9 August 2022

The UK urgently needs a strategic gas reserve

By Damien Phillips

In this Conservative leadership race, both Rishi Sunak and Liz Truss have made a point of talking tough about the unions and taking steps to make sure vital infrastructure keeps working during strikes. But what do they plan to do if the relevant strike is in another country?

I ask because last month a strike by Norwegian oil and gas workers came very close to cutting off all exports to the United Kingdom. And Norway supplies 42% of this country’s entire demand for gas.

We aren’t used to needing to play close attention to such stories, but we’re going to have to. Whilst everyone might hope that the crisis will pass and things will return to the old normal, the reality is we’re facing an extended period of disorder. Good-time strategies, dependent on fragile supply lines, will no longer cut it.

Yet the old, complacent attitudes still dominate the debate, typified by Greenpeace’s recent bid to get a judge to shut down Shell drilling at a major North Sea gas field. Bear in mind that the North Sea accounts for another 40% of domestic gas demand – and that is set to rise.

With millions of households facing a cruel winter, the prospect of serious disruption of up to 80% of this country’s gas supplies – on top of the ongoing global crisis precipitated by the war in Ukraine – should chill politicians to the core. We desperately need to act to improve the UK’s energy security.

That means addressing our decades-long failure to build a proper strategic gas reserve.

Europe’s four biggest gas holders – Germany, Italy, the Netherlands and France – have gas storage capacity equivalent to 25-37% of annual consumption. This gives them the ability to release reserves to soften price spirals and buy time to find new supplies. The British figure? 2%.

America is even more ambitious. Its Strategic Petroleum Reserve (SPR) is the largest known emergency supply in the world. With a capacity of over 714 million barrels, spread across four sites in Louisiana and Texas, it has enabled Joe Biden to release one million barrels a day since the beginning of March, lowering gasoline prices by 17 cents per gallon.

Contrast that with the UK. In 2017, the shuttering of the offshore Rough facility cut our gas storage capacity by 70%, whilst proposals for new onshore facilities have to fight their way through our absurd planning system.

As a result, gas experts say that the UK is ‘more exposed than virtually anywhere because it is so short of storage’.

Back in 2013, when then Energy Secretary Ed Davey was breezily declaring that gas storage capacity was not a concern because of our supply mix of domestic production and diverse import sources, this might have looked tolerable.

Not any more. The American SPR was founded in the wake of the 1975 OPEC oil shock; the current crisis must be a similar call to arms here. So, what needs to happen?

First, the Government needs to set up a taskforce with a mission to build a strategic gas reserve network. We have the model with the Vaccines Taskforce; what we need now is the gas industry equivalent of Kate Bingham, and an outfit with the same access to adequate resources, expertise, and freedom of manoeuvre.

This new team would be empowered to operate outside of the normal chains of command, relying on their industry nous to make decisions without getting mired in bureaucracy or being swallowed by the green blob at the Department for Business, Energy and Industrial Strategy (BEIS).

The specifics, in terms of ideal reserve levels and the means of securing them, should be developed by the experts. But there are plenty of options, from upgrading our neglected import and pipeline infrastructure (as a Centre for Policy Studies report suggested in 2017) to converting the UK’s numerous salt fields into caverns – an efficient, natural storage mechanism.

Rather than the Government trying to do everything in-house from scratch (who can forget the disastrous first attempts at Test and Trace and a Covid-19 app in summer 2020?), the Strategic Reserve Taskforce could strike a series of deals with utilities companies to create the infrastructure.

Private suppliers could be induced to join the programme through various incentives, from full expensing for the relevant investments to special planning provisions for essential infrastructure and tax incentives for providers who build and maintain storage facilities.

It would even be future-proofed against our transition towards green energy, as much natural gas infrastructure can be easily repurposed for hydrogen.

Building a network is only half the challenge, however – filling it is the other. We aren’t going to be diverting supplies from Norway or the North Sea away from the front line in the depths of a crisis. Fracking won’t come online for at least 18 months, assuming there is sufficient will to actually get any fields operational at all.

But the crisis could last for months, if not longer. How can we fill a reserve network without impacting current consumption?

The answer is Liquified Natural Gas (LNG). Unfortunately, due to limited supplies and under-investment in liquefaction infrastructure, there isn’t enough to sooth the immediate crisis, so our new taskforce would need to box clever to secure additional supplies at the margins for the time being. 

We already have a ‘supplier of last resort’ deal with Qatar, a major provider. However, as with the other leading LNG exporters (the US and Australia) much of the new Qatari capacity was booked up years ago. Nevertheless, industry experts believe the Government could leverage bilateral relations to secure additional supply from state-owned Qatargas in return for defence and trade deals. 

It will be harder to strike a similar bargain with US suppliers, which are all private companies who may prefer aiming their new capacity (set to come online in the middle of the decade) at the lucrative LNG spot market rather than committing large volumes to long-term contracts. 

Even so, the taskforce may be able to incentivise deals to supply our reserves through inter-governmental agreements highlighting the UK’s desire to buy more US shale gas and providing clear evidence of our intention to become an ‘LNG bridge’ – a transhipment hub facilitating trade between the US and continental Europe – by building the import and storage infrastructure to enable this. 

With Australia and other top suppliers aiming to complete major new production facilities by the early 2030s, the UK has a chance to get ahead of the game and turn the present misfortune to our future advantage.  

It isn’t a silver bullet; we can’t go back and make the decisions previous generations of politicians should have made. But if the new prime minister bucks the baleful British tendency toward short-term thinking, in just a few years we could have a proper energy reserve and the trade deals to keep it topped up – a shield for British households against future fuel crises, and a legacy any leader could be proud of.

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Damien Phillips is a Fellow of The Cobden Centre, and a specialist in international affairs and political economy.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.