Providing for the UK’s Energy Needs

UK Gas Market

In the UK, gas was historically 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. Demand grew rapidly and gas now provides 42% of the UK’s total energy needs. Compared with coal fired technology, gas offers higher energy conversion efficiency and lower carbon emissions at a competitive cost.

Figure 18: Total Gas Demand by Sector 1985 - 2004

Combined with market liberalisation, the development of gas-fired generation caused rapid growth in gas use, with demand rising to 100 billion cubic metres per annum by 2000. Since then, UK gas consumption has grown more slowly with the attractiveness of new-build power plants diminishing. However this is expected to change as many of the existing nuclear and coal fired power stations are decommissioned.

UK-Part of a European Gas Market: The UK gas market is the most liberal in Europe. It is continuing to evolve in response to changes in supply and the forthcoming rise in imports to meet overall demand for gas. Gas production from the UKCS has met the country’s needs for many years and the UK has been a net exporter of gas since the mid-1990s, during which period there has been an abundant supply of gas. This gas surplus has now disappeared and gas demand continues to grow at around 1.5% per annum. Whilst the UK will be a net importer of gas in 2005, it is still anticipated that over 95% of UK gas demand will be provided by indigenous production.

About half of UKCS gas production comes from “dry” gas fields, predominantly located in the southern North Sea and Irish Sea, and requires limited processing to meet sales specification. The term “dry” means that the gas exists in the reservoir without the presence of liquids (oil, condensate or gas liquids). The flow rates from these fields may be varied over the year to accommodate changes in demand, depending on the commercial terms under which the gas is sold. The other half of UKCS gas production comes from oil fields in the central and northern North Sea and is mostly “wet” gas. Here the gas is produced together with liquids (oil, condensate or gas liquids) and requires substantial processing to meet sales specification. These are much more complicated reservoirs to operate and manage and the economics are usually dictated by the liquids. Overall recovery of gas is aided by constant flow conditions in such reservoirs.

It is estimated that up to 75% of the gas produced is sold to wholesale buyers (known as shippers) under medium or long term contracts, with the balance under short term arrangements, where it is typically sold on the spot market at the NBP (national balancing point). Shippers in turn sell gas to power stations, large industrial and commercial users and to suppliers who retail the gas to smaller users – shops, offices, households etc.

Gas market liberalisation and the introduction of the spot market in the mid 1990s saw the wholesale gas price decline sharply; this decline in gas price was sustained by significant oversupply of gas from the UKCS, with no export route to the larger European market. This changed with the opening of the Interconnector (Bacton - Zeebrugge) in 1998, linking the UK and European gas markets for the first time. This allowed UK gas to be exported to Europe when there was a surplus and enabled gas to be imported to the UK in periods of high demand, typically during the winter months. The physical linkage to the European market via the Interconnector enables gas to be freely traded between the UK and mainland Europe.

Figure 19: Monthly Interconnector (Bacton – Zeebrugge) Gas Flows 2001 – 2005