UK energy security in a pandemic

29 Apr 2020

When the UKERC research programme on ‘UK Energy in a Global Context ‘was first conceived, we saw Brexit and global commitment to climate change mitigation as the major sources of uncertainty; we had no idea how challenging that global context was about to become.  This article presents some early observations on the likely implications of the Covid-19 pandemic for UK energy security.

Gas Markets were stressed before the pandemic struck

Global gas markets were stressed even before the current crisis. China’s recent dash for gas had delayed the anticipated LNG glut, but when demand growth eventual faltered, surging LNG production resulted in low prices and a growth in LNG deliveries to the UK and the rest of Europe. In 2019, the UK imported 18.7 bcm of LNG, accounting for 39% of gas imports and 20% of total supply, double the volumes imported in 2018 and the highest since 2011. Then came the pandemic.

So far, natural gas has not been as hard hit as oil by the demand crisis, for one it is less tied to the transport sector, but prices continue to fall, and we can expect Europe’s LNG and gas storage capacity to fill up. The global gas industry is adjusting, LNG projects under construction are being slowed down by the impact of the pandemic, and final investment decisions on new projects are being delayed and some cancelled. Longer-term this may not be a bad thing as the industry was in danger of over-building again to create another supply glut in the second half the 2020s. As a producer, exporter, and importer, the UK is in an ambiguous position in all of this.

Low oil and gas prices spell trouble for domestic oil and gas production

Today oil and gas account for 75% of UK energy demand and UKCS production is enough to meet 63% of that. In 2019 the UK imported 49% of its gas needs, it also exported modest amounts to Ireland and continental Europe. No doubt, a prolonged period of low prices would be good for consumers, and gas bills have been falling, but it is very bad news for sustaining production from the UKCS.

As a mature basin, production costs in the UKCS are relatively high.  According to the energy consultants Wood MacKenzie, energy companies operating in the North Sea need a price above $ 40 to remain profitable and a window of $60-$70 would be more ‘comfortable.’  More worrying is whether the UKCS can attract the future investment needed to ensure the maximum economic recovery required by the UK Government, as well as the demands of net-zero. According to the Norwegian energy consultancy Rystad, at a price of $ 30 per barrel, only 34% of new unsanctioned UKCS projects would be commercial and at $20 per barrel, none are viable.

The result of a prolonged low oil price world would be an even more rapid decline in UKCS production and a greater reliance on imports. Before the crisis, the latest OGA forecasts predicted by 2030 a more than doubling of the UK’s oil import dependence to 54% and for gas an increase to 67%, against a backdrop of falling demand. It in this context that both the industry body Oil & Gas UK, and the Scottish Government are demanding support for the offshore industry.

On opportunity of shale gas?

A final thought, does this present an opportunity for domestic shale gas? Some are suggesting that the Government should revisit the current moratorium on hydraulic fracturing, likening it to: “a blunder equivalent to turning our backs on the North Sea.” Even if the moratorium were lifted, the industry is a long way off commercial production, most shale companies in the UK are small and may not survive a deep recession and very low gas prices will challenge the economics of shale gas production.

Increased exposure

The bottom line is that, even with a continued commitment to decarbonisation, the UK will continue to require considerable amounts of oil and gas for the foreseeable future. In the current Covid-19 and an eventual post-pandemic world, persistent low oil and gas prices will increase the UK’s reliance on imports, potentially, exposing its greater energy security risks.

Mike Bradshaw recently appeared on a podcast about preparing for the new oil order based on the paper: Preparing for the new oil order? Saudi Arabia and Russia.

Listen to the podcast here: