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   Web Issue 3149 May 16 2008   
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Supply and demand keeps gas pressure building
ALF YOUNGApril 29 2008

The Grangemouth dispute has highlighted just how vulnerable we all are to disruption in any of the complex supply chains which bring us the daily necessities of life. In this instance it is petrol and diesel. It could have been food. Or water. Or electricity. Or gas.

Interrupt one or more of them and everyday certainties dissolve. Orderly human behaviour crumbles as self-interest and self-preservation takes over.

Sever one of these arteries of civic order and chaos looms.

Such disruption need not be, as at Grangemouth, a result of employer/employee conflict over the future of an occupational pension scheme. Indeed, the trigger need not be any form of industrial unrest. It isn't difficult to dream up all sorts of other risks which, were they to crystallise, would have the power to bring life as we know it to a shuddering halt.

Grangemouth supplies refined fuels that keep us on the move and drive vital machinery. But one by-product of the strike which ended this morning has been the shutdown of the Forties pipeline system in the North Sea. And, for as long as that is out of commission, a significant source of UK natural gas is halted.

Across the UK as a whole we are more reliant on gas for heating buildings and generating electricity than on any other primary source of energy. Around 40% of all primary energy use in the UK is accounted for by gas.

And even if Forties is up and running again 24 hours after this Grangemouth walk-out is over, as the operators promise, that doesn't resolve all the risks currently clouding the UK's access to adequate supplies of natural gas in future.

Gas demand on these islands continues to grow by roughly 2% a year. But UK self-sufficiency ended in 2006. By 2020 we will be meeting less than a sixth of that growing demand from our own reserves. We will all be largely dependent on imported stocks.

But finding sufficient, reliable sources of alternative supply is proving a much tougher proposition than many anticipated. Following the winter supply crunch in 2005-06, when gas prices in Britain rocketed, the government made clear its belief that diversity was the best means of ensuring long-term security of supply.

New pipelines from Norway and Belgium, new storage complexes across the UK and new receiving terminals for the shipment of liquefied natural gas (LNG) were already under construction. It was expected that that surge of physical investment, opening the UK up to supplies routes from Norway, Russia, Algeria, the Gulf and further afield, would offset the rapid decline in indigenous UK supplies.

But so far things haven't quite worked out as planned. The first phase of National Grid's £800m Isle of Grain LNG terminal in Kent is up and running and an extension well under way. Two other major LNG terminals, Dragon and South Hook, are being completed at Milford Haven in South Wales.

But the expected shipments so far to Isle of Grain have not matched the advance billing. The Medway complex hasn't had a shipment since the end of January. One planned shipment, from Algeria, was diverted to Turkey, where the client was prepared to pay more because Iran had disrupted existing pipeline supplies.

Japan, Korea and China, all anxious to secure gas supplies, have also been bidding prices higher, Japan reacting to earthquake damage which halted indigenous nuclear production of electricity. We are discovering that, unless UK buyers are prepared to match the competition on price, the new supply route infrastructure may not attract the level of imports predicted.

Yesterday Paul Golby, chief executive of E.ON in the UK, suggested those who thought otherwise of a little naivety. "There has been an assumption that if the metal is there, the gas is going to flow. That does not follow," he told The Guardian. "Having the capacity does not mean the molecules are going to arrive," was a National Grid spokesman's take on the same emerging reality.

And despite opening a new pipeline, Langeled, from a major offshore gas field to the UK last year, a senior Norwegian official has warned that the UK is "a secondary priority" when it comes to striking long-term supply contracts from continental Europe.

It begins to look as if we will only get the levels of gas imports required to meet demand and offset the rapid decline in our own North Sea production, unless we pay a very heavy price to get it. And that spells higher end-user prices here, for both domestic and industrial customers, as early as next winter.

And, given how much UK electricity is generated by burning gas, there is likely to be a knock-on impact on electricity tariffs, too. Let's hope the Grangemouth dispute is quickly resolved. But that doesn't mean there won't be more supply chain shocks, notably on the price required to keep gas flowing here. And, since that is down to increasing supply competition in a globalised gas market, it's a challenge that may prove much harder to fix.


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