NATURAL GAS INVESTMENTS

Demand for natural gas in U.K. power generation is anticipated to increase over the next decade and beyond. According to the Chief Executive of Ofgem, the U.K.s energy regulator, over one-fifth of the U.K.s ageing power stations are due to close over the next decade, and new nuclear and renewable resources are not anticipated to come online until 2020, leading to a heavier demand for, and reliance on, natural gas. The coalition government has identified natural gas as a key part of its future energy strategy, with an estimated 26 GW of new gas plants required by 2030. However, in the coming decade there is a more immediate need for natural gas. With a number of existing power generation sources due to go offline in the net few years, concern has been raised on how to keep the lights on in the U.K. to fill this energy gap. The Office of Gas and Electricity Markets (Ofgem) estimates that by 2020, between 60% and 70% of U.K. power generation may have to come from natural gas to prevent energy shortages. With a projected increase in electricity use of up to 66% by 2050, and increasing reliance on natural gas as a fuel source, demand for natural gas in the U.K. is set to increase substantially along with wholesale and domestic gas prices signifying that keeping Britains lights on will come at a price. After declines in natural gas production, the U.K. is increasingly reliant on international gas markets to deliver security of supply to electricity generators and gas consumers, exposing the nation to a range of additional risks. Unless the U.K. secures supply of natural gas in the future, disruptions from a wide range of potential events from natural disasters, and technical failure, to the geopolitics of energy could considerably impact gas prices.

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The U.K. has less gas storage relative to consumption than any other major European economy. In fact, according to Ofgem, storage facilities could only provide enough gas for less than 21 days based on average consumption. Such storage constraints combined with a low proportion of long-term contracts leaves electricity providers and consumers exposed to swings in gas prices. With our increased dependency on international gas markets it is difficult to envisage any measure that could insulate consumers against long term global market trends.

What is natural gas?

Physical natural gas is a colourless and odourless, naturally-occurring flammable gas consisting largely of methane. It is a fossil fuel and occurs naturally underground. Like oil and coal, it is formed from buried remains of prehistoric animals and plants that are subjected to high temperatures and pressure for millions of years.

Where does natural gas come from?

Natural gas is a fossil fuel found deep underground in natural rock formations. It is often found with other fossil fuels such as oil and coal. Natural gas has also been found in shale beds, under arctic permafrost, and most recently extracted from frozen undersea deposits.

How is natural gas used?

Natural gas is used for domestic and industrial heating and cooking, for large-scale power generation and in the manufacturing of plastics. In the U.K., 84% of homes use gas for central heating, natural gas makes up 85% of household energy costs (aside from electricity) and natural gas makes up 35% of the energy mix for UK power generation. The latter figure is anticipated to increase to 60-70%3 before 2020 as many older coal power stations are forced to close under tightening European environmental regulation.

What are the units for natural gas?

UK natural gas is generally measured in British therms (thm). Each therm is equal to 100,000 British thermal units (BTUs), which is the energy produced by burning 97 cubic feet of natural gas. One therm is also equivalent to 29.307 kWh. Natural gas can also be quantified by volume: cubic feet (cf) or metres (cm).

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Is natural gas carbon environmentally friendly?

Natural gas is the cleanest fossil fuel producing approximately 45% less carbon dioxide (CO2) than coal and 30% less than oil. Combustion is also very efficient. Natural gas produces no carbon monoxide, sulphur dioxide, dissolved solids or airborne particulates, all of which can be harmful to human and animal health. However, natural gas-fired power station emit approximately 487g of CO2 equivalent (CO2e) for each kilowatt-hour of electricity it generates meaning it is still not as environmentally friendly as renewable energy sources such as wind, solar and biomass. Despite this, these levels can be reduced to 170g CO2e/kWh when combined with carbon capture and storage (CCS) techniques. These techniques are designed to capture CO2 emitted by power stations and store it underground rather than releasing it into the atmosphere. Although this technology is still being developed, it is anticipated that newly built natural gas- fired power stations in the future will use CCS techniques to reduce harmful emissions.

Is natural gas refined?

The natural gas received in our homes is refined by processing plants which remove impurities such as butane, ethane and propane before it is distributed to utility companies and onto domestic and industrial users. Additionally, utility companies add a harmless chemical to natural gas, which has a distinct smell to help customers detect leaks.

How and why is natural gas stored?

The exploration, production, and transportation of natural gas takes time and once natural gas reaches its destination it is not always needed right away. Stored natural gas plays a vital role in ensuring that any excess supply delivered during the summer months when demand is lower is available to meet the increased demand of the winter months when demand is higher. The majority of natural gas storage is in depleted reservoirs underground. The gas is injected into the formation, building up pressure as more gas is added, creating a pressurised chamber from which natural gas can be extracted. In addition to underground storage, natural gas can be stored as liquefied natural gas (LNG). LNG allows natural gas to be shipped and stored in liquid form, meaning it takes up much less space than gas.

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What percentage does natural gas contribute to the UK power generation mix?
In 2011, the UK electricity generation energy mix was as follows: natural gas 35%, coal 34%, nuclear 20%, renewables 4%, oil 1% and other 6%. The UK government will release 2012 data later in the year.

What does the average UK person spend on natural gas per year?
The UK spends approximately 436 on natural gas annually and 520 on electricity, for which natural gas makes up about a third of generation. This totals approximately 610 a year.

What domestic gas resources are available to the UK?

North Sea gas fields account for a significant volume of current natural gas production in the U.K., but production from these sources is declining rapidly. UK offshore production has declined from over 110,000 Million cubic metres in 2001 to under 50,000 in 2011 largely due to depleting reserves. In 2010, 85% of gross offshore production came from fields that had been producing for more than 10 years, and 39% of gross offshore natural gas production came from fields that started flowing natural gas prior to 1991. Onshore production in the UK has only made up an average of 0.2% of gross gas production in the UK over the past 20 years. More recently the potential to exploit U.K. shale gas reserves has been considered. These reserves could be as large as 150 billion cubic metres (Bcm); however the ability to extract this natural gas in a similar way to the U.S. is limited due to geological, environmental, regulatory and demographical restrictions. Little drilling has yet taken place and commercial production of shale gas has not been proven in the UK, so it is not yet possible to make a reliable estimate of recoverable reserves.

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ABOUT KENDRICK ZALE

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