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UK oil and gas prices spiked yesterday following the closure of the Forties Pipeline System, which delivers 40 percent of North Sea oil and gas to the mainland. To add insult to injury, an explosion at a gas facility in Baumgarten an der March, east of Vienna has disrupted a large part of the gas supply between Russia and Western Europe. The resulting shortages have driven European oil and gas prices much higher.
For the moment, the UK media has focused on the impact of higher prices. Brent crude hit a three year high, while the wholesale gas price rose 25 percent. According to Jillian Ambrose in the Telegraph:
“MPs have told energy companies that any hike in bills for consumers would be a “disgrace” because wholesale prices are agreed well in advance. Ian Liddell-Grainger, the Conservative MP and member of the parliamentary business and energy select committee, said: ‘Passing on price rises to the consumer would be totally unfair because it’s not their fault and this is nothing to do with them’.”
That, however, is the problem when you do something as insane as selling your country’s critical infrastructure to the private sector – you are left with no way of preventing them from walking away with the profits and passing the costs on to the public. Even a modest rise in fuel prices may yet prove to be the black swan event that triggers a UK recession; but energy companies will always put profit ahead of the public interest. Following on the heels of the collapse in the exchange rate after the EU referendum last year and last month’s decision by the Bank of England to raise interest rates, UK high streets are already in the doldrums; with some retailers saying that they are just one bad Christmas away from bankruptcy. Every extra pound added to the cost of heating, lighting and transport is a pound that isn’t going to get spent in the shops this winter.
This said, a temporary increase in oil and gas wholesale prices may turn out to be the least of Britain’s problems. As Ambrose explains:
“In 2005 the UK was a net exporter of energy. North Sea oil production boomed, and the power system ran mainly on cheap coal. Today, the North Sea’s creaking infrastructure and dwindling North Sea supplies struggle to deliver the gas which is needed to heat homes and run the gas-power plants which are expected to generate the majority of our electricity.”
Ambrose is being mendacious here. The UK was already a net importer of gas by 2004, and became a net importer of oil in 2005. Indeed, North Sea production peaked in 1999, and has collapsed by 60 percent since then. The sentiment is, however, correct. The problem is compounded by Centrica’s closure of the Rough gas storage facility earlier this year, as Nathalie Thomas at the Financial Times explains:
“Such facilities have traditionally helped to smooth out price spikes over the winter and Rough — which is still releasing gas but is no longer taking fresh supplies — accounts for more than 70 per cent of the UK’s storage capacity. However, it is now 32 years old and Centrica deemed that a refurbishment would ‘not be economic’.”
Indeed, one reason why the Cameron government (2010-16) continued deploying wind turbines despite announcing that it intended ditching “the green crap” is that for better or worse, the UK is increasingly dependent on renewables and nuclear to fill the growing void where North Sea gas used to be. This is undoubtedly why the Cameron government also seemed determined to will profitable UK shale gas into existence despite warnings from geologists that this is unlikely to materialise in anything like the volumes required.
Where Ambrose is correct is that the North Sea infrastructure is, indeed, creaking. As Kelly Gilblom and Jonathan Tirone at Bloomberg report:
“Most of Europe’s gas infrastructure was built from the 1960s to the 1980s, as the Soviet Union began tapping Siberian fields to pump supplies westward in exchange for hard currency and production expanded in the North Sea. Like an old washing machine or refrigerator, those facilities require increasing levels of maintenance–just as rising demand for energy means they’re seeing more wear and tear. With today’s low commodity prices, replacing most of the equipment is out of the question. So repairs, and worries about dangerous incidents, will only become more commonplace…
“While the oil and gas industry seeks to mitigate risk and taps new technologies to extend the useful life of equipment, the U.K. government says about half the oil and gas platforms in the North Sea have outlived their expected lifespans. And the European Union has concluded that the bloc’s energy infrastructure isn’t suited to fulfill future demand, with the gas and power networks needing 210 billion euros ($247 billion) of investment.”
This is a far greater problem than a crack in a pipeline that should be repaired in the course of a few weeks. The Forties Pipeline is 42 years old. And like most of the UK oil and gas infrastructure, ownership has passed from the global oil giants to smaller national companies. As Nathalie Thomas reminds us:
“Ineos, which only completed its purchase of the Forties network from energy company BP in October, responded to the issue by reducing the rate of oil and gas flowing through the network. Ineos sought to stem a ‘very small’ amount of oil that had seeped out of the pipeline while it designed a clamp system to try and seal the crack. But over the weekend the crack worsened and Ineos decided to shutdown the system while it works on another method to fix the problem.”
Where an oil giant like BP is in a financial position to withstand a major oil disaster, there are real questions about the ability of smaller companies like Ineos – which is dangerously exposed to a fracking industry that may yet prove to be a dud – to maintain the infrastructure and, ultimately, to decommission it without causing an environmental catastrophe.
But by far the biggest problem for the UK over the course of the next 5 years is simple chemistry. It takes hundreds of millions of years and very specific biological and geological circumstances to form oil and gas fields like those in the North Sea. It turns out, however, that it takes just a few decades to exhaust the recoverable (i.e. profitable) proportion of that oil and gas. When it is gone, it is gone; and it is hard to see where Britain is going to get a replacement. Gas accounts for nearly 42 percent of the UK’s electricity generation, and is essential to balancing the intermittency of renewables. New nuclear capacity will not be available (if at all) before 2025; and possibly a lot later.
This is not to suggest that Britain is about to run out of gas any time soon. We will no doubt have access to some domestic oil and gas for decades to come. The problem is that energy is what powers economic growth – without additional energy there will be no growth; and with declining energy we will experience economic collapse as we are all forced to downsize. And like it or not, for the time being in the absence of grid scale storage technology we cannot add renewable energy without adding gas power to balance it.
For now we are able to – temporarily – offset the loss of gas from the North Sea with imports from Europe, liquid natural gas from the middle east, and by cranking up the remaining coal-fired plants (most of which will be gone by 2020). Today – perhaps fortunately – the wind is blowing providing us with 17.5 percent of our electricity consumption. If we are fortunate, the Forties pipeline will be back on line before we are hit by another Arctic high pressure weather system bringing low wind and freezing temperatures. Nevertheless, we do not need a crystal ball to see that sudden losses of oil and gas infrastructure and supply is something we are just going to have to get used to in the coming months and years.
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