Oil & Gas UK Economic Report 2014

Gas production from the UK’s Continental Shelf (UKCS) has been in decline since 2000 at an average annual rate of eight per cent. In 2013, gross production fell by a further six per cent to 38.8 bcm. Nevertheless, despite this steady reduction in output, indigenous production still met 50 per cent of the UK’s demand in 2013 and there are signs that the rise in dependence on imports will moderate in the next few years, unless demand recovers strongly. It is unlikely that onshore shale gas exploration will make a material contribution to indigenous production before 