KEYFACT Energy
The answer both Labour and Conservative MPs were searching for on Question Time
I have been busy writing a paper and trying not to get distracted by the media’s lack of knowledge about energy, but this week’s guff from MPs, BBC journalists and self-appointed media commentators was impossible to resist.
First, let’s start with Fiona Bruce, a BBC journalist who has a staff of researchers to explain things to her, who asked a Conservative MP on the Question Time panel on Thursday:
‘If North Sea gas is sold on the International Market, how does drilling more make the UK more secure?’
The hapless Conservative MP, Harriett Baldwin, was sure that drilling would make the UK more secure, but couldn’t explain why, because she doesn’t understand energy markets any better than Bruce. Balwin, like Bruce, also believes there is an ‘international gas price’ and that the UK gets a significant amount of gas from Qatar. At least the Labour MP on the panel, Lucy Powell, knew that the UK gets less than 2% of its gas from Qatar, but even she couldn’t step in to explain where Bruce and Baldwin were going wrong about UK energy security. So here’s my attempt to set them straight:
1. There is no ‘international’ gas price.
Natural gas prices vary with demand at the gas supply location, unless it is connected by pipeline to other areas of demand.
The US gas price at Erath, Louisiana, Henry Hub, is the price used for delivery of the NYMEX (New York Mercantile Exchange) Natural Gas Futures Contract, and is the benchmark for US natural gas prices, BUT, it is NOT the international gas price. The Henry Hub price is currently about a quarter of the UK’s natural gas price. Even before the Iran attacks, it was about a third of the UK price.
There are at least four gas markets in Europe, and even they don’t trade at the same price. The UK’s virtual Natural Gas trading hub, the National Balancing Point (NBP), trades in pence per therm, while the virtual Dutch Title Transfer Facility (TTF) gas price trades in Euros per MWh. If you do the conversion, they trade at a very similar price because the two markets are connected by a pipeline. Italy’s PSV gas price tends to be higher than the Dutch TTF gas price because Italian gas faces higher transport and network costs, as much of it is LNG or via a gas pipeline from North Africa. France also has a national gas market, Point d’Echange de Gaz (PEG), which differs from the TTF price because it has higher LNG exposure, different transmission costs and different regional supply and demand.
2. We are the highest bidder for North Sea gas.
When Bruce claimed on Question Time that ‘UK gas would be sold to the highest bidder’, she ought to know that the highest bidder in Europe at the moment is the UK. This is because it has the least gas storage and has reduced its production by imposing the Windfall tax on production companies.
Roughly 40% of the UK’s total energy consumption is supplied by natural gas, making it the single largest fuel in the UK energy mix, according to DUKES. Yet successive UK energy ministers have never considered building more gas storage to cover shortages. Centrica, the owner of British Gas, owns the Rough gas storage site but claims it is unprofitable and requires major investment to refurbish. Centrica wants the government to pay for this. So until this is sorted, the UK will continue to be the ‘highest bidder’ for our own gas.
3. Gas transport is NOT FREE
There is no ‘international gas price’ because gas is difficult and expensive to deliver without a pipeline, and even pipelines are not free. Gas importers have to pay for a pipeline contract based on the daily capacity of gas delivered. For most European pipelines, transport costs add roughly €1 to €4 per MWh to the cost of the gas, but for long-distance pipelines, such as those from Russia to the EU, it can add €5 to €10 per MWh. Luckily, pipeline costs from Norway to the UK are very cheap because Norway’s Gassco system is non-profit and priced to recover costs only, and there are no ‘transit fee’ charges by over countries traversed by the pipeline, so the cost is between £1.20 and £2 per MWh. This includes the Norwegian exit tariff, Gassco, the UK entry tariff (NGT), the capacity reservation uplift and the commodity charge.
Transporting gas beyond a pipeline is much more expensive, as the gas must be converted to Liquid Natural Gas (LNG). To do this, gas has to be purified, then compressed, then ‘frozen’ to -161°C in specialist plants, stored in cryogenic tanks, transported on specialist ships, then ‘regasified’ again in specialist plants, and finally stored or put into a pipeline (another cost). LNG shipping and regasification can add €5 to €8 per MWh to the gas price.
4. The UK does NOT have an LNG plant
The UK does not have any plants for converting gas to Liquid Natural Gas (LNG), although we do have several plants for regasifying it, including Grain LNG, the largest regasification terminal in Europe. So Bruce’s claims on Question Time that UK natural gas would be ‘sold on the international markets’ to ‘somewhere else’ are again wrong. The UK can ONLY sell gas to countries connected to it via pipeline – Ireland, Denmark and the Netherlands.
Gas liquefaction plants are expensive, costing about $6 billion for a mid-sized facility; no UK company would invest this money in the UK when the government is trying to close down the North Sea. Only Norway and Russia have LNG plants in Europe. All of the EU countries are net gas importers.
5. Cost, Insurance and Freight
Transporting LNG across the Atlantic or out of the Arabian Gulf also requires chartering specialist ships, shipping fuel, port fees, and freight insurance. Insurance is currently enormous and always is during wars, conflicts, or Houthi attacks on ships. Freight from the Gulf to Europe has to pass the Strait of Hormuz, the Gulf of Oman, the Bab el-Mandeb, the Red Sea and the Suez Canal. Insurance has to cover all these potential chokepoints. According to Reuters, the new insurance rate of 3%, is up from 0.25% before the conflict began.
