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THE RETURN OF
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Since the early 1990s the UK has been self-sufficient in natural gas due to the increasing production from the North Sea fields. This enabled the UKto become a net exporter of gas since 1995 as supply exceeded demand. But this has not always been the case. In
October 1964 the world’s first commercial shipment of LNG (Liquefied
Natural Gas) was delivered to Canvey Island, UK. This continued for fifteen years, as
one million tonnes per annum (mtpa)
of LNG arrived from Algeria. In 1979 the first international LNG contract expired and the deliveries
ended in 1980. The facilities at Canvey Island
were later dismantled as the
UK
enjoyed the benefits of having its own supply of pipeline gas from UK
and Norwegian fields that met the demand needs at the time.
Demand for natural gas grew rapidly through the 1990s, and has continued to grow, albeit more slowly, since 2001. On the other hand, UK gas production peaked in 2000, and is forecast to go into steep decline over the next few years. The UKis likely to become a net importer of gas this year or next, and certainly by the beginning of the next decade will be seeking a high proportion of its supply elsewhere as local fields are exhausted. NationalGridTransco’s Ten Year Statement published in December 2004 forecasts that the UKwill import 46% of gas demand by 2010 and 67% in 2013/14. LNG, together with some additional pipeline imports, is seen by many as the major source to fill this growing supply gap. But
why LNG? LNG
is natural gas, cooled to around -161°C,
at which temperature it liquefies, and so allowing it to occupy about 600
times less space than it did as a gas at standard temperature and
pressure. This opens up alternative transportation and storage options for
gas, breaking free of the constraints of a fixed pipeline network. LNG can
be shipped in insulated tanks either by sea or, in much smaller
quantities, by land. Once at its destination it is regasified and sold on
to the end-user. The initial costs are much higher when compared to
building pipelines, but over large distances (typically over 2,000km) LNG
works out more economic and, for certain gas reserves located where
pipeline transportation to market is not an option, may be the only way of
getting gas to market. In addition there have been major reductions in LNG
costs as well as increases in global LNG production and shipping capacity
over the last decade, which is making LNG more available to the market.
The other main advantage over pipelines is that the UK is an attractive market to LNG producing nations around the world. Because
the UK has that rare commodity in global gas markets, a liquid gas trading
market, it provides a potential sink market for LNG from anywhere – LNG
can always be sold in the UK without a long-term contract (subject to
access to regas capacity) as long as the sellers are prepared to accept
the market price. In most other LNG import markets around the world this
is not the case, as there is limited opportunity to trade gas on the spot
market. LNG imports will contribute greatly to reducing the
UK
’s future supply/demand deficit and so continue to make natural gas a
competitive source of energy, they may also allow the UK to continue to export gas through the UK-Belgium Interconnector in the
medium-term. At present there are three sites under development to receive LNG into the UKover the next few years. Grain LNG, Dragon LNG and South Hook LNG. The combination of all three, when working at full planned capacity, will allow over 30 mpta (42bcm/yr) of LNG to enter the UK, perhaps supplying as much as a third of UK gas demand by 2012. This section reviews the major UK LNG projects. Grain LNG
The
first contract is held by a joint venture between BP and Sonatrach, the
Algerian gas producer, and will enable them to import 3.3 mtpa through the
terminal over the next twenty years. This is equivalent to 4.4 billion
cubic metres per annum or 12 million cubic metres a day of gas entering
the NTS. Although this is expected to utilise the entire capacity of the
existing tanks, it may be only the start as the current site can
potentially take up to 10.5mtpa (14bcm/yr) of LNG, approximately 12% of UK
annual gas demand from 2008, although this will require further
construction. Planning the additional work in phases allows the terminal
to start taking the initial 3.3 mtpa in 2005 and the rest should be
completed for 2007/08, assuming buyers commit to the additional capacity.
