Gas Storage – the DTI perspective

John HavardEnergy Markets Unit, DTI

Presentation to the Geological Society 19th October 2004

Contents• The significance of the decline in UKCS

production for the UK economy

• The Government response and security of supply

•

The contribution of gas storage in providing flexibility

Declining UKCS production• Peak production capability of UK gas

fields declining faster than expected.– Historically high gas prices mean Southern

North Sea gas fields being produced harder in both summer and winter

– Transco forecast of peak UK gas supply for this winter reduced by 9% from 2003 forecast

Declining UKCS production

Natural Gas Supply and Demand Projections (bcm)

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

20

40

60

80

100

120

UKCS Probable Production

UKCS Probable Production + Vesterled Full Capacity

UK Demand (net of producers' own use)

UK Demand + Exports to Ireland

• By about 2006 the UK will be a net gas importer

Implications for GB gas supply• Already imports gas during winter peak period

to meet GB demand• By around 2006 likely to become a net importer

of gas on an annual basis• By 2010 imported gas will meet about half of

GB demand.• Implications for:

– Security of supply– Swing capability to meet winter peak demand

The importance of gas..• The GB economy is dependent on gas:

– 20m households use gas directly for cooking and heating

– 40% of power generation is gas fired (likely to be c.60% by 2010)

– Over 50% of non transport energy use– Industry reliant – 1/3 of gas consumption

Contents• The significance of the decline in UKCS

production for the UK economy

• The Government response and security of supply

•

The contribution of gas storage in providing flexibility

The Government’s response to security of supply

• Liberalise markets to encourage competition and security through diversity

• Govt “will not intervene in the market except in extreme circumstances such as to avert, as a last resort, a potentially serious risk to safety”

What does the DTI do?

• DTI aims to create a framework where the market can operate effectively and efficiently– Light touch regulation of monopoly and

potential competition– In a competitive market, the private sector

will respond to commercial signals

The role of Regulation• Transco must provide sufficient

transportation capacity in the network to cover peak demand (a 1 in 20 winter)

• “Balancing Duty” - shippers have to balance the gas they put onto the network with their ‘offtakes’ on a daily basis– Storage provides shippers with additional

flexibility to meet this duty– Without storage , there is more price volatility

and therefore risk

The need for flexibility• Gas demand is seasonal – need

‘swing’ supply capability:– Ratio winter peak daily demand to annual

average daily demand > 30%– Ratio of annual low daily demand to

winter peaks is > 50%

Contents• The significance of the decline in UKCS

production for the UK economy

• The Government response and security of supply

• The contribution of gas storage in providing flexibility

Regulatory duty encourages access to swing

Oversize import infrastructure

Build storage capacity

• Without additional daily “swing” capacity the balancing duty could act as a barrier to entry

Commercial Decision on how to fulfil regulatory duties

Trade and Hedge Demand-side

response

Gas storage provides swing capability• Might not be economic to oversize fixed import

structure• Diversity of swing is an important aspect of

security of supply• Storage provides another source of flexibility• Value in close to market sources • Gas quality not a constraint with stored gas

The UK Gas Storage Market• Currently storage gas accounts for c.4%

of overall consumption mix• Offshore “Rough” facility accounts for

80% of UK storage space – likely to fall to 60% of total market with future known developments

• Near future capacity rights in existing storage facilities are over-subscribed

• Record forward prices for next 2-3 winters

Gas supply for winter peaks• UK swing capacity is provided by:• UK Southern Basin gas fields

– By 2009/2010 this is expected to decline significantly • The Belgian Interconnector (has capacity to

supply 5% of peak day demand)• Storage• Linepack• Interruption (a flexibility rather than swing)

Is the UK vulnerable?• Significantly less storage than some EU

member states

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UK The Nthlds Germany France Belgium

Gas C

apac

ity (M

CM)

Approx Peak day demand in 2000

Daily Deliverable from Gas Storage2003

32%

92% 114%

95%

29%

High levels of storagemay be for export to Belgium

Daily Deliverable Gas from Storage, compared to Approx Peak Day Demand

Source: DTI economists

The Future: is the UK vulnerable?• New gas import infrastructure is expected

to meet annual average demand• But will need additional SWING capacity to

meet winter peak demand in the future • Swing capacity will potentially come from a

variety of sources:– LNG, storage, UKCS, new pipeline, new

interconnector, linepack, interruptions

The potential for new projects

Onshore storagein salt caverns

?

Onshore storagein natural porous strata

Offshore Storage

?

Limited by Geography:Cheshire and East Yorkshire

Planning regime and HSE

Production regimeGas Act 1965Planning permission and HSE

Offshore production regime

Storage Types Opportunities Main regulatory regime

Conclusions• UK increasingly needs swing capacity for:

– Peak winter demand and daily demand fluctuations– Balancing Duty

• Gas storage is an important source of swing capability

• The market will decide how much additional storage capacity is needed

• Conference and the professional expertise represented will have an important role in informing the market of opportunities