UK gas output to reach stability over next few years

Jan 10, 2001 01:00 AM

Gas output in Britain will reach stability over the next few years and although demand growth is declining, imports will account for a larger bite of UK gas consumption, analysts say. But cash-rich gas producers are pouring profits from high gas prices into exploration and could give supply a much-needed boost in 18-24 months, some said.
"UK gas production next year will be similar to this year and it will stay that way for the next two to three years," said Neil Thomas of Wood Mackenzie. The DTI said output last year rose nearly 10 % thanks to new fields, just above the 9.7 per cent rise in 1999 -- a boom year for production.
Analysts said momentum was unlikely to continue at the same rate in 2001 because few new fields were due to start up. "Supply is still going to grow but significantly slower," Niall Trimble, managing director of The Energy Contract Company said. Analysts said sinking prices in recent years meant producers had little spare cash to develop new fields. But gas prices have catapulted to their highest since full market liberalisation two years ago and companies are using their new-found spending power to invest in exploration.
"Since the rise in prices, many companies have been investing in new exploration, we can expect to see increased production from new fields in about 18-24 months," Nick White of PHB-Hagler Bailly said. A spokeswoman for the UK Offshore Operators Association said companies were pumping £ 4 bn ($ 5.80 bn) into exploration in 2001. "On this basis we would expect production to continue to rise until 2005," she said. But even if supply does continue its upward climb, Ilex Energy Consulting said the Interconnector pipeline to Europe, which has opened up the export market, means the supply demand ratio is much tighter.

"The balance has shifted from an oversupply position to a much tighter position," an Ilex report prepared for the government said. The outlook for the supply/demand ratio may be gloomy but consumers can take heart from a new pipeline that will boost imports from Norway, The Energy Contract's Trimble said.
"The supply/demand ratio is deteriorating, and will look worse if we start getting colder weather... but there will be a big increase in supply from Norway," he said. "Substantial imports are still a few years away, but we will be a net importer by the second half of the decade, possibly sooner."
Britain has for many years imported gas from Norway's Frigg field but this is virtually depleted and in future imports will come through the planned Vesterled pipe linking Norway's gas grid with the UK. Demand growth, which has motored upwards since the "dash for gas" in the 1980s, will also tail off since a tight window between depressed electricity and buoyant gas prices spells bad news for gas-fired power stations, analysts said.
The DTI said demand rose 4 % last year, compared with 6 % the year before and analysts expect this year to be even slower. "Demand will keep growing... but I don't think we will see a huge number of new stations -- prices are too high versus electricity," Trimble said. Most home and factory owners who want to switch to gas have done so already and analysts expect these markets to put the brakes on further growth.

Posturing on demand and supply, however, no longer helps analysts forecast prices, because the Interconnector gas pipeline between Britain and Belgium means European prices, which are index-linked to oil, drive the British market.
"Fundamentally domestic demand and supply will not have a lot of impact on prices as long as the UK is linked to Europe," Thomas said. Household gas bills are set to rise by about 10 % this year, driven by a huge increase in wholesale prices in 2000 in mainland Europe which were boosted by crude oil catapulting to ten year highs.

Source: Al Nisr Publishing LLC
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