With the addition of another jetty the site could eventually take up to
13mtpa, although this prospect is still some way off with the rash of
other LNG facilities due to enter the UKmarket over the next four years. Grain LNG also offers intriguing
possibilities of LNG arbitrage as the two capacity holders, BP and
Sonatrach, are both major LNG players with interests in a number of
markets, which could see cargoes intended for Grain diverted to US or
European markets, or even extra cargoes arriving, depending on price
differentials and trading opportunities. Dragon LNG
Dragon LNG is made up
of a partnership of BG Group 50%, Petronas 30% and Petroplus 20%. The LNG
importation terminal at Milford Haven, South West Wales, is anticipated to
cost around £250 million to develop and is expected to have an initial
capacity of six billion cubic metres a year. Dragon expects this terminal to
be fully operational by Q4 2007. It then intends to double the facility by
2012 to take 12 bcm. Dragon has
already signed a 20-year agreement for the capacity rights, with BG Group and
Petronas, the Malaysian national gas company. They both are entitled to
throughput 2.2mtpa, but unlike Grain LNG, all imported LNG will be immediately
regasified and flow into the NTS. Short-term storage will only be offered to
allow ships to unload so preventing a queue. BG Group and Petronas are each expected to need two or three LNG tankers to service the project at an estimated cost of $150 million each. The turnaround of these ships will then add an additional 6.5% of the UK gas demand. Transco are currently in discussion with the Dragon partners and local end-users regarding the construction of a 110 km pipeline necessary to carry the gas to where the NTS currently ends in South Wales. Petronas’ involvement in this project will allow it to enter the UK gas market as a new market entrant as well as enhancing it’s position as a major player in the Global LNG business. Petronas currently supplies around 16.5 mtpa of LNG to Japan, Taiwan and Korea, but has only had occasional spot sales to European markets until now. Petronas has signed a contract to sell 3bcm/yr of gas to Centrica, which is the first publicised deal selling LNG to the UK market since 1980s. South Hook LNG
Qatargas
II plans to bring 7.8 mtpa of LNG to South Hook from early 2008. Under the
current expansion plan an additional 7.8 mtpa would be added during 2009/2010,
making South Hook the largest LNG regas terminal in the world, however, as
with the other expansion plans, this may be subject to the pressures of
competition. Like Dragon they have no intention to store LNG other than during
the unloading and regasification process and will share the pipeline to the
NTS. Milford Haven offers deepwater anchorage needed for LNG tankers. The
existing jetty from the former oil storage facility and refinery is being
refurbished to handle the larger ships, indeed Qatar Petroleum has already
place orders for four 205,000m3 LNG tankers to supply the project.
These ships are more than 30% bigger than the largest LNG shippers currently
in operation around the world. And elsewhere… The
UK is not the only country to benefit from the Qatar gas field, as Fluxys LNG is investing Euro 165 million to double capacity at
the Zeebrugge LNG terminal by 2007, after signing long term contracts to bring
a total of 9 bcm of natural gas per year to the Zeebrugge terminal. This
brings another potential source of gas to the UK, with LNG supplies arriving at the Belgian end of the Interconnector. The
contracts for Zeebrugge LNG expansion were signed with Qatar Petroleum/ExxonMobil,
Distrigas and Tractebel Global LNG. Elsewhere in Europe there are LNG
facilities under construction in Spain, Italy
and France, and further sites proposed in Italy, the Netherlands
and Germany. There are also a couple of other LNG projects that have been announced in
the UK, including Canatxx’s proposal for an regas terminal on Anglesey and
BP’s for one at its Coryton refinery, although neither plan is well
advanced. The impact of LNG on the UK gas marketThe
arrival of the first commercial LNG shipment in 1964 had a huge impact on the UK
gas market, precipitating the shift from towns gas to natural gas, and
instigating the beginnings of what is now the national transmission system.
Although the UK gas market has been through many revolutions since that time, the return of
LNG will have a number of major impacts in the world’s most liberalised gas
market. LNG
imports will be bringing new players to the market, notably Petronas,
Sonatrach and Qatar Petroleum, who are all significant world players with
large gas reserves. In addition some of the existing UK
players, notably ExxonMobil and BG should see increases in their UK upstream gas market share. For BP it may rather replace some of the
UK production currently in decline or recently sold. In the long-term it may also
lead to changes to UK gas specifications. Currently the specifications to gas to be acceptable to
Transco set comparatively low upper limits on the Calorific Value (energy
content per unit of volume) and Wobbe Index of gas. Most LNG falls outside
this limit as it is almost 100% pure methane. LNG imported to the UK typically requires blending with lower CV gas or nitrogen in order to meet
UK gas specs. In the short-term the terminal operators will mostly install
nitrogen injection stations at regasification, however, in the longer term
(and a recent ministerial response to a parliamentary question put this about
20 years ahead) there may be a change to gas specs, and potentially to a wide
range of gas-burning equipment to meet these revised specs. The
