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Gas Storage

Volume 488: debated on Tuesday 24 February 2009

I am grateful to have secured this short but timely debate on the adequacy of UK gas storage. We are experiencing another winter of tight gas supply with supplies being drawn down heavily in the face of a colder than normal winter and European supply disruptions caused by the dispute between Russia and Ukraine. Rather perversely, it is only because of a sharp drop in industrial demand, due to the recession, that the UK has avoided severe difficulties in meeting peak gas demand this year.

Over the past week, since receiving notice of this debate, I have been contacted by numerous companies that take a close interest in the subject, including some that are directly involved in trying to take forward some gas storage projects, and some of the large industrial gas users or their trade bodies—for example, the Chemical Industries Association—which are deeply concerned about the future security of gas supply. Their individual interests may differ, but all have emphasised the crucial importance of adequate gas storage as the UK becomes increasingly reliant on imported natural gas and gas per se in our overall energy mix as ageing coal-fired and nuclear power stations are decommissioned.

By 2010, gas imports could be meeting up to one third or more of the UK’s total annual gas demand, perhaps rising to around 80 per cent. by 2020. That represents a huge change from our position just five years ago, when we were a net exporter of gas. I do not share the populist panic about imported energy, and I do not believe that energy independence is achievable or even a necessary or desirable goal in an age when international energy markets are increasingly interlinked. There is an unquestionable economic loss to the UK as our domestic oil and gas production declines and that is significant, but I shall not lose sleep about energy security and energy imports as long as we have a diversity of reliable suppliers with proven long-term reserves alongside as strong a domestic component as possible with diversity of infrastructure for the import, transmission and distribution of energy, including a measure of spare capacity and, crucially, an adequate stock of stored energy to serve as a buffer against supply disruptions.

The UK has significant stored capacity of oil and gas. We have around 80 days’ consumption of oil and petroleum products in stock and around 90 days’ consumption of coal. There is no common stocking obligation on those types of fuel, but it is interesting that there is around three months of coverage for both. Britain’s natural gas storage capacity is around 4.3 billion cu m, which represents no more than 15 days’ supply. I take the point that the Minister made in response to my parliamentary question last month that the amount of gas held in storage, expressed in terms of days’ supply, may not be meaningful, but will he explain why it is deemed to be an adequate measure for oil and coal, but not for gas? Will he also say what he believes is a prudent level of gas held in storage as we become increasingly reliant on imports expressed, if not as days’ supply, as a proportion of total demand or volume in billion cubic metres? How much gas should we have stored for when we become, for example, 30 per cent. reliant on imported gas and how much should we have when we become 70 or 80 per cent. import reliant?

The UK needs more storage capacity, and the Government must provide a clearer message on how much new capacity is needed, where it will come from, when it will be delivered, and what can be done to mitigate the effects if it does not come on stream in a timely way.

I believe that the current and future inadequacy of gas storage facilities represents a crucial vulnerability in our energy system, which could have profound negative consequences for UK industrial and domestic consumers. Over the past 10 years, the Government’s response to this increasingly important issue has been disturbing complacency. The inadequate level of UK gas storage facilities has been well discussed, and in October 2008, the Select Committee on Business and Enterprise reported:

“The Government has not responded quickly enough to the UK’s increasing, and entirely predictable, gas import dependency by encouraging investment in storage…Significant additional storage, beyond that currently planned, is needed to reduce volatility in the wholesale gas price, which is otherwise likely to increase as the UK becomes increasingly dependent on gas imports. It is now an issue of national importance”.

Five years ago, the regulator, Ofgem, predicted that the UK would have 10 billion cu m of storage capacity by the end of the decade, but here we are in 2009 and current capacity is not even 5 billion cu m, and 75 per cent. of existing capacity is provided at just one facility, Rough. That facility has around 3 billion cu m of capacity, but it can pump only 45 million cu m a day, so in periods of peak demand the UK could run out of gas relatively quickly if demand outstripped supply.

More than three years ago, I asked the Minister’s predecessor what steps were being taken to increase the UK’s gas storage capacity, and his reply was rather over-confident. In a written answer, he said:

“Some 10 new projects are currently being developed, which (if they all proceed to commissioning) would more than double GB’s gas storage capacity”.—[Official Report, 13 February 2006; Vol. 442, c. 1467W.]

In November 2007, I asked whether new storage capacity would be provided through the marketplace or price signals, or whether the UK would have a stocking obligation imposed on it. The Minister’s response then was that we need more storage and that

“The new planning Bill will help us realise that aim before too many years have passed. That kind of infrastructure needs speedy implementation…and I believe that we have the answer to it.”—[Official Report, 22 November 2007; Vol. 467, c. 1331.]

