WHEN the Ramdane Abane set sail from the Algerian port of Arzew on February 5 with a £15m shipment of liquefied natural gas, the captain thought he was heading for Kent. The 300 metre-long tanker had been booked into the National Grid’s Isle of Grain terminal, where the cargo would be pumped into Britain’s gas network. But she did not get far into her four-day voyage before being forced into a three-point turn.
A message reached the bridge from Sonotrach, the Algerian gas producer that owned the cargo. Don’t go to Britain, it said, go to Turkey instead. Iran had cut off Turkey’s gas supplies and Turkey was now willing to pay twice the market rate. The customers in Britain would have to wait.
The story is a familiar one. The Isle of Grain is Britain’s only import terminal for LNG. Although the Kent plant is set up to receive at least one shipment a week, the last ship that actually turned up docked on January 29.
LNG shipments that had been expected to help smooth Britain’s winter heating demand simply have not turned up. The gas has gone to higher bidders elsewhere. Japan has been paying over the odds for gas to keep its power plants running since an earthquake last year knocked out much of the country’s nuclear power stations. Korea, China and Taiwan are also offering better prices.
Only four years ago there was more than enough gas being pumped from the North Sea to meet our domestic demands, with the excess being piped to customers in continental Europe. In two years’ time, roughly 40% of the UK’s gas supplies will need to be sourced from overseas as North Sea stocks run dry.
LNG imports from Qatar and Algeria are expected to account for roughly 11% of our supplies. By 2020, it is hoped that more than 30% of Britain’s gas supplies will be sourced from LNG with tankers arriving from other producers such as Egypt, Nigeria, Trinidad and Oman.
As Britain becomes more dependent on these supplies, the cost of keeping the lights on could well be dictated by events on the other side of the world.
“Ten years ago, there was no way that a Japanese earthquake would have had any impact on gas prices in the UK,” said David Cox, managing director of Pöyry Energy Consulting in Oxford, an adviser on energy affairs to the government. “But now, as the market shifts to being more global, that potential exists.”
Billions of pounds are being invested in new LNG terminals around Britain and by next winter’s coldest days, the capacity to import gas will have increased almost sevenfold.
Simon Fairman, manager of the Isle of Grain terminal, gestures towards one of four enormous concrete storage tanks being built on the Medway marshes to support a huge expansion of his empire.
“You could fit the Albert Hall in one of them, with room to spare,” he said. “One of those tanks would be able to keep the whole of the West Midlands supplied for about five days, if they were five cool spring days like this.”
National Grid is spending £800m on the development of the Isle of Grain, where construction will continue until 2010. More than 1,500 people are working on the site, one of the country’s biggest civil-engineer-ing projects.
Once completed, it will be able to receive 240 ships a year – four-and-a-half times present capacity. By 2010, the site alone will supply up to 20% of Britain’s gas.
On the opposite side of the country, two huge new terminals are being built at Milford Haven, in South Wales – both of which are due to come on stream this year. BG Group and Petronas, the Malaysian oil company, are investing £250m in the Dragon LNG project, which could meet about 5% of Britain’s annual gas demands. The neighbouring South Hook development is part of a $13 billion (£6.5 billion) project led by Qatar Petroleum, with backing from Exxon Mobil and Total.
South Hook will also be capable of providing as much as 20% of the UK’s gas supplies.
Everything related to LNG comes in extreme proportions. The gas itself is cooled to -161C for transportation. Before it can be pumped into the British grid it needs to be piped through an industrial-sized Jacuzzi-type facility that warms it up to 5C, converting it back into gas.
The equipment needed at both ends is very expensive, leading to huge costs in building LNG terminals. Just one pipe fitting that connects an LNG tanker to shore costs about £1.5m.
LNG is potent stuff. One cubic metre creates 600 cubic metres of natural gas, so a shipment of LNG is an extremely valuable cargo. The newest tankers have a cargo worth about £30m.