most important impact of the return of LNG, focuses on issues of security of
supply. The return of LNG, not only increases the share of imports to the UK
gas market, but also dramatically increases the diversity of supply, with LNG
not limited by the fixed pipeline network. In addition to the existing UK, Norwegian, Dutch and Russian supplies, the
UK
will soon receive gas from Algeria, Malaysia
and Qatar, as well as potentially a range of other locations where soon-to-be UK LNG
importers BP and BG are active such as Trinidad, Nigeria, Egypt and Equatorial Guinea. The range of sources is not limited to the current capacity holders of the
planned facilities as operators will be required to release unused capacity to
the market, opening up the potential for any player than has or can purchase
an LNG cargo to bring it to the UK, if capacity is available. Combined with the handful of pipelines currently
under construction or planned, the UK’s security of supply situation therefore looks much better by 2007. Indeed
if all or most projects go ahead the UK
could have a significant oversupply of gas from 2006, as shown by the graph of
UK gas supply surplus taken from NGT. Additional volumes are likely to flow back
through the Interconnector to Continental Europe, as well as meeting growing
Irish gas demand. The impact of this gas bubble is not yet clear, however, it
is worth noting that the potential surplus is way beyond the current maximum
export potential of the Interconnector, which is 20bcm/yr. If the
Interconnector becomes full of exports again there is a possibility that the
marginal price link between UK
and Continental prices would be broken, and UK gas would again escape from the oil price indexation, at least during the
summer. Much will depend on LNG and pipeline gas importers’ alternative
choices of markets. UK potential gas supply surplusSource: NationalGridTransco, Ten Year Statement 2004
Clearly LNG is perceived to be a good thing for UK security of supply, as demonstrated by the recent decisions of Ofgem, the UK gas regulator, to exempt the three LNG terminal operators from the requirement to offer third party access to their facilities, partly on the grounds of their contribution to UK supply security. There is one note of caution, however. Most supply/demand projections covering LNG import facilities assume terminals are operating at almost full capacity. However, LNG is increasingly part of a global market, with LNG ships being diverted between the major destinations of Europe, the USA and Asia-Pacific based on price differentials and gas demand. An early example occurred in January 2001 when Algerian LNG cargoes bound for France were diverted to the US because of high gas prices there, a situation which in turn led to gas being exported from the UK to Belgium despite spot market prices at Zeebrugge being up to 10p/therm lower than at the NBP market in the UK at the time. In 2003 high gas demand in Japan and Korea due to nuclear generation problems and cold weather, saw more LNG cargoes diverted to Asia-Pacific, despite higher prices available on the US spot market. The LNG the UK will become dependent on may simply not be available when needed if other markets are also experiencing a so-called ‘Siberian winter’. Perhaps not entirely good news for a market where indigenous production is in sharp decline and there is comparatively little gas storage capacity… still the return of LNG to the UK is inevitable, and in most senses very welcome. Written by Nick F White and Paul Cassar. |
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Grain
LNG is situated on the river Medway just 20 miles east of Central London
and will be the first of the UK’s new LNG terminals. The site currently provides storage services to
gas shippers in an old LNG facility built by British Gas before
competition. However, work is currently approaching completion on
converting the storage site into an LNG importation terminal. LNG tankers
arriving at the site will moor at a deepwater jetty in the Medway, from
where the LNG will be pumped through a cryogenic pipeline into one of the
four existing 50,000m3 tanks. When required, the LNG can be
regasified (by heating) and fed into the National Transmission System (NTS)
via the existing pipeline already connected to the site. It is expected to
be commissioned early in 2005, with the first tanker expected around
April, and is owned and operated by GrainLNG, a subsidiary of
NationalGridTransco, the major British gas and electricity transmission
company. Once commercial operations commence the first contract is
expected to contribute around 5% of UKgas demand.
South
Hook LNG Terminal Company Ltd (SHTCL) is owned by Qatar Petroleum (70%) and
ExxonMobil (30%), through the joint venture known as Qatargas II and is also
situated at Milford Haven. The intention is that the terminal is for self-use,
allowing the partners of the QatarGas II project to secure a market for gas
from Qatar’s North Field reservoir, which is the world’s largest
discovered gas field. The capacity of this super-giant field would maintain
the existing UK demand for around 250 years. All regasified LNG is therefore expected to be
transferred to ExxonMobil’s UK trading business for sale, although ExxonMobil may in turn sign long-term
supply contracts for the gas, with current speculation that Centrica is to buy
a significant proportion of it. Whatever the eventual route to market of the
gas, South Hook will further increase ExxonMobil’s share of the upstream gas
trading market, particularly when combined with 50% volumes of around 8bcm/yr
sold by Gasunie to Centrica from 2007 due to be transferred to ExxonMobil
under the Dutch Government’s gas industry restructuring plan.