Here we are in February 2009, and when I asked the Minister last month about progress on the projects, he said that in 2007-08 no new gas storage facilities were becoming operational. Only 13 million cu m of additional capacity is provided at existing facilities. Progress has been breathtakingly slow, and I am afraid that when I looked at the official list of projects that represent current and future gas storage developments, totalling some 13.5 billion cu m of capacity, I saw the picture as one of continuing delays, timetable slippage and reports of some projects hitting financial difficulties. We are told about the various stages of development, but frighteningly little is under construction. For example, the Portland project, which is an enormous 1 billion cu m facility, recently reported financial difficulties. Gateway Storage and the Esmond Gordon projects have also reportedly hit financial difficulties. Will the Minister please say what new storage capacity he envisages coming on stream in 2010, 2011 and 2012? The next three years could have some tight, challenging supply and demand scenarios during peak winter seasons.

Despite the marginal economics of providing storage and, at least in the short term, the declining availability of bank financing for those projects, the private sector has shown an appetite for working up development opportunities. If the problem is not, by and large, market failure, the delays must be due to regulatory and planning processes, for which Ministers are ultimately responsible.

I want to raise some points about the steps that the Minister could take to create a more benign environment for private investors. We welcome the measures in the Planning and Energy Act 2008 to speed up delivery of energy infrastructure, but the Minister must be aware that there is huge concern in the industry about the time it is taking to develop the national policy statement under the new Act. It seems that it will be at least another year before designation of the relevant national policy statement for gas storage projects. Perhaps the Minister will update us on that.

On cushion gas—the gas that must remain in storage facilities and cannot be used commercially but is used to maintain pressure in the facility—the industry is waiting to hear whether there is an entitlement to capital allowances. It is still waiting for clarification from Her Majesty’s Revenue and Customs on that point. Perhaps the Minister will update us on what discussions he has had with Treasury colleagues about the tax status of cushion gas and on when HMRC might be able to clarify that.

Another concern that has been raised with me relates to the rents being charged for offshore storage facilities. I understand the duty on the Crown Estate to extract the maximum rent from offshore projects—especially at a time when the public finances have been smashed to pieces—but I ask the Minister to examine whether those rents are currently a deterrent to investment and whether the public interest might be better served by a more co-operative approach, perhaps along the lines of the regime introduced to stimulate offshore renewable developments.

My final point relates to the problems created for UK consumers by the asymmetry in market liberalisation that currently exists between the UK and the continent. During and following the period of the Russia-Ukraine gas dispute, UK gas stocks were rapidly depleted as large volumes of gas were exported from the UK on to the continent via the interconnector pipeline to help to meet the shortfall created on the continent. What many people would regard, perhaps naively, as our gas—British gas—was pumped out of our storage facilities to respond to demand conditions in Europe. However, we know that that does not necessarily work in reverse. We know from our experience of the winter of 2005-06 that the market on the continent does not necessarily work like that.

Securing additional gas imports when our own storage capacity is inadequate may be tricky because of a range of what the Department describes as

“regulatory, commercial and infrastructure constraints”.

In other words, European gas stocks will be much less available to help to meet UK demand spikes than our stocks are for continental demand. In fact, under third party access rights, up to 85 per cent. of the gas held at our most important storage facility at Rough is potentially available to continental purchasers. Centrica, the British company, gets first dibs on only 15 per cent. of that gas. Forget British jobs for British workers, what about British gas for British consumers?

In addition, with the decline in the value of sterling, gas in UK storage is currently about 20 per cent. cheaper for continental purchasers. A large chunk of Rough’s capacity in the coming year is already being tied up, I understand, in European contracts. I do not believe in turning the clock back on liberalisation, but I have gone from being optimistic about European gas liberalisation to being profoundly pessimistic about it. Can the Minister give me any assurance at all that there is progress on creating a level playing field? At the moment, the asymmetry is serving to compound the challenges facing our energy system because of the tightness of supply and the lack of greater storage capacity. When will EU authorities get tough on the continued non-compliance of other European Governments with previous energy directives and EU competition law?

Britain’s shortage of gas storage capacity is potentially a critical vulnerability in our energy system. It is driving up wholesale prices during peak times, leaving British businesses and consumers facing higher bills. Instinctively, I do not feel inclined to support a mandatory stocking obligation, but I would be interested to hear the Minister’s thoughts on that issue. I want to have faith that commercially held stocks will be all that is required in the future, not some costly strategic stock that is held inactive somewhere and which British consumers will end up paying for. I need convincing by the Minister that there is a practical plan to deliver adequate gas storage for the UK. I would be interested to hear what he regards as adequate gas storage capacity, whether we are anywhere near to achieving that and what plans he has for ensuring that we deliver more.

I congratulate the hon. Member for Preseli Pembrokeshire (Mr. Crabb) on securing this debate on an issue that I agree is very important. I also agree with him on a number of other things, and let us start with that. This winter, there have been gas shortages across continental Europe caused by the Russia-Ukraine dispute. We have seen the lowest temperatures in Britain in more than a decade. The picture in the longer term is indeed a challenging one. Declining stocks of North sea gas will increase our dependence on gas imports. The hon. Gentleman has cause to be grateful for that, in that his constituency has one of the leading liquefied natural gas terminals where gas is imported. I therefore understand why he has no concern about, or no objection to, a reliance on imported gas. Indeed, I suspect that he is grateful for the jobs in his area that come from that.

However, I do have concerns about the hon. Gentleman referring to “British” gas when he starts talking about the interconnector. He should be grateful that the Europeans and a number of other countries that export LNG are not talking about Qatar gas or whatever. What we have is a market in gas. For a brief period in the last month, it was the case that the interconnector exported gas. However, for most of the month, it was going the opposite way; we were importing gas from continental Europe. Just under one fifth of our gas comes from Norway. When I was previously an Energy Minister, I signed the treaty with Norway that enabled us to have the Langeled pipeline, which ensures that we get a large amount of our gas. During the recent cold snap and during the dispute between Russia and Ukraine, we saw the energy market across the board working very well for the UK. In respect of gas, we were able to ensure that we had adequate energy supplies. We were not in a position, in either of those cases, of being concerned that we would have to disconnect people’s gas supply. That was never an issue. No domestic gas supplies, certainly, were ever in the slightest degree at risk. To suggest that the only reason why we did not have a serious problem was the recession is just plain wrong. I do not agree with the hon. Gentleman’s analysis at all. It is simply wrong.

The concern primarily is not among domestic consumers; it is among the large industrial users, whose supply will be cut off first, as the Minister understands. However, my reason for intervening is that the popular perception of gas held in British storage facilities is that it is gas for meeting UK demand. I understand and agree on all the points that he is making about the international and European nature of the gas market, but will he accept that when people talk about gas held in UK storage facilities, understandably the man or woman on the street would think of that as their gas?

I am sure that people will have all sorts of perceptions, but when they look at the way in which the gas market operates and the fact that it operates by and large in Europe to the UK’s advantage, they will see that we have a diversity of supply that is facilitated by ensuring that the market operates as efficiently as reasonably possible. The hon. Gentleman mentioned larger industrial users and he is right, because there are what are called interruptible contracts. He knows that; he is nodding. Under those contracts, in order to get a discount in the price, various larger companies say that they will reduce or cease their consumption on request. As it happens, that measure was used a few years ago; I seem to recall that it was briefly used the last time that I was an Energy Minister.

We need to ensure that we have an adequate gas supply, and during both the cold snap and the dispute between Russia and Ukraine, we monitored the situation closely—I was watching it very closely on a day-to-day basis; let the hon. Gentleman be in no doubt about that—and we were never in a position in which we had a crisis of any kind. That just was not the case.

The hon. Gentleman raised other issues, on which we do agree. Given our increased reliance on international markets to deliver gas, we need to ensure that those markets are diverse and that we do not become over-reliant on particular sources of energy. Furthermore, there is fierce competition in the global gas market, so prices can vary considerably. In addition, a quarter of our coal and oil-fired electricity generating capacity will close in the next 10 years, which will put even more pressure on gas. Finally, there is the possibility of investment in gas supply infrastructure being held back by the credit crunch, and I am watching the issue closely to ensure that its impact is absolutely minimised, because it is important that we ensure that supplies come through.

I therefore have no doubt that these are testing times for the energy market, and we need to ensure that it delivers. We must ensure that those of our oil and coal-fired power stations that close are replaced and that there is not a gap, although I do not believe that there will be. Look at it this way: every consumer in the country knows what bills they pay; they know that those bills have gone up and that many of the energy companies are making quite healthy profits. There is a lot of money to be made by those energy companies, and they will supply the energy to ensure that they make those profits. We need to ensure that we have adequate energy supply and that when I turn on the electricity or the gas, it is there, and that is what most consumers want. They will argue about the price, as they should, and we are sometimes in the business of arguing with the energy companies about the price, too.

A lot needs to be done to meet all those challenges, and I agree with the hon. Gentleman that ensuring that we have adequate gas storage is an important component. The Government recognise that, and the fact that last October Parliament passed its largest tranche of energy legislation ever shows the priority and importance that we attach to energy, climate change and the whole agenda. The planning legislation and the Energy Act 2008 were key parts of that package, and they will help with gas storage issues.