“There’s quite a lot of kudos attached to being the captain of one of these LNG tankers,” said one shipping-industry source. “It’s about one rung down from being captain of a cruise liner.”
In the boatyards of South Korea, the slipways are full of half-built LNG tankers. Across the world there are 258 LNG tankers in circulation, and there are 129 new ones on order, waiting to be delivered, according to data from the ship broker Braemar Shipping Services.
The new tankers are being built to the highest standards. The 30-strong crew can expect single bedrooms with en-suite facilities and satellite TV. Hiring one of these ships costs about $50,000 a day.
Qatar is building bigger and better ships than anyone else to shift its vast LNG reserves. Six of eight so-called Q-Flex vessels are already in use; they are roughly 60% bigger than other LNG tankers.
Even bigger ships – Q-Max tankers – are being built in Korea’s Samsung yards. These $290m ships will carry some 265,000 cubic metres of LNG, twice as much as standard tankers today, and are due to begin docking at Milford Haven by the end of the year.
“We saw UK gas prices come under pressure a bit last year,” said Frank Harris, head of LNG at Wood Mackenzie, the energy consultancy. “There was a view that as the terminals in Wales come on stream and the capacity at Grain increases that prices would crash. That was based on the simple economics of supply and demand. But the way the global fundamentals are moving mean that nothing like the volumes of LNG that could potentially flow through the UK are actually going to arrive.
“Look at South Hook, where you have these new facilities that are going to be capable of taking 15.6m tonnes a year. I reckon, realistically, we’re not going to see more than about half of that come to the UK. The rest will be sent to meet higher spot prices all over the world.”
Expectations of an LNG-led gas-price slump have well and truly abated. Next winter, wholesale gas prices are expected to jump 25% to about 69p a therm, based on today’s forward prices.
The gas price has a straight feed through to the electricity price. Britain’s gas consumption has soared about 70% since 1992, largely due to an increased dependency on gas-fired power stations. Gas now generates about 40% of the UK’s electricity.
National Grid forecasts that UK gas demand will continue to rise by 2% a year until 2015 – and presumably beyond.
Meanwhile, Britain’s own gas supplies continue to fall. North Sea gas production slipped 12% last year, according to Oil & Gas UK, an industry trade body.
While there are several gas pipelines linking Britain to the Continent, these are still being used primarily to export British gas. Most of the gas in countries such as Germany and the Nether-lands is secured from the likes of Russia’s Gazprom on long-term contracts that are priced relative to oil. Soaring crude costs have pushed gas prices higher across continental Europe. So European utilities have been sourcing UK gas at lower prices via the pipelines.
But if remaining North Sea supplies are being exported, the nation’s dependence on imported gas can only increase.
“A lot of what happens to the gas price in the UK depends on what is happening to the price of gas on the Continent,” said Cox at Pöyry. “That in turn will have a say in how much LNG actually turns up in the UK.”
Trading LNG cargos is a lucrative business for the world’s energy companies. BG Group, which has global LNG interests, has contracts to ship most of its supplies into the American gas market through its Lake Charles terminal in Louisiana.
BG was scheduled to bring 48 LNG shipments into the US in the fourth quarter of last year. Only 11 actually reached Louisiana, with the rest diverted to other points around the globe. BG’s profits from LNG jumped 48% last year to £521m, partly as a result of this type of trading.
In spite of all the money being ploughed into the UK’s new LNG terminals, they are not guaranteed to receive gas. The financing of these plants has been structured so that terminal owners get paid for each available unloading slot, irrespective of whethera tanker turns up or not. The likes of BP and Centrica have signed 20-year deals ensuring that they have access to the Grain terminal – whether they need it or not.
As Ofgem, the gas regulator, continues its probe into the UK gas market, after recent record price rises, one thing seems clear.
“The unfortunate truth for British consumers is that we are about to enter a period of much more expensive energy,” said Mike Tholen, economics director of Oil & Gas UK. “That’s going to feed back to everyone’s gas and electricity bills.”
