money could be made for European suppliers by tapping into UK prices.

Blair has a lot still to ponder, but the workers on the Thames platform will continue their shifts with little regard for the bustling of Westminster, making sure that gas keeps coming.

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