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UKCS Outlook Gas Supply and Demand Historically, in the UK, gas was regarded as a premium fuel sold only into domestic, commercial and certain industrial markets. A new market for gas opened up during the 1990s, using the fuel for power generation. Compared with coal fired technology, gas offers higher energy conversion efficiency and lower carbon emissions at a competitive cost. Combined with market liberalisation, the development of gas-fired generation caused rapid growth in gas use, such that by the year 2000 demand had risen to 100 billion cubic metres per annum. Since 2000, UK gas consumption has remained relatively constant as the attractiveness of new-build power plant has diminished. Price Unlike oil, the majority of UKCS gas produced for the UK market is sold under long and medium term contracts indexed to, but lagging, inflation and energy prices. The remainder is sold directly into the wholesale spot market. Whilst there are a variety of contract prices, they tend to be lower than the spot price. The spot price averaged 20 pence per therm in 2003 but daily prices ranged from 9 — 34 pence per therm over the year. The price of gas remains lower than oil's value in energy equivalent terms, despite the relative environmental premium associated with gas. In 2003, based on the average spot price, gas was priced at approximately 66 % of the equivalent oil price. Since the mid 1980s the real price of gas supplied by UKCS producers has more than halved as the competitive gas market has emerged. The long term fuel price trend of gas against oil and fuel oil is shown in figure 10. Figure 10: Long Term Fuel Price Trends Security of Supply UK gas production peaked in 2000 at 297 million m3/d and is now declining slowly at around 2% per annum. In 2003, gas represented 45.3% of UKCS annual hydrocarbon production, some 40% of UK energy production and 4.1% of world production, making the country the fourth largest gas producer in the world. Gas demand swings over the year, reaching a peak above 400 million m3/d in winter and averaging around 270 million m3/d. In the winter of 2003/4, UK gas production peaked at 330 million m3/d in January '04, compared against gas demand of 440 million m3/d, the gap between supply and demand being met from storage and imports. Currently, the UK produces more gas in a year than it consumes with the excess primarily exported to mainland Europe via the Interconnector between Bacton and Zeebrugge. Based on current production and demand projections, the UK should continue to be a net exporter of gas in 2004. However, between 2005 and 2006 the UK is expected to become a net importer of gas. In terms of security of supply, this event should largely go unnoticed as the country is already part of a dynamic gas supply network covering the whole of Europe. The UK already benefits by importing substantial volumes at periods of high demand and exports excess gas during periods of low demand. However, the longer we can remain a net exporter of gas, the more the UK balance of payments will benefit. As indigenous gas production slowly declines, the security of gas supply is recognised by the industry as a strategic issue. While the UK will begin to rely more on the import of gas to meet its needs, latest projections show it will still produce 60% of its own gas needs in 2010. Figure 11: Gas Import Projections Transco holds an annual exercise known as "Transporting Britain's Energy" to assess gas demand and demonstrate security of gas supply. In the introduction to the 2004 consultation process, Transco confirms that the market is responding to the changing pattern of production both by importing additional gas and by developing new storage projects. Figure 12: Emerging Gas Import Routes to the UK New pipelines are being built to import additional gas from Norway and the Netherlands and the capacity of the existing Interconnector is being increased. Agreement on the principles of a new framework treaty between the UK and Norway has allowed partners in Ormen Lange to progress development plans for this giant field. Capable of supplying 20 billion m3 per annum - 20% of the UK's gas demand - first gas from this field is scheduled to be landed at Easington in 2007 via the Langeled pipeline. The expectation is that a new interconnector will be installed, the Balgezand — Bacton (BBL) pipeline linking the Netherlands with the UK. The latest indications on potential bookings suggest the line will have a capacity of 13 — 17 billion m3 per annum. The Interconnector pipeline between Bacton and Zeebrugge was opened in 1998 and allows gas to flow to or from the European market. The facility has an annual export capacity (i.e. from the UK) of 20 billion m3 per year. Currently import capacity (i.e. to the UK) is limited to 8.4 billion m3 per year. As import needs rise, plans are proceeding to increase import capacity to 16.8 billion m3 per year by the end of 2005 rising potentially to 25 billion m3 per year in 2006. Figure 13: Monthly Interconnector (Bacton — Zeebrugge) Gas Flows 2001/3 Additionally liquid natural gas (LNG) imports from the Middle East, Africa and elsewhere are emerging as a new source of gas supply. Planning approval has been granted for LNG import facilities at the Isle of Grain and Milford Haven. Redevelopment of the Isle of Grain site on the river Medway is underway and will allow the supply of Algerian LNG from 2005. Milford Haven may receive twice this quantity, with imports from Qatar scheduled to commence in late 2007. Figure 14: New Gas Import Capacity New gas storage facilities are also being commissioned in the UK to supply gas at periods of high demand. Figure 15: New Gas Storage Capacity The issues of security of supply are dealt with more fully in a separate UKOOA paper "Security of Gas Supplies" published in October 2003 and available on UKOOA's website www.oilandgas.org.uk.