Back in the spring, weathermen noticed unusually low sea temperatures around Iceland and the Azores. This gave warning of a phenomenon known as the ‘North Atlantic Oscillation’. It has resulted in some of the harshest winters on record, including the ‘big freeze’ of 1963.
Now the Met Office has issued an amber alert, and told the London Resilience Forum to brace the capital for ice and snow. But it’s already too late for the Government to fix its short-sighted energy policy.
‘If it is cold this winter I promise we are going to run out of fuel,’ says Sir Digby Jones, chief of the Confederation of British Industry. ‘Businesses will have to close and that means that people will lose their jobs. We are very worried.’
Yet one company offers to help resolve this crisis, and prevent similar power cuts and shortages in the future. It’s already earned its place in the Fleet Street Letter’s portfolio, and has risen 32% since we first recommended it. Past performance is no guarantee of future gains, of course. But consumers and investors alike will find it worthwhile today asking why Britain is so low on gas.
From the interwar period until about 20 years ago, gas was used in this country to provide only domestic heating. But following the privatisation of the electricity industry in the late 1980s, it became a low-cost alternative to coal for power stations. Back then, nearly 80% of our electricity was produced by coal. The remainder came from nuclear power stations. But this changed in the 1990s when there was a ‘dash for gas’.
This shift made economic sense; oil prices were falling sharply in the mid-1980s. But it also made political sense in the wake of the 1984 miners’ strike. This preference was then compounded by a growing awareness of gas’s environmental advantages. It produces fewer hazardous emissions than coal. So now, we rely on gas for 40% of our electricity today.
Our gas used to be a by-product of North Sea oil production. And when Britain had large amounts of readily available North Sea gas, it was able to produce in greater or lower quantities to meet variations in demand. Hence there was no need for storage facilities. On the other hand, Continental European countries have always been highly dependent on foreign sources of natural gas. Worried about supply disruptions, they built up storage capacity accordingly.
But Britain’s position is changing. As our gas supplies have fallen, Britain’s capacity to vary output to match demand has also diminished. Imported gas does not have the same flexibility as the UK production it has replaced. New pipelines cannot provide the winter capacity needed – double the capacity required for most of the year. Meanwhile several terminals built to receive shipments of Liquid Natural Gas (LNG) are unlikely to have any spare capacity during periods of peak demand.
In other words, Britain is beginning to look more like a European country – lacking its own domestic gas supplies – but without the storage capacity. And while the UK may have enough gas to meet demand in an average winter, we are totally unprepared for a harsh one.
In its Winter Energy Outlook, published in October, The Office of Gas and Electricity Markets (OFGEM) forecast an available daily gas supply of 476 million cubic metres. This is below last year’s figure of 488mcm. And it leaves little margin over the highest recorded daily demand of 449mcm. Such has been the decline of North Sea production.
While Ofgem will not use the word ‘shortage’, it admits that even in an average winter, demand can only be met ‘with a small amount of demand reduction from large gas users.’ This means business users and in particular, electricity companies.
In an exceptional winter, Ofgem believes, we can make up the deficit by switching electricity supply away from gas-fired power stations to nuclear, coal or oil-fired facilities. National Grid, the pipeline operator, has also said that in a severe winter, industrial users and power stations would have to cut back their use. And as a rule of thumb if we were to have a one-in-ten cold winter, industrial gas demand would have to be cut by 30% for up to 40 days in order to keep the system in balance and prevent power cuts to domestic users – the ‘sacred cow’ of Britain’s woefully inadequate energy politics.
So in fact this is a shortage by any other name. And the worse the weather, the more business and industry will be made to suffer. Already, large users like the chemical industry have studied their gas supply contracts, and discovered legal clauses that require them to cut back if supplies come under pressure.
But will this be enough to keep your home heated and your hot water running? Lord Woolmer of Leeds, chairman of the House of Lords European Union Committee, has said that too much reliance is being placed upon cutting back supplies to industrial users. And when you learn what other expert commentators are saying, the picture worsens.
The chief executive of major gas producer Tullow Oil says: ‘A lot of people think there will be a blackout this winter and next. I think there is a good chance of that happening.’
The next few weeks will show who has been complacent and who is alarmist. Because if the Meteorological Office has got it right, this country’s ability to pump enough gas could collapse in the New Year. And the situation won’t get any easier in 2007 or beyond.
You see, gas is fast-becoming a political weapon. In less than 5 years’ time the UK will be importing around half its gas requirement from some of the most politically unstable and potentially hostile counties around. From Algeria to the Middle East and the Caspian Basin…by 2010/11 we will be relying on imported gas to meet half our needs.
That figure is set to reach 70% in 2020. We will rely on tankers of LNG and imports from as far afield as Algeria, Russia, and Norway – all piped through unstable countries such as the Ukraine.
Moreover, the gas must be transported to Europe via long pipelines vulnerable to terrorist attack. Not only this, but Britain sits on the extreme periphery of the European gas network. So there is a real risk that in the event of a gas shortage, Britain might find it impossible to get adequate supplies.
We have already seen how key gas-producing nations may choose to exercise their political muscle in the future. In 2004, relations between the Ukraine and Russia became strained. The pro-Western opposition party led by Mr Yushchenko beat the Russian-backed incumbent Mr Yanukovych in a general election. By spring this year, the Ukraine economy was crippled by a petrol shortage.
Coincidence? While two of the Ukraine’s six refineries were closed for repairs and maintenance by their Russian owners, the Russian oil giants Lukoil, Tatneft and TNK- BP suspended their supplies to a third refinery.
Thus it appears that Russia used its energy muscle to teach a neighbour a lesson. And it worked. Although Victor Yushchenko came to power on the back of Western money and influence, he now realises on which side his bread is buttered. He knows that Brussels is not going to fast-track Ukraine’s EU membership any more. So he has switched horses in order to get back into Moscow’s good books, and appointed an ethnic Russian as his Prime Minister.
Meanwhile, do not be surprised if the UK Foreign Office rolls out the red carpet for President Putin just as it did for the Saudi oil sheiks in the 1970s. And Britain is already in competition for scarce LNG shipments with the United States, which is banking on them to fill its own energy gap as Dan Denning reported in The Daily Reckoning earlier this year:
‘The June 16th edition of the London Times reported that recent cargoes of LNG, originally destined for the UK, have been diverted to the US,’ wrote Dan, ‘where the gas commands higher prices. LNG analyst Steven Smith said, ‘The mix of gas supply is changing. If America pays more and LNG is diverted, we [the UK] will be worse off.”
To be fair, the UK Government does recognise that security of supply as a strategic issue. Last year, John Prescott overturned the decision of local planners to permit the construction of an underground gas store in salt caverns below Cheshire. But your heating, hot water and electricity supplies also face a practical problem this winter: There is no guarantee the required gas imports will be available or can be managed in the market place to balance the network on a daily basis.
After all, cold weather will tend to affect most European countries at the same time. And the UK, remember, sits at the end of the pipeline.
Wrap up warm!