Overview

Although still a major consumer of gas, production of the fuel in the UK has fallen dramatically in recent years. North Sea production started in the 1960s and peaked in 2000 at 108 billion cubic metres, but has since plummeted – with volumes in 2013 amounting to just 37 bcm. Companies have started exploring in areas with more challenging environments, such as west of the Shetland Islands, but volumes are expected to drop further over the next 20 years, leaving the country increasingly reliant on imported gas.

The UK is the second-largest consumer of gas in the EU, behind Germany, and gas-fired generation makes up around a quarter of the nation’s power supply. According to UK transmission system operator National Grid, demand for gas from the electricity sector could either rise or fall in the long term, depending on the uptake of low-carbon generation. Efforts by the government to shore up the UK power supply include the introduction of a capacity market, offering gas-fired generators financial incentives for keeping power plants on standby. The first auctions are due to take place before the end of 2014, with capacity in place by winter 2018.

The UK has traditionally relied on Norway and the Netherlands for its gas imports, but with North Sea fields in decline it has had to look farther afield to secure supplies. The startup of the Isle of Grain LNG terminal in 2005 marked the country’s first LNG imports since the early 1980s. LNG began to make a major contribution to imports in 2009 with the opening of the Dragon and South Hook terminals in Milford Haven. LNG imports rose from 25% of total gas imports in 2009 to 46% in 2011. More recently, however, an increase in Asian LNG demand – driven by the Fukushima crisis – has reduced the number of cargoes entering the UK, with LNG accounting for just 18% of total gas imports in 2013. Qatar is the UK’s primary source of LNG, with cargoes from the Arab state accounting for more than 90% of total imported volumes.

The projected decline in North Sea production means the UK will become more and more reliant on imported gas in coming years, but the government is far from giving up on domestic resources. Hopes of replicating the US shale boom appear far-fetched, but significant unconventional resources in the North of England could still provide a welcome boost to UK production. Cuadrilla Resources, the country’s leading shale explorer, aims to produce test volumes from its Bowland shale licence in 2015 – although commercial production is unlikely to follow before the end of the decade. A profitable shale gas industry would provide economic benefits, but controversy remains over its environmental and social impact.

The government is also in favour of maximising production from fields in the North Sea and has provided tax relief for exploration activities west of the Shetland Isles as well as relief on decommissioning costs to make marginal fields economic. Fears such measures may be insufficient, however, have led the UK Treasury to examine how it could further improve its oil and gas tax regime. A tax review, launched in May 2014, aims to unlock much of the 21 billion barrels of oil equivalent the government estimates remain beneath the sea bed.

Page updated: 26/09/2014