You will find that the State is the kind of organization which, though it does big things badly, does small things badly, too.
John Kenneth Galbraith
US (Canadian-born) administrator & economist (1908 - 2006)
Looking forward to a more environmentally-friendly, secure and cheaper energy future for the UK, it seems that a sensible government strategy would involve gas, ‘clean’ coal, nuclear power and renewables.
Considering gas, of course the major gas UKCS gas discoveries of the 1960’s and 1970’s enabled the UK to transform both power generation and domestic consumption and, living off this endowment, the UK is now the world’s third largest consumer of gas after Russia and the USA. After many years of UKCS gas fields supplying the UK’s needs, production is now in fairly rapid decline and by 2015 imported gas is expected to meet 80-90% of UK demand. In fact the UK has already become a net importer of gas on an annual basis, having become reliant on imports during the winter.
As will be seen later, the UK has relatively less gas storage space than other countries in NW Europe, is therefore less able to buy cheaper gas in the summer months and pays relatively higher prices for gas imports in the winter. Finding a stick to beat both energy companies and the UK government with, the Daily Mail reported this on 4th June 2008 under the heading “You can blame the European power giants for sky-high bills: They buy the gas we can’t store and sell it BACK”!
There seem to be three questions in here, namely:
1. How long will global gas resources last?
2. Where will the UK import from?
3. What’s the issue with gas storage in the UK?
Global Gas Resources and UK imports
There are many sources of information on global gas resources but two good recent summaries are provided by the BP Statistical Review of World Energy, June 2008 and a BG paper entitled “Are we facing Peak Gas?” from April, 2008.
The following Estimates are increasingly ‘Guestimates’ are we move down the page, with that for Gas Hydrates little more than speculation (see Fischer, World Oil, June 2008 for a somewhat sceptical review):
Conventional Gas Reserves are estimated as:
Proven: 6,400tcf
Proven + Probable: 9,000tcf
Proven + Probable + Possible: 12,660tcf
Conventional Gas Resources are estimated as:
Yet-to-Find: 5,200tcf
Unconventional Gas Reserves are estimated as:
Tight Gas, Coal Bed Methane, Shale Gas: 16,000tcf
Unconventional Gas Resources are estimated as:
Tight Gas, Coal Bed Methane, Shale Gas: 35,000tcf
Gas Hydrates: >100,000tcf.
Nevertheless, given current global production levels of just over 100tcf a year (see Exhibit 1), then the above estimates suggest gas could last between sixty and several hundred years.
Where are the Proven Conventional Gas Reserves to be found? Exhibit 2 shows the distribution at the end of 2007. What is very clear is that the bulk of proven reserves are found in the Middle East and Europe & Eurasia: in fact, Russia, Iran and Qatar hold more than 55% of proven gas reserves and the five largest global gas discoveries are also in these countries, namely (all estimates are Proven + Probable):
North Field, Qatar: 900tcf
South Pars, Iran: 500tcf
Urengoy, Russia: 382tcf
Yamburg, Russia: 222tcf
Bovanenkoy, Russia: 150tcf.
Where are Unconventional Gas Reserves most likely to be developed to a point where they compensate a decline in Conventional Gas? The answer is clearly in the USA where the innate belief in technology, backed up by sensible fiscal policies, will see domestic unconventional gas replacing conventional gas from 2010 onwards.
NW Europe will see global gas arriving by pipe-line from Russia, Norway and possibly Algeria, and by LNG from the Middle East (Qatar), Algeria and West Africa. In the UK, new import terminals have been or are being built (e.g. Milford Haven, Canvey Island, Teeside) to enable the import of gas to replace our own domestic production but actually there remains no guarantee that the gas flows can be managed to meet UK winter needs. Of course the northern winter impacts NW Europe and North America at the same time so gas might be moved to where the price is higher, for example LNG ships could be diverted to the USA.
UK Gas Storage
A signal that storage has ‘arrived’ as an issue may be that it has attracted the attention not only the attention of the Daily Mail but also our Members of Parliament in the form of the Business and Enterprise Committee (June, 2008).
Gas storage facilities play an important role in managing variable demand and mitigating the need for imports when they are at their most expensive as they can in principle be filled relatively cheaply during times of lower demand to be available at times of higher demand, either daily or seasonally.
At the current time, UK storage capacity is only around 4% of annual consumption, compared with ~25% in France and ~20% in Germany and the USA: only the Netherlands, at 5%, is as low as the UK. Put another way, if there were to be a major supply disruption, the UK has only about 14 days of storage compared with around 90 in France and 77 in Germany: even if current UK storage projects go ahead, the UK would only have around 20 days storage. Also, the UK is unusual in being very dependent on a single facility – the Rough storage facility comprises more than 80% of UK storage capacity and 10% of peak demand.
What are the main characteristics of gas storage facilities? World-wide there are nearly 500 gas storage facilities and these are in either depleted oil/gas fields or salt caverns or aquifers: as shown in Exhibit 3, 75% of facilities are based on depleted fields. The BGS (October, 2005) published an authoritative review of the possibilities of using salt caverns for UK storage but in reality salt caverns have to be created by leaching and are roughly twice as expensive to develop compared with utilising depleted fields.
In addition to this cost advantage, depleted fields have three or four other significant advantages as storage facilities. Firstly, they are low risk as they have a proven hydrocarbon containment capability over geological time. Secondly, they have significant storage capacity – indeed one could prognose that the ultimate storage capacity available in the UK is similar to the gas initially in place before any development started! Thirdly, much equipment – wells, platforms, processing plant, pipelines, terminals – is already in place (though requiring further investment). Fourthly, the sub-surface, petroleum engineering, drilling and so on skills and “Know How” required to identify, develop and operate such facilities are already available in the oil & gas industry.
What is standing in the way? Superficially, it seems like there are two issues.
Firstly, some would argue that the economics for offshore gas storage have not been convincing. In order to bring forward such facilities at a depleted offshore field, one may be looking at hundreds of millions of dollars of investment both to extend the field life and to develop terminals on the coast and perhaps twice as much again to provide the ‘cushion’ gas that is needed to make these reservoirs effective. The market is not yet seeing pricing signals of sufficient strength and duration to encourage this investment and the current UK government has created at atmosphere of fiscal uncertainty around the UK’s oil & gas industry.
Secondly, the UK planning environment introduces an additional risk into the calculations, making it potentially time-consuming and expensive to develop infrastructure, especially onshore; indeed, the Gas Storage Operators Group (April, 2008) has described planning delays as the ‘main investment risk’ for gas storage projects.
However, Centrica have long since proved with the Rough facilities (owned and operated by Centrica Storage Ltd – www.centrica-sl.co.uk : see Exhibit 3 and Exhibit 4) that it is possible to develop and operate a successful offshore gas storage business. Rough was an early (1960’s) discovery some 18 miles off the Yorkshire coast, finding gas in homogenous, high quality Rotliegendes sandstone at a depth of about 2750 metres: it was developed with two offshore platforms, installed in 1987 and 1983, and an onshore gas processing terminal at Easington. It was ‘turned around’ into a storage facility in 1983/4 with 340bcf ‘cushion’ gas (to maintain pressure in the reservoir), 100bcf storage capacity, deliverability of 1.5bcf/day and average injection of 0.6bcf/day.
The Easington terminal processes the gas before it enters the National Transmission System, separating dry gas and a small amount of condensate from the production stream. Easington also withdraws gas from the National Transmission System during periods of low gas demand and sends it for re-injection into the Rough reservoir.
Rough acts as a storage facility for gas shippers and suppliers – any company with a UK gas shipper licence can apply to purchase storage capacity at Rough.
Worldwide, as shown in Exhibit 5, there are at least 350 gas storage facilities based on depleted fields of which around 320 are in the USA. A little research reveals that, just as with the Strategic Petroleum Reserve, the USA Department of Energy (DoE) has a clear strategy and policy with respect to gas storage as can be seen by browsing the Energy Information Administration web-site, for example at http://tonto.eia.doe.gov/dnav/ng .Country-wide gas storage is documented in detail, by State and by Operator – typically in excess of 8tcf is in storage of which 7tcf or so is in depleted fields.
What’s clear from the Rough example and the USA experience is that the technology of gas storage is not especially challenging, especially to an industry that can contemplate developing reservoirs at depths of 600m in a couple of thousand metres of water!
The USA has used its heritage of oil & gas infrastructure, mainly onshore, supported by sensible Federal fiscal policy and pragmatic State planning authorities, to move ahead with gas storage in well-known reservoirs, at negligible risk.
It’s clear that the UK also has a heritage of oil & gas infrastructure, mainly offshore, and has had an endowment of gas, the very depletion of which offers the opportunity to move ahead vigorously with gas storage in well-known reservoirs, at negligible risk.
What really seems to be missing is the strategic thinking and fiscal encouragement to give gas storage developers the certainty that they will see proper financial returns over the multi-decade lives of such facilities: in this sense, gas storage is yet another victim of the present UK government’s evident vision of the oil & gas industry as simply a ‘cash cow’.
References
BP “Statistical Review of World Energy” June 2008:
www.bp.com/productlanding.do?categoryId=6929&contentId=7044622
BG “Are we facing Peak Gas?” April 2008:
www.bg-group.com/InvestorRelations/Presentations/Documents/BG_Peak_Gas_April_2008.pdf
BGS “The geology of gas storage in offshore salt caverns” October 2005:
www.og.berr.gov.uk/information/papers/index.htm
Gas Storage Operators Group “Issues influencing the development of gas storage in the UK” April 2008:
www.berr.gov.uk/files/file45937.pdf
Fischer, P “Methane hydrate: Fuel of the future – and it always will be?” World Oil June 2008:
www.worldoil.com/Magazine/Magazine_Contents.asp
House of Commons Business and Enterprise Committee, June 2008:
www.publications.parliament.uk/pa/cm200708/cmselect/cmberr/uc293-v/uc29302.htm
Author:
David Bamford
Thursday, July 24, 2008 08:25