The UK is the world's third largest consumer of gas following the US and Russia. The UK has recently become a net importer of gas on an annual basis and, by 2010, imported gas is expected to meet half of UK demand due to a rapid decline in North Sea gas production. This has implications for security of supply and the swing capability to meet peak gas demand. The swing refers to the significant difference in gas consumption between summer (typically less than 200 million cubic meters per day) and winter (where on a cold day consumption can be higher than 400 million cubic metres a day). In the past the swing has been provided largely by the variation of flows from the producing fields in the North Sea.
In the future the UK's gas supplies will increasingly originate from more distant locations such as by pipe-line from Norway, Russia and Algeria, or by ship (as liquefied natural gas or ‘LNG') from the Mediterranean and the Middle East. To reflect this change more ‘Interconnector' pipe-lines are being constructed to increase the capacity to import gas from Europe, and LNG terminals are being constructed east of London and at Milford Haven in Wales. Although the new import facilities will allow the imports of gas required to replace the UK's dwindling production there is no guarantee that the gas flows will be available or can be managed in the market place to meet the swing requirements or balance the network on a daily basis throughout the year. Cold weather will tend to affect Europe at the same time putting pressure on supplies and new LNG ship imports could be diverted on a particular day to a market where the price might be higher (e.g. the US).
An important tool to manage swing demand is gas storage. Gas storage facilities can be filled during times of lower demand to be available during periods of higher demand, either on a daily basis or seasonally. Annual consumption in the UK is currently approximately 103 billion cubic metres. Storage capacity is around 4 billion cubic metres or 4% of the annual consumption, compared with 25% in France and 21% in Germany. Considered another way, in the event of a supply disruption, the UK has only about 14 days of storage, compared to 91 days in France or 77 days in Germany.
At present only 150 million cubic metres could be delivered from UK storage facilities within a day in a gas supply emergency, compared to an average daily demand of 310 million cubic metres. The large economies in Europe have more storage than the UK because they have not had the benefit of a large production base enjoyed by the UK from the North Sea and their gas companies have become used to managing gas supplies using storage as a network balancing tool.
The UK requires significantly more storage volume. Several new facilities are currently being developed in the UK, both within deep lying salt layers and in depleted oil and gas fields to meet the anticipated demand. Portland Gas estimate that should all the proposed dozen projects go ahead, including the Isle of Portland facility, the UK storage volume would increase from around 4% to approximately 9% of annual consumption by the middle of the next decade, still significantly less than in France and Germany.
On 16th May 2006 the Secretary of State for Trade and Industry issued an 'Energy Statement Of Need For Additional Gas Supply Infrastructure'. The DTI summarised that 'onshore storage is needed to enable slow-moving gas to be available close to market when consumers require it' and noted that 'there are limited locations currently suitable for much needed gas storage projects'.
There are currently no underground gas storage facilities in existence or planned within south-west England. Portland Gas believe the proposed facility on the Isle of Portland will be an important asset locally, regionally and nationally to ensure the efficient functioning of the gas market and security of supplies.
Salt Cavern Gas Storage
Gas can be stored at the surface in gasometers (low pressure tanks), as LNG in cryogenic tanks, within the pores spaces of rocks in depleted oil or gas fields, in subsurface structures in which oil or gas has not been previously trapped (known as ‘aquifer storage' of which there are no examples in the UK) or in cavities created within salt sequences. The NTS pipe-line infrastructure also contains a volume of gas that can be provided to balance the network by reducing the gas pressure in the lines (known as ‘linepack').
Salt cavities within the context of the UK currently provide only 9.5% of the available storage volume, yet can deliver proportionally more on a daily basis, particularly compared with depleted field storage facilities. Each type of storage medium has its own place in the hierarchy of supply flexibility; generally LNG facilities are used to balance the NTS on an hourly or daily basis, salt cavities on the day, weekly and seasonal basis, and depleted fields more on a weekly and seasonal basis. All types of storage make an important contribution to ensuring that supplies to gas users are not interrupted.
