UK looks for lessons from Ukrainian gas dispute

London (Platts)--3Jan2006

The UK's energy supplies were not put at any great physical threat by the
New Year gas dispute between Russia and the Ukraine, although disagreement 
between Russia and Ukraine continues, even as flows of gas to western Europe 
are now picking up.
     UK energy minister Malcolm Wicks, quoted on the BBC website, has said the
Ukrainian dispute posed "no immediate threat" to supplies to the UK, though he
added it was a developing situation and that prices could be affected. The 
Department of Trade and Industry was not available for immediate comment when 
contacted by Platts Tuesday morning.
     The UK still produces most of the gas it needs from its own North Sea 
reserves. It was only in 2004 that the UK became a net importer of gas and the
North Sea still supplies somewhere around 90% of UK needs. Supplementary gas 
comes from Norway via the Frigg line and from Algeria and other Middle Eastern
sources as liquefied natural gas into the Isle of Grain LNG terminal.
     Only those supplies from the continent to the UK that come through the 
Belgium-UK Interconnector pipeline could have been affected by a long-running 
dispute on Europe's eastern borders, which might have impacted on the amount 
of free gas in Germany and France that was available for onward export to the 
UK. Most of the UK's gas, however, comes from other sources, so any physical 
disruption to supply would probably have been manageable.
     The UK has already been coping this winter with flows of gas to the UK 
through the Interconnector pipeline that are lower than was expected before 
the winter began. UK energy regulator Ofgem persuaded the European Commission 
to launch an investigation in December to see if continental European 
companies were deliberately holding back gas that could have gone to the UK. 
The EC sent out questionnaires on this topic demanding urgent answers.
     But while the UK is not yet heavily dependent on Russia for its gas, the 
dispute raises two topics for concern. The first is prices. UK gas and 
electricity prices for household customers have already gone up by around 35% 
over the last two years, and could go up another 15% this year, the result of 
soaring oil prices (gas prices are linked to oil) and the UK's increasing 
import dependency. Manufacturers who buy gas at wholesale prices have been 
even harder hit. A long-lasting dispute would impact European gas prices and 
add even further pressure on UK gas prices, and power prices too, with around 
40% of UK electricity being gas-fired.
     The second concern is that the UK will become increasingly dependent on 
Russian gas in the future. From self-sufficiency in gas in 2003, the UK could 
be around 80% dependent on imported gas by 2014/15. And as existing aging coal
and nuclear plants are decommissioned, unless they are replaced like-for-like,
UK generation will become ever-more dependent on the default power generation 
option of gas. As UK imports increase, more of the UK's gas will come from 
Russia. Russian producer Gazprom has expressed an aim of securing 10% of the 
UK market--perhaps 13-bil cu m/year--by 2010. Other imports could come from 
countries including Algeria, Nigeria and Iran, as well as Norway and the 
Netherlands.
     Gazprom is keen to promote itself as a reliable supplier to western 
Europe that never let its customers down even during the height of the 
Cold War. While seeking to exert control over Ukraine, Russia wants to keep 
good relations with the UK and other western European countries that will 
offer it high prices for its gas. For this reason, Gazprom is looking to 
options that would allow it in the future to cut supplies to Ukraine while 
maintaining gas to the UK.
     Gazprom's key project is the Baltic Sea gas line that will carry up to
27-bil cu m/year direct from Russia across the Baltic Sea to Germany,
bypassing Ukraine and other eastern European states. From Germany gas could be
transported on to the UK through a planned new Dutch-UK pipeline, or the 
Belgian Interconnector. Gazprom is also investing in UK gas storage--such as 
the new Humbly Grove, Hampshire facility. That means it could keep its UK 
customers secure even during a short period of transport interruption.
     A spokesman for Centrica, which supplies gas to over half of UK 
households, agreed that the physical impact on the UK from the dispute was 
probably limited, but said there could be a price impact which could have an 
ongoing effect on the European market. "All suppliers are under pressure," he 
said, adding there was some "inevitability" about household energy prices 
going up further this year given recent wholesale levels. Centrica's 
residential gas supply arm, British Gas, made a loss in the second half of 
2005 despite raising prices 14.2% in September 2005.
     But Allan Asher, CEO of consumer group Energywatch, has warned UK energy 
suppliers against using the dispute as an excuse to put up prices. "Sadly, 
the gas and oil companies are always looking for excuses to ramp up the 
prices," he told media.
     The UK's increasing reliance on gas imports and whether or not new 
nuclear plants are needed to safeguard UK energy supplies will be debated in a
UK energy policy review this year. The government will publish a consultation 
document in January.

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