UK Gas Security: an evidencebased approach

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UK Gas Security an evidence-based approach

• Professor Jonathan Stern
• Director of Gas Research
• Oxford Institute for Energy Studies
• SEG Security Seminar
• University of Sussex, January 27, 2009

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Approaches to (Energy and) Gas Security

• Resource-based approaches peaking
  supplies/exhaustion of resource base
• Arithmetic/modelling approaches dependence
  statistics, diversity indices, attaching
  numerical values to different factors
• Ideological approaches
• Political unreliable and nasty foreigners
• Economic/market based liberalisation and
  competition solve security problems

Most of this work is theoretical and/or
normative very little of it involves study of
actual gas security incidents
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Shortcomings of Approaches Including the UK 2003
and 2007 White Papers

• Attempts to construct an all embracing definition
  of security are too general and difficult
• Attempts to categorise all of the possible types
  of security event lead to generalised (often
  ideological) solutions
• Over-concentration on
• threat of disruption of imported supplies
  especially from Russia
• need for EU liberalisation and competition

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Security of Gas Supply definition

• Shortage or loss of natural gas which cause
  consumers to suffer reduction or disconnection of
  their supplies and resulting gas price increases

By no means the only way to define security and
neglects the longer term dimensions of adequacy
of supply and need for investments
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Gas Security an Evidence-Based Approach

• RESEARCH QUESTIONS
• What have been the causes of short and long term
  shortage or loss of natural gas supplies and
  resulting gas price increases in different
  countries?
• Are future events most likely to arise from
  similar or different causes?

Main difficulty is the lack of detailed
information about events which have caused
shortage of gas and their consequences
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Why did the UK Suddenly Become So Concerned About
Gas Security Around 2004-05?

• BECAUSE THE UK MOVED FROM A POSITION OF NET GAS
  EXPORTER TO GAS IMPORTER AND SUDDENLY FELT
  VULNERABLE TO EXTERNAL DEPENDENCE

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UK Gas Security a potentially serious issue

• Gas is gt40 of UK energy demand and therefore
  reliability of supplies from all sources
  becomes much more important BUT
• a liberalised and competitive gas market
  delivers a high level of efficiency but a low
  level of insurance
• UK has little or no contingency supply against
  short term extreme events
• addressing this problem requires a change in the
  policy/regulatory and contractual framework of
  obligations on market players

This requires altering the current market
framework which has proved unacceptable
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Notable UK Gas Security Events 2006-08

• 2006 Rough
• 2007 CATS Pipeline
• 2008 Bacton Fire Grangemouth strike
• Numerous small failures of fields, terminals,
  pipelines etc

None of these events attracted significant
media/political attention equally important,
they are seldom referred to as security events
and more often as market failures Rough and
CATS caused significant, but unquantified price
increases over a period of months
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THE UKCS HAS BECOME A MAJOR GAS SECURITY PROBLEM
WE HAVE VERY LITTLE IDEA HOW MUCH WE CAN RELY ON
THE UKCS EITHER ON A DAY TO DAY BASIS, OR OVER
THE NEXT DECADE
Import dependence and long term supply adequacy
are UK policy preoccupations but short term
disruptions of domestic supplies and facilities
are the biggest problems
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Source National Grid
Highly successful investment in import capacity
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Energy Markets Outlook Report 12/08

• Recognised that main threats over the past few
  years have been
• unplanned outages of (electricity) transmission
  and distribution networks
• accidents (Rough) and Coryton/Pembroke
  (refineries)
• extreme weather 2007 floods, US hurricane
  season
• industrial action Grangemouth 2008

Para 2.6
Disruption costs forcing 10 of gas demand off
the system involuntarily could cost the economy
300m/day (para 2.2) VOLL 5-30/therm
(para 3.5.1)
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EMO Dimensions of Security

• Physical security avoiding physical
  interruptions
• Price security avoiding unnecessary spikes due
  to supply/demand imbalances and poor market
  operation
• Geopolitical security avoiding undue dependence
  on specific nations to maintain maximum foreign
  policy freedom

Energy Markets Outlook 2008, Para 3.2.1
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Major Gas Security Events Outside UK

• QUIZ QUESTION Which OECD country has suffered
  three major gas security events over the past 7
  years (most recently in 2008) which have resulted
  in large numbers of disconnections?

Unless a gas shortage can be attributed to an
international political threat - preferably from
Russia or a Gas-OPEC then a) it is not
considered a security threat b) it is of little
interest to policy makers and the media
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THE JANUARY 2009 RUSSIA-UKRAINE CRISIS

• The most serious European gas security crisis,
  and one of the most serious European energy
  security crises, ever

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What Was the Impact of Cutting Off 20 of
Europes Gas for 2 Weeks in the Middle of Winter

• OLD MEMBER STATES
• No impact on deliveries to customers
• No major price impact except in UK where NBP rose
  briefly then dropped sharply when flows resumed
• NEW MEMBER STATES BALKANS
• Crisis everywhere but especially Bulgaria,
  Romania, Bosnia, Serbia, Croatia (to a lesser
  extent Slovakia)

Key factors were lack of alternative supplies
and supply routes, commercial storage, strategic
storage
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Impact on the UK was Minimal

• Increase in NBP prices for a few days then
  sharp drop when the crisis finished
• Interconnector moved to export mode for a few
  days
• Media were interested for a few days but mostly
  in relation to whether crisis would threaten
  expected price reductions in the UK

Worst crisis of Russian gas supply imaginable had
no significant effect on UK gas supplies and
prices
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Lessons of the 2009 Crisis from Other Countries
for the UK

• Ensure resilience against supply failure through
  any single route or from any single country eg
  Norway
• Ensure resilience of failure of major gas
  pipeline or terminal infrastructure Forties,
  CATS, FLAGS, Bacton, St Fergus, Barrow, Easington
• Reconsider strategic storage if commercial
  storage build fails to improve drastically (to a
  much higher of winter demand)

Do not take an ideological political or
economic approach to security focus on
infrastructure and impact of real events!
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Gas Security Remains Very Important for the UK

• Unless other future sources of energy, the
  infrastructure to import very large quantities of
  gas is built (or just about to be completed)
• This infrastructure can bring gas from diverse
  sources through diverse routes (pipeline and LNG)
  
• Although this is not backed by long term
  contracts, the existence of the infrastructure is
  a major advantage because the security emphasis
  switches to price, rather than availability
  especially of LNG

We are entering another gas surplus/low price
period but lack of storage and resilience will
remain very important