Gas can generally be cycled into and out of salt cavities more quickly than using the pore spaces within depleted fields. Gas storage in salt caverns is a mature industry, the first facilities being operational in the early 1960's. There are currently around 60 salt storage facilities in operation around the world with many more under construction. About a third of these facilities are located in Europe, the majority in Germany. Salt caverns are also used worldwide for the storage of other petroleum products such as oil, liquefied petroleum gas and ethylene (for example in salt caverns within Permian salt on Teesside in the UK).
Salt cavern natural gas storage facilities are currently in operation within the UK in both Cheshire and Yorkshire. The Hornsea facility in Yorkshire has been in operation since 1973. Two further facilities are currently being built at Byley in Cheshire (by utility company E.ON) and at Aldbrough in Yorkshire (by utility company Scottish and Southern Energy in partnership with Statoil).
Storage of natural gas within salt is restricted to areas where salt sequences are sufficiently thick to create cavities. Within the UK, salt is of Triassic or older Permian age and limited in its sub-surface distribution to NW England, Yorkshire or Dorset.
Salt cavities can be created if the salt can be leached and disposed of, or used, locally. In the case of Cheshire there has been a longstanding salt industry which extracts the salt leached from the salt caverns. Elsewhere, the alternative is to dispose of brine into the sea. Disposal into the sea was done for the development of the Hornsea facility, and is currently taking place in the development of a new facility at Aldbrough. It is also proposed for the Portland Gas facility.
The Isle of Portland Project
Egdon Resources recognised a sequence of interbedded salt and claystone of Triassic age (220 million years old) which reaches a thickness in excess of 400 metres in the south of Dorset.
Within this interval, known as the Saliferous Beds, there is a sequence of salt which has a very high salt (halite) content of over 90%. This interval was thought by Egdon to be sufficiently thick over an area of approximately 20 square kilometres in the Weymouth and Portland area for the development of a storage facility. The nearest borehole to the Isle of Portland to penetrate the Saliferous Beds was drilled by BP near the village of Chickerell in 1987 (10 kilometres to the northwest of Upper Osprey). The borehole encountered a salt sequence with a thickness of 493 metres.
A seismic line was acquired over the potential gas storage site by Portland Gas during May 2005 to provide a better understanding of the geological setting and to refine the anticipated depth and thickness of the salt sequence.
In addition to the presence of a thick salt sequence with suitable characteristics and access to the sea for salt disposal, any development requires access to the NTS gas network via a pipe-line from which the gas will be taken and stored in the facility and then returned as required by the storage users. The NTS is approximately 40 kilometres to the north of the site, the nearest connection point to which is at an AGI at Mappowder.
The selected site - a brownfield site, called Upper Osprey within Portland Port, enjoys easy access both by road and sea, is remote from residential development and is the closest landfall point on the Isle for a pipe-line route across Weymouth Bay. No other potential non-designated location within the area of thick salt development benefits from the essential location criteria of available brownfield land, remoteness from communities, easy road and water borne access and the potential for pipeline access to the NTS. Upper Osprey duly became the preferred surface location for the storage facility.
Between March and June 2006 Portland Gas drilled the Portland-1 borehole from the Upper Osprey site on the Isle of Portland with the BDF Rig 28 to confirm that a halite sequence with a low insoluble content (called ‘S7' by Portland Gas), within the Saliferous Beds, was suitable for the creation of caverns to store natural gas.
A total drilled depth of 2929 metres was reached in the Triassic Sherwood Sandstone on 21st June 2006. The Saliferous Beds in the Portland-1 borehole were 470 metres thick. The top of the target S7 interval was penetrated at a depth of 2365 metres and was found to have a thickness of 135 metres.
Technical analyses of the data acquired from the borehole, by Portland Gas consultant DEEP. Underground Engineering GmbH ('DEEP') of Germany, has determined that individual caverns with a physical volume of approximately 265,000 cubic metres could be created within the S7 sequence at the Isle of Portland location.
