Energy: the final act?

By Richard North - September 3, 2022

I don’t suppose that there are many who are particularly surprised by the Russian announcement that the Nord Stream 1 pipeline, ostensibly shut down for “maintenance”, is to stay closed for an indefinite period.

And while there have been comforting noises coming out of Germany about the level of gas storage, it is readily conceded that storage alone will not be enough to see European nations through the winter in the absence of replenishment stocks.

According to Reuters, citing the data intelligence firm ICIS, supplies would have been exhausted by March even had the limited flow of Russian gas continued through the winter and the weather stayed relatively mild.

In the absence of supplies, European nations need to cut their consumption by 15 percent below the five-year average to avert a supply crisis, and without aggressive measures to cut usage, Mauro Chavez Rodriguez, European gas research director at Wood Mackenzie, warns that there could be rationing this winter.

Yet so far, sustained cuts in gas demand on the scale needed have not happened despite multiple industries being forced by extraordinary gas prices to curtail output. Particularly affected is two-thirds of European fertiliser production, with potentially serious effects on agricultural yields for the next season.

But, if Putin is intent on the long game, it is not this winter which will be the crunch point, but the next. Europe will emerge in the spring with heavily depleted reserves and, without pipeline supplies from Russia, could exhaust its reserves by the November of next year.

The Russian manoeuvres do not, of course, directly impact on the UK as we draw our supplies mainly from our own North Sea resources and from the Norwegian gas fields, topped up with supplies of LNG from Qatar, the United States and from as far afield as Australia.

With Norwegian supplies still substantial, despite recent gas field maintenance problems, flows have been sufficient to meet UK demand, especially as national gas production increased by 26 percent in the first half of this year.

This has enabled the UK to boost energy exports to Europe, not only through the Dutch interconnector, but also to ramp up electricity generation to supply French needs as the state-owned energy supplier, EDF, deals with the ongoing maintenance problems in its nuclear fleet.

Sadly, increased gas production has not translated into UK winter reserves. Although approval to reopen the Rough storage site has now been given, contracts between owners Centrica and the British government have yet to be finalised which means that no date has been given for the start of filling operations.

Any top-ups required to keep British gas supplies flowing through the winter, therefore, will still depend continued purchases of LNG, the availability of which has been fundamental to the UK’s efforts to ensure security of supplies, filling the gap left by declining UK production.

This reflects the thinking in a series of reports on energy security dating from 2009, when it was already recognised that Britain was over-reliant on imported gas. As early as 2010, the complete loss of Russian pipeline gas supplies to Europe via all main routes was regarded as a “big impact and low probability event”.

Disruption for a period of one year was “best characterised as an extremely rare event”, but it was assumed that sufficient gas supplies would flow to GB although it was conceded that the alternative supplies available to meet GB demand would come “at a price”.

It was that philosophy which was largely behind the decision of Cameron’s coalition government in 2013 not to boost the UK’s storage capacity.

Then, secretary of state for energy and climate change Edward Davey told parliament, almost nine years to the day, that it would not be “cost effective” to intervene, with the government preferring to rely on “GB’s well-functioning gas market”.

In 2017 two reports on gas security were produced. The first confidently asserted that the UK gas system was “resilient to all but the most extreme and unlikely combination of events”.

In the second, a BEIS strategic assessment of gas security of supply, the strategy to deal with supply shocks had firmed up. The intention was to rely on the ability of UK buyers to compete on price, attracting large volumes of gas that the UK might need in the event of a supply disruption or surge in demand.

Markets, the BEIS report said, “must be able to respond effectively to price signals to be able to secure supplies in the short term and ensure the infrastructure is available to secure supplies over the longer term”. It was emphasised that an efficient market could minimise any impacts of a severe shock, by allowing prices “to rise sufficiently to bring in more marginal sources of gas”.

Even in a December 2021 report, when the effects of Russian disruption were already being experienced, the government remained “confident” that GB’s gas security would be maintained “thanks to the diversity of supply sources and established market mechanisms”.

A month earlier, though, the Guardian made the obvious point in an otherwise incoherent piece headed: “A secure UK gas supply is meaningless, minister, if no one can pay their bills”.

This was not a direct reference to the government’s security of supply strategy, but the question, addressed to business secretary Kwasi Kwarteng, was well put. The British government for nearly 20 years, if not longer, has been relying on the price mechanism to ensure adequate supplies of gas, to compensate for the dangerous over-reliance on gas for electricity generation.

All this was based on the premise that a complete disruption of Russian supplies, constituting “a large and sustained global supply shock scenario, affecting the whole of Europe” was “highly unlikely to occur”, and the scale and duration was “even more unlikely”.
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After all, the 2017 BEIS report said, “Russia is heavily dependent on gas exports for budgetary revenues, and kept up sales, remaining a reliable supplier throughout the Cold War”. Furthermore, it added, “Russia’s pipeline network serving Europe has considerable over-capacity, so a major catastrophe affecting one pipeline can be mitigated largely by resupply via an alternate route”.

But, while no one can really be faulted for failing to game a scenario where Putin might invade Ukraine, with all that has followed, the fact is that successive governments had left the UK desperately vulnerable to such a shock, with only one shot in the locker if things went belly up – to buy our way out of trouble, outbidding all the other nations who were affected by supply disruption.

And so, with Putin choking off Nord Stream supplies, we are now in competition for our gas supplies with not only European nations but global powers, which may be bringing us close to the final act. Years of UK policy failures have come together to present an unsolvable crisis, where the only planned response – buying our way out – is one we simply cannot afford.