Successive changes in the make-up of the UK energy mix will shine a spotlight on the importance of the security of the UK’s gas supplies. Traditional coal-fired generating plants are being retired and replaced with cleaner gas-fired plants. The UK’s major gas storage facility, Centrica’s Rough Storage, is now closed, and while the contribution from renewables gradually increases, the demand for gas is slowly climbing.

Against this background, there was a fall in the domestic production of gas in the final quarter of 2017: it was down 10% when compared with the same period in 2016. At the same time, gas consumption was up by 11%, which suggests a trend towards lower North Sea production, higher demand and an increased reliability on imports.

About one third of the UK’s primary energy requirements come from gas, and of this total only 40% is produced domestically, with the balance being imported via continental pipelines (the Netherlands, Norway and Belgium) and via LNG shipments. Although there are abundant resources of LNG in the Asia Pacific region, Qatar, Russia, Peru and the US, these cargoes will tend to find a home in the destinations and markets offering the highest price, so to some extent the UK needs to compete for these supplies. As we have seen in the past few months, gas prices are susceptible to short-term price shocks and this only contributes to more volatility in the wholesale energy market.

UK shale gas development is likely to take a step forward during 2018, when after significant delays, drilling will start on a test basis in the vast Bowland shale formation.

Initial British Geological Survey estimates suggest this reserve may contain up to 1,300tn cubic feet of gas (tcf). Current UK annual consumption is 3 tcf and at a very conservative estimate that only 10% of the gas is recoverable, the shale gas reserves in Britain could represent up to 50 years of domestic supply.

Exploiting these reserves will require hydraulic fracturing or fracking; a technology that has been used for more than 30 years elsewhere in the world and most notably with extraordinary success in the USA. Applications to commence fracking in the UK have become mired in extended planning permissions and challenges from environmental groups. Cuadrilla, one of the first companies to the market in the UK, has started to drill four vertical and four lateral bores at sites in Lancashire. Once these wells have been completed in Q2 2018, it is expected that fracking will commence on a test basis to determine the potential flow rate for this source of natural gas.

There has been understandable concern about the potential environmental impact of fracking and of the possible impact on the water table. However, whilst the bottom of the natural water table lies at about 350 meters, fracking will take place at depths of up to 1,800m.

These are very early days for UK shale gas and it will be interesting to follow the developments of this potential home grown resource, which if exploitable in commercially viable volumes, could have the beneficial effect of smoothing some of the volatility from the UK energy market.

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Article by: Richard Clayton