Portland Gas has also undertaken feasibility work, with DEEP and RPS Energy at Winfrith, Dorset, looking at the use of brine, rather than gas as a cushion for the gas storage operations. In the case of gas cushion operations a quantity of gas must always remain in the caverns to maintain a minimum operating pressure. If brine were used the pressure would always be maintained close to the maximum operating pressure. Gas withdrawn from the caverns would be compensated by replacement with an equivalent volume of brine at the subsurface pressure. Conversely, when gas is injected into the caverns the brine would be withdrawn. Such operations would offer significant benefits to the Portland project as it would remove the need to purchase gas to maintain the internal pressure. Portland Gas proposes to source the brine required for these operations from the Triassic Sherwood Sandstone aquifer in Dorset.
While the Portland-1 borehole confirmed that the properties of the Sherwood Sandstone aquifer are not suitable on the Isle of Portland, feasibility studies have identified an area close to the proposed route of the gas pipeline, which would link the storage facilities on the Isle of Portland to the National Transmission System, where the Sherwood could be used. At this location boreholes could be directionally drilled to withdraw or inject saline formation water. A brine pipeline would be constructed alongside the gas pipeline to the Isle of Portland to support the gas storage operations.
Following analysis of the data acquired from the Portland-1 well, Portland Gas confirmed on 4th September 2006 that it proposes to develop a facility comprising 14 caverns within the Triassic Saliferous Beds capable of storing 1000 million cubic metres (35 billion cubic feet) of natural gas.
The facility is being designed to enable the injection or withdrawal of gas at a rate of 20 million cubic metres per day (0.7 billion cubic feet per day). At these rates the entire storage volume could be filled or emptied in 50 days.
Portland Gas is now finalising the environmental statement for the project and the planning and pipeline construction authorisation applications are being prepared for submission in the fourth quarter of 2006.
Assuming planning approval for the project is forthcoming in the first half of 2007, it is anticipated that an initial storage capacity would be available to make gas deliveries to the national transmission system in the winter of 2010, with full capacity being available during 2013.
The proposed facility would make a significant contribution to the storage needs and security of gas supply for the United Kingdom, with the capability when fully developed to provide up to 5% of the national gas demand on a winter's day.
N M Rothschild & Sons have been appointed as financial advisors to Egdon Resources with specific responsibilities for Portland Gas. The appointment of Rothschilds to assist with the financing of the project and securing storage agreements with customers is an important element to ensure that construction of the facility can commence immediately upon a grant of planning approval.
How much more storage does the UK need?
Storage requirements for a country would be at a minimum if the supply could be varied to exactly meet the varying hourly demand. Following the switch over to North Sea supplies in the late 60's/early 70's right up to the early part of this decade sufficient gas was produced in the UK to meet demand levels. By the end of the 20th Century there was still sufficient capacity in the North Sea gas fields to mean that only 3% of annual demand was required in store to meet the fluctuation in demand of domestic and commercial consumers. The low level of gas in store reflected the fact that the UK production could be varied and the limited gas in store (primarily in the offshore Rough facility and the onshore Hornsea facility in Yorkshire) could therefore meet the remaining ‘swing' in demand. Meanwhile in the large economies of France, Italy and Germany with little domestic production (less than 15%), they required a storage capacity of 20-25% of imports to satisfy the swing in demand.
If it is assumed that the UK will require a similar level of storage in the next decade, when domestic production drops below 10%, then the UK will need a significant increase in its storage inventory. The inventory is now starting to increase but at a slower rate than required. The graph above shows the estimated growth in storage volumes based upon data available on proposed developments. Assuming all the announced projects are developed, Portland Gas estimates that the UK will have 9% of annual demand in store by 2016 or about 10% of UK import levels. This represents significantly less than seen and required in France, Italy or Germany.
