An Examination of Natural Gas Supply and Pricing in the United Kingdom

November 1, 2006

Michael AngiolilloZachary SimpsonKristen SmithDavid Williams

Executive Summary

UK: From Net Exporter to Net Importer

Demand Up: Power Generation Supply Down: North Sea Decline Issue: Security of Supply Recommendation: Encourage

Development and Construction of LNG Regas, Nuclear and Wind Energy, and Gas Storage

Agenda

Description of UK Natural Gas Infrastructure

History Natural Gas Demand and Usage in the UK

History of Natural Gas Market Structure in the UK

From Exporter to Importer Supply Issues and Risks

• Transportation• Storage• LNG

Recommendations

UK Natural Gas Supply Chain

•Supply from offshore wells

•Transported to UK via pipeline

•Minimal Storage (North Sea is the storage)

•Primary Users: Industry, Domestic, Power Generation

UK Natural Gas Infrastructure

1. LNG Import Terminal

2. United Kingdom Continental Shelf

3. Largest storage facility (85% of UK storage)

4. LNG Storage Facilities

5. Belgium Interconnector

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History of NG in UK - Demand

1970s: Natural Gas found at UK’s Continental Shelf

British Petroleum: http://www.the-eic.com/events

History of NG in UK - Demand

Gas Begins to Replace Coal in Industries and Homes Abundance from UKCS Gas fired power plants replace coal Carbon Dioxide Emissions lowered under

Earth Summit in Rio and Kyoto Protocal

History of NG in UK - Demand

DTI: Our Energy Challenge; http://www.dti.gov.uk/files/file25079.pdf

History of NG in UK - Demand

DTI: Our Energy Challenge; http://www.dti.gov.uk/files/file25079.pdf

Today: Coal= 39%, Gas= 33%, Nuclear= 19%, Renewable= 6%

History of NG in UK - Demand

Relationship between Gas and Coal

DTI: Our Energy Challenge; http://www.dti.gov.uk/files/file25079.pdf

History of NG Market in UK

Gas Act of 1948 Nationalized Gas Market

Gas Act of 1986 Privatized Gas Market- British Gas Co. Created Ofgas Regulatory Body- Office of Gas Supply

1996: British Gas demerges to form British Gas plc and Centrica Increased Competition

Currently: National Grid Transco Co. controls majority of pipelines and suppliers may choose their provider

History of NG Market in UK

Ofgem Present Regulatory Body after Ofgas and

Offer Merger Regulates pipelines and electricity wires Protects customers

History of NG Market in UK

White Papers of 2003 Cut emissions of carbon dioxide by 60%

by 2050, Ensure that every home is adequately

and affordably heated Maintain the reliability of energy supplies Promote a competitive energy market in

the UK and beyond

From Exporter to Importer

Large Reserves in the United Kingdom Continental Shelf promoted self-sufficiency for past 20 years.

Natural Gas production peaks in 2000 at 108 billion cubic meters.

Production set to decline rapidly following 2008. Demand continues to rise at roughly 1% per year.

Projected Supply Gap

Supply Issues

Creation of infrastructure to meet future import demand.

Promote diversification to avoid risk of single supply route interruptions.

UK Import Plan Pipeline Imports Increased Number of Storage Facilities Liquefied Natural Gas Import Terminals

NG via Existing Pipelines

The Norway-UK Vesterled connects UK markets to Heimdal Riser Platform in the Norwegian Sector. Capacity of 4-10 bcms annually.

The Belgium-UK Interconnector operates as a bidirectional link between UK and continental Europe. Capacity after compression facilities 25 bcms.

Norway-UK Langeled

Constructed to link the Ormen Lange Field to UK import terminal of Easington.

Pipeline will be 1,200 km when completed.

Currently testing this pipeline, expected full-scale usage slated to begin October 2007.

Added import capacity will represent between 20-25% of UK natural gas demand.

Source: http://www.offshore.no/nyheter/sak.asp?Id=10744

Balgzand-UK Pipeline (BBL)

Construction by Dutch Gasunie. Extends 230 km worth of pipeline from

Balgzand to Bacton. Expected completion 2007. Depending on the number of compressors,

pipeline could increase imports between 10-17 bcms annually.

North European Gas Pipeline

Construction primarily by Gazprom.

Will traverse former Soviet states and enter EU markets in Germany.

Will be longer than 2,000 km upon completion.

Adds 19-30 bcm annually to EU markets.

Source: http://www.hydrocarbons-technology.com/projects/negp/negp1.html

Potential Pipeline Risks

Fairly Regional Heavy reliance could increase risks associated

with supply failure and competition between neighboring markets.

Routes of Future Pipeline Imports Tampering with trans-boundary pipelines. Russia/Ukraine incident.

Storage Capacity

Functions as a “buffer” to smooth out potential demand supply problems.

UK has previously relied on domestic reserves in UKCS to serve this purpose.

Most European Countries maintain storage capacity to serve 80 days.

UK has previously only stored to meet 13 days.

Construction of New Storage

Humbly Grove in Hampshire Facility became operational in 2005. Storage capacity of 0.28 bcm.

Aldbrough in Yorkshire Underground storage facility to be fully functional

between 2007-09. Storage capacity of 0.42 bcm.

LNG in the United Kingdom

In 1964, the UK became one of the first importers of LNG from Algeria

Continued into the 1970’s until production from the North Sea increased

No new regasification terminals until 2005

LNG in the United Kingdom

2005 – Isle of Grain terminal opened Annual capacity of 4.5 bcm Planned expansion to 13 bcm by 2008

Two more terminals under construction Total additional capacity of 36 bcm by 2010

Isle of Grain terminal idle for much of 2005 due to higher gas prices in US and Spain

Recommendations

Continue to focus on LNG importation Will be primary source of gas in the future

Success in Japan Imports 97% of its natural gas, all from

LNG Largest importer of LNG in the world

Recommendations

Increase use of renewable energy sources UK has over one third of Europe’s entire

potential for wind energy Denmark generating over 17% of its

electricity from renewables Current goal is to increase generation of

electricity from renewables from 4.7% to 10% by 2010

Recommendations

Reconsider use of nuclear energy Deemphasized by Energy Policy Act of

2004 Not considered to be financially feasible

at this time France generating 78% of its electricity

from nuclear power

Recommendations

Develop strategic gas reserves Currently only has capacity for 13 day

supply Other European nations that have

traditionally relied on gas imports have on average 80 days worth of strategic reserves

Further insulate itself from sudden changes in supply and demand