Typically (2024/5), insurance from the Gulf to Europe added about €1 per MWh but can double if there are Houthi attacks or, as now, Iran is threatening to blow up oil tankers. In contrast, insurance of LNG across the Atlantic was about $0.10 per MMBtu in 2024/5.
6. There is no standard gas composite
There is no international gas price because there is no international gas composition. Gas composition varies by the amount of methane it contains (about 65% to about 97%) and by the additional gases or liquids it contains (ethane, butane, propane, etc.). North Sea gas is typically rich in hydrocarbons, with methane levels of 85-92%, with the rest mostly Ethane or Propane. Nigerian Delta gas has less than 75% methane but higher levels of ethane, propane, butane, and pentane. Qatari (North Field) is about 70% to 85% methane with high levels of ethane, nitrogen, and helium. Chinese (Sichuan Basin) gas is less than 75% methane, with high CO2 levels. Many US gas fields have low levels of methane, but the gas is processed to remove the saleable Natural Gas Liquids (NGLs) such as ethane, propane and butane before it enters the pipeline, so processed Henry Hub gas has high levels of methane, up to 97%.
7. UK gas production is about half of UK gas consumption
For future reference, Bruce and her QuestionTime MPs should consult DUKES (Digest of UK Energy Statistics) before making easily checked remarks. I recommend Table 4.1.1 Methane production and consumption. The only problem with DUKES is that they are slow to update it.
In 2004, UK gas production and consumption were equal, both about 1.1 million GWh. Since then, UK consumption has fallen by about 40% to 684,000 GWh, while UK production has fallen by 70% to 344,000 GWh. This is due to successive UK governments’ policies: over-taxing production, restricting new wells, holding up approved wells, and basically doing whatever they can to destroy this industry. Presumably, the politicians either didn’t understand how important Gas was to the UK economy for heating, electricity production and back-up power and as an input for chemical industries, or successive UK governments always assumed that the UK would be able to import adequate gas supplies whenever it needed them, even though this has not worked in the past. The Government hasn’t even been able to sort out the UK’s Rough storage site. This was also an issue in 2022 when the Russians invaded Ukraine, and the UK believed the EU would stop buying Russian gas… Oh, no, they won’t.
Interestingly, in 2024, the UK imported 450,000 GWh and exported 120,000 GWH. This was because the UK still acts as a Land bridge to get gas to Ireland, Denmark and the Netherlands. The UK’s land bridge role was even more pronounced in 2022 when we imported 620,000 GWh and exported 260,000 GWh. This was US LNG being degasified in the UK and then sent via pipeline to the EU. At the time, Germany had no facilities to regasify LNG, as it was completely reliant on Russian gas delivered through the old Soviet Eastern European pipelines and the two Nord Stream pipelines. Germany now has 4 regasification terminals, all built since 2022, with two more under construction.
8. The EU Internal Energy Market is not a shield from international prices
This brings me to my final point: another nitwit social media commentator, the indefatigable Liz Webster, attempted to blame the UK’s daft energy policy on Brexit with the following post on X.com:
‘The Tories sold off our oil and gas instead of managing it like Norway. Then Brexit took the UK out of the European Union Internal Energy Market and doubled down on gas prices on global markets.’
Where to start! The EU Internal Energy Market governs how gas is traded within the EU; it is a transmission mechanism, not a price shield. The gas price in the EU is overwhelmingly determined by global supply, international pipeline contracts and the price of LNG and Shipping rates because the EU is a major NET GAS IMPORTER. The EU imports LNG from the US, Qatar, Nigeria, and Algeria, and has gas pipelines from Norway, Algeria, Azerbaijan and the UK. The EU depends on imports, so global LNG prices and international pipeline contracts feed directly into EU hub prices. Since 2021, imported LNG has become the marginal supply setting price for the EU. EU gas prices on the TTF, PEG, and PSV all rise when LNG is bid up by Asian buyers and fall when LNG is abundant.
Brexit did not cause the UK to ‘double down on global markets’, but the destruction of the Nord Stream pipelines forced the EU to do this. The EU only ever had one member with large natural gas deposits – the UK. So, if anything, Brexit removed the EU’s one source of gas.
So, would the UK gas supply be more secure with North Sea gas?
So, in answer to the question: Would UK gas supply be more secure if we allowed oil and gas companies to exploit the North Sea, issued new drilling and exploration licenses and removed the Energy Profits Levy (Windfall Tax)? Yes! Undoubtedly, YES! Unequivocally, YES! Emphatically, YES!
Yes, the gas would be sold to the highest bidder, but only to the highest bidder with a pipeline connected to the UK Continental Shelf (UKCS) gas fields. Right now, that means us, and potentially Ireland, Denmark and the Netherlands.
Until the UK builds or restores its gas storage, and while gas provides 40% of UK energy, the UK will always be the highest bidder for North Sea gas transported by pipeline.
Without an LNG plant, the UK cannot export gas internationally.
There is no ‘international gas price’: gas prices vary with supply, demand, quality, transport costs, and insurance costs. Piping gas from the UKCS to the UK involves few costs and definitely no war risk insurance. The North Sea will always be our most secure supply until we start fracking or open the Gainsborough Trough field.
And finally, North Sea gas drillers pay 40% tax on their ring-fenced profits, so even if we get rid of the cretinous Windfall tax, the HMT will still do very well from North Sea gas production. North Sea gas rigs employ thousands of workers at above-average wages, which also brings in tax revenue. Using domestic gas rather than imported gas reduces the UK’s trade deficit.
What’s not to like?
Original article l KeyFacts Energy: Commentary