We have recently also launched a public consultation on offshore gas storage and unloading, with a view to introducing a new offshore regime later this year. We have also been working closely with the industry to provide advice on the credit crunch, and I have been holding weekly meetings to ensure that we are in the best possible position to deal with the issue.

A lot is being done, but I entirely accept that much more needs to be done if we are to ensure that our gas supplies are secure over the next decade and beyond. The Government recognise that; we are addressing it and we want to ensure that we are in a strong position.

Over the past 10 years, there has been a significant increase in Britain’s gas storage capacity. Expansion at the Rough facility off the Yorkshire coast means that it can now meet about 10 per cent. of the UK’s peak demand. The Aldbrough facility in east Yorkshire is predicted to become operational next month, bringing in new capacity of 370 million cu m. In addition, 17 new commercial gas storage projects are at various stages of development.

The hon. Gentleman rightly says that all those projects might not happen, and it is correct that companies change their commercial plans from time to time for commercial and proper reasons. However, we have had a whole series of announcements; indeed, only on Friday, Canataxx announced that it has submitted a planning application to Lancashire county council for its Preesall—also known as Fleetwood—storage project in north-west England. At about 1 billion cu m, it would potentially be the largest onshore storage in the UK. I could go through a list of other projects, including the Gateway, South Bain and Caythorpe projects, that are going through the processes at the moment. Their combined capacity would bring 17.3 billion cu m of gas storage if they all went ahead. If we added our existing storage capacity of about 4.4 billion cu m, we could have just over 20 billion cu m of commercial storage capacity by 2020, which is equal to 20 per cent. of our current annual demand.

Why is it that the Germans, the French and a number of other countries have more storage than we do? The answer is fairly simple if one thinks about it. We have North sea gas, and although it is depleting, it will not deplete tomorrow, but over the next three or four decades—it will gently go down. There is a ratio. As North sea gas production declines, we will have to import more gas and will therefore become more reliant on gas imports. At that point, we will need to have more gas storage just in case we have a problem with some of those gas imports. Our North sea gas means that we do not need as much gas storage as countries that do not have their own oil and gas reservoirs, but we need to be aware of the ratio that I mentioned, because as North sea gas declines, imports rise and storage needs to rise, too. Germany has vastly less indigenous gas production than the UK, so it needs much more gas storage capacity now. As a proportion of our gas imports, however, our gas storage capacity is broadly in line with Germany’s, at about 25 per cent., and that is an important statistic.

As our North sea gas declines, we will need more gas infrastructure, including storage, and that is why we are bringing forward the 17 projects that I mentioned. At the moment, we have a level of variability in our gas and storage supplies. The Sean and Morecambe fields provide us with a bit of flexibility, so that we can quickly access gas supplies. However, I would be the first to say that the storage facilities are not new and that we need more new facilities to ensure that we have more flexibility of supply.

Just for clarity, does the Minister regard the 25 per cent. measure that he referred to as the benchmark that we should keep in mind as new infrastructure is planned?

I do not think that we particularly need to measure ourselves against Germany; we need to decide what is right for us, and that, to some extent, will be a market decision. I am not one of those who says that we have to have this target or that target for the amount of storage that we need. We need to have an adequate supply, so that when I turn on my gas cooker, it will light—actually, the ignition does not necessarily come from the gas, but from other sources. However, we must ensure that the gas is there, so that I get the power that I need.

There is another factor to bear in mind: it is not just about profit. It is important to recognise that gas storage is just one of the tools that companies have to ensure that gas supplies are secure. Licensed gas shippers have a legal duty to balance the gas that they put into the network with demand from their own customers on a daily basis. The UK’s commercial regime therefore allows demand and supply to balance in the most efficient and cost-effective way, as both sides react to price signals. If the gas shippers fail to balance, they have to pay the national grid at spot price for urgently putting the gas that is needed into the system, so there is a real market incentive. If the shippers have the customers, they have to ensure that the gas is there; if they do not, they have to pay the spot market price, which could be quite high. Shippers therefore have a real incentive to make sure that there is adequate gas.

The industry’s cash-out arrangements are complicated, but they provide real financial incentives for shippers to ensure that they have access to the gas that they need, including in gas storage, which is important. The amount of gas storage or import infrastructure in the UK is decided by the gas shippers on the basis of the price signals that they receive. That is illustrated by the way in which we have been able to deal with the problems of the cold snap and the Russia-Ukraine dispute.

A significant amount of gas infrastructure has been completed over recent years and a lot more is in the pipeline. Many of these planned projects are likely to be completed, and we are carefully monitoring the situation to ensure that we have adequate gas storage supplies in the future. There is always the issue of whether the market will provide, and we need to ensure that it does. We need to create the right planning and legal structures to ensure that the market provides, and that is precisely what the Government have been doing.