U.K. Post-Brexit Economy Depends on Energy Market That’s a Mess

By: | at 01:00 AM | Liner Shipping  

Relying on natural gas to fuel Europe’s second-largest economy was never going to be easy for the U.K., even before Brexit.

Britain’s once vast North Sea gas fields are fading, and even after a decade of trying, the island nation hasn’t replicated the fracking boom that turned the U.S. into the world’s largest producer. Gas imports have jumped 87 percent in the past decade. That’s left the country at the mercy of foreign suppliers just as the U.K.’s planned exit from the European Union signals trade rules for the fuel probably will have to be rewritten.

Already, the U.K.’s $445 billion manufacturing industry, which uses gas to run machines, heat buildings and mix chemicals, is having to go as far as the Amazon rain forest to source fuel. An aging storage reservoir off the east coast that holds most of the country’s winter reserves has deteriorated so much it’s partly closed. Gas will become even more important as the government plans to quit using coal by 2025.

“The U.K. could do a lot better,” said Russel Mills, director of energy and climate policy at Dow Chemical Co., the world’s second-biggest chemicals maker. “The country’s already taking a bit of a risk in terms of the low level of gas storage. Brexit is going to complicate matters.”

Gas has been pivotal to the nation for four decades, but domestic output peaked almost 20 years ago and imports from Norway to Qatar are being used to make up the difference. About 75 percent of foreign supplies arrive by pipelines.

Shortages aren’t an immediate risk because liquefied natural gas import terminals are using about a third of their capacity. LNG is “a fantastic thing” for the U.K. market, Dan Monzani, head of security of electricity supply at the Department for Business, Energy and Industrial Strategy, said March 29 at a conference in London.

Tim Malone, a spokesman for the department, didn’t respond to emails and phone calls seeking further comment.

Imported fuel adds to costs for U.K. consumers, whose electricity costs are already higher than for other EU nations, according to a government paper from January on the nation’s post-Brexit industrial strategy. Fuel purchased in other currencies became relatively more expensive for U.K. buyers in 2016 when the pound fell more than 13 percent against the euro and dollar.

New Cables

The nation is an importer of power from France and the Netherlands and total energy purchases from abroad are now at levels not seen since the 1970s. New electricity cables are planned with France, Germany, Norway and Denmark to help boost supply security, but they risk trade tariffs once Britain leaves the EU.

“Finding energy partnerships with EU member states will be an important task in the years to come,” said Jade Kalinowsky, a senior trader at Fredericia, Denmark-based utility Dong Energy A/S.

While there are approvals for as many as 26 new gas-fired power stations, investors are hesitating because of the vast array of policies to navigate, according to the U.K.’s Major Energy Users Group. Diesel and coal generators have emerged as winners in government auctions designed to entice investments in large-scale gas-fired plants.

“We’ve lost our way,” said Keith Anderson, chief corporate officer at Iberdrola SA’s Scottish Power unit, which had a gas plant approved in 2011 it hasn’t yet built. “Investors want a clear signal. The market signals are just not there. Do you want gas plants built?”

Supporting Utilities

To ensure supplies, the country relied for decades on gas pumped into the Rough storage facility, a depleted North Sea field. The underground reservoir is deteriorating from age. Stockpiling fuel at the site is halted until at least May 2018 due to the risk of leaks.

“I personally don’t see how the system is going to fill the gap of 3.31 billion cubic meters that Rough is able to provide without having a big impact in prices,” said Guillermo Baena Gomez, a senior market analyst and energy trader in London at Advantage Utilities Ltd. “That could lead to a ‘gas crisis’ due to the change in supply and demand in the U.K.”

Bloomberg New Energy Finance estimates that Centrica Plc.’s Rough, which accounts for 70 percent of the U.K.’s total storage capacity, won’t ever return to service.

Shale could provide some domestic supplies. Two companies were granted permission to drill or hydraulically fracture shale in the last year. But even gas, with half the emissions of coal, is becoming politically fraught, according to Natascha Engel, a member of parliament for the Labour party for North East Derbyshire, an area where Ineos Group Holdings SA intends to apply for a license to frack.

“Fracking is a really awful word, it sounds quite frightening,” she said at an industry event in Birmingham last month. “So people don’t really look beyond that so much.”

National Grid Plc, which manages the nation’s pipelines, estimates power output from gas plants may drop as much as 64 percent by 2025, according to a scenario where the nation focuses on climate protection. A business-as-usual scenario has gas output rising.

“Nobody will build gas plants with these sorts of numbers being bandied about,” said Eddie Proffitt, chairman of the natural gas group at the U.K.’s Major Energy Users’ Council. “I’m not sure the government itself is clear what it wants.”


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