Storage is not the only way of managing fluctuations in demand but it does provide the most cost effective solution when compared to varying LNG supplies or over sizing long-distance pipelines from distant gas fields (e.g. Algeria or Russia) to meet the cold winter day demand. Increasing demand for gas in the major European users of gas also means that more storage will be required on the continent. Since cold ‘snaps' tend to affect all of western Europe at the same time, the UK cannot rely on gas stored in Europe to be available to the UK market (unless perhaps if the winter price in the UK is much higher).
If it is assumed that the UK requires a capacity of 15% of imports in store for the effective management of demand, perhaps conservative given the requirements seen in for example France, Italy and Germany, the UK has had a sufficient level of gas in store until 2006/7. This ‘surplus' (gas in store exceeding the 15% level) has been reducing since 2001/2, and will become a ‘shortage' (gas in store less than 15% of imports) for the first time in 2007/8. This decreasing ‘surplus' has been reflected by an increasing utilisation of the existing UK storage facilities particularly at the offshore Rough facility and an increasing cost of storage at Rough.
The cost of storage (see note below) is related to the anticipated variation in gas prices between summer and winter and volatility within season. However the provision of storage in the market place is one of the most important factors determining the spread and volatility in prices. Without the construction of more storage facilities the UK will have an ever increasing ‘shortage' in storage capacity as our imports, and indeed demand, increase (see graph above). By 2015 the ‘shortage' of storage (using the definition above) would be of the order of 5,000 million cubic metres (175 billion cubic feet) of gas. This assumes that all the announced projects (including Portland) receive planning permission and are built, if this is not the case then the requirement will be greater. In the case that 20% is required in storage to manage the market effectively then the ‘shortage' rises to 10,000 million cubic metres (350 billion cubic feet) of gas.
Note: Provision of storage space in the UK
The Rough facility (approximately 2,900 million cubic metres or 100 billion cubic feet of gas in store) offers space as ‘Standard Bundled Units' or SBUs. Rough is divided into approximately 450 million SBUs of gas storage space. A customer has the right to inject or withdraw gas into Rough, storing as much gas as they have leased space. In the case of Rough it takes 167 days to completely fill and 76 days to withdraw the total volume of gas. A proportion of the space can be injected or withdrawn at any time during a storage year, subject to a utility charge in addition to the SBU charge. As noted above, the average cost of an SBU at Rough has been increasing over the past 6 years in line with the reduction in the surplus, i.e. decrease in storage volumes as a proportion of import volumes.
Other storage facilities in the UK offer similar services to customers, unless they have third party exemption. The size and value of a given SBU of space varies from one facility to another depending upon the time it takes to ‘fill' or ‘empty' the space, which is determined by the type of storage. Salt cavern storage generally has a shorter cycle time (time to withdraw the gas in addition to the time to inject the gas). Storage space with a shorter cycle time will generally command a higher premium for a given storage volume. A more expensive storage space is offered by National Grid at their LNG storage facilities. The advantage to the customers is the ability to unload the stored gas in just 5 days. Such a source of gas can be very important on the coldest days in the winter to meet high demand spikes. The added cost of such space is reflected by the high price of gas in the market on such cold days.
The intention is to offer space in the Portland facility to customers on a similar basis as the Rough facility with the ability to fill or empty their stored gas in 50 days. Portland if fully developed would be roughly a third of the size of the Rough facility.
A storage facility has what is known as the ‘intrinsic' value. This represents the volume of gas that is injected into the facility at the time of low demand/ cheaper prices and withdrawn at a time of high demand/ higher prices. The value of this intrinsic volume (effectively a single cycle of storage) is dependent upon the perceived difference in the market of prices between the time the gas is stored and then withdrawn, typically the summer-winter ‘spread' for seasonal storage. A facility also has an ‘extrinsic' value which is the ability to use a proportion of the space more than once. This is of particular value if a facility can cycle gas more than once and respond to variations in demand/price within a season or during a given day.
Author
Egdon Resources