2. Gas Storage – the DTI perspective John Havard Energy Markets Unit, DTI Presentation to the Geological Society 19 th October 2004

3. Contents The significance of the decline in UKCS production for the UK economy The Government response and security of supply The contribution of gas storage in providing flexibility

4. Declining UKCS production Peak production capability of UK gas fields declining faster than expected. –Historically high gas prices mean Southern North Sea gas fields being produced harder in both summer and winter –Transco forecast of peak UK gas supply for this winter reduced by 9% from 2003 forecast

5. Declining UKCS production By about 2006 the UK will be a net gas importer

6. Implications for GB gas supply Already imports gas during winter peak period to meet GB demand By around 2006 likely to become a net importer of gas on an annual basis By 2010 imported gas will meet about half of GB demand. Implications for: – Security of supply – Swing capability to meet winter peak demand

7. The importance of gas.. The GB economy is dependent on gas: –20m households use gas directly for cooking and heating –40% of power generation is gas fired (likely to be c.60% by 2010) –Over 50% of non transport energy use –Industry reliant – 1/3 of gas consumption

8. Contents The significance of the decline in UKCS production for the UK economy The Government response and security of supply The contribution of gas storage in providing flexibility

9. The Government’s response to security of supply Liberalise markets to encourage competition and security through diversity Govt “will not intervene in the market except in extreme circumstances such as to avert, as a last resort, a potentially serious risk to safety”

10. What does the DTI do? DTI aims to create a framework where the market can operate effectively and efficiently –Light touch regulation of monopoly and potential competition –In a competitive market, the private sector will respond to commercial signals

11. The role of Regulation Transco must provide sufficient transportation capacity in the network to cover peak demand (a 1 in 20 winter) “Balancing Duty” - shippers have to balance the gas they put onto the network with their ‘offtakes’ on a daily basis –Storage provides shippers with additional flexibility to meet this duty –Without storage, there is more price volatility and therefore risk

12. The need for flexibility Gas demand is seasonal – need ‘swing’ supply capability: –Ratio winter peak daily demand to annual average daily demand > 30% –Ratio of annual low daily demand to winter peaks is > 50%

13. Contents The significance of the decline in UKCS production for the UK economy The Government response and security of supply The contribution of gas storage in providing flexibility

14. Regulatory duty encourages access to swing Oversize import infrastructure Build storage capacity Without additional daily “swing” capacity the balancing duty could act as a barrier to entry Commercial Decision on how to fulfil regulatory duties Trade and Hedge Demand-side response

15. Gas storage provides swing capability Might not be economic to oversize fixed import structure Diversity of swing is an important aspect of security of supply Storage provides another source of flexibility Value in close to market sources Gas quality not a constraint with stored gas

16. The UK Gas Storage Market Currently storage gas accounts for c.4% of overall consumption mix Offshore “Rough” facility accounts for 80% of UK storage space – likely to fall to 60% of total market with future known developments Near future capacity rights in existing storage facilities are over-subscribed Record forward prices for next 2-3 winters

17. Gas supply for winter peaks UK swing capacity is provided by: UK Southern Basin gas fields –By 2009/2010 this is expected to decline significantly The Belgian Interconnector (has capacity to supply 5% of peak day demand) Storage Linepack Interruption (a flexibility rather than swing)

18. Is the UK vulnerable? Significantly less storage than some EU member states Gas Capacity (MCM) Approx Peak day demand in 2000 Daily Deliverable from Gas Storage 2003 32% 92% 114%95% 29% High levels of storage may be for export to Belgium Daily Deliverable Gas from Storage, compared to Approx Peak Day Demand Source: DTI economists

19. The Future: is the UK vulnerable? New gas import infrastructure is expected to meet annual average demand But will need additional SWING capacity to meet winter peak demand in the future Swing capacity will potentially come from a variety of sources: –LNG, storage, UKCS, new pipeline, new interconnector, linepack, interruptions

20. The potential for new projects Onshore storage in salt caverns ? Onshore storage in natural porous strata Offshore Storage ? Limited by Geography: Cheshire and East Yorkshire Planning regime and HSE Production regime Gas Act 1965 Planning permission and HSE Offshore production regime Storage Types Opportunities Main regulatory regime

21. Conclusions UK increasingly needs swing capacity for: –Peak winter demand and daily demand fluctuations –Balancing Duty Gas storage is an important source of swing capability The market will decide how much additional storage capacity is needed Conference and the professional expertise represented will have an important role in informing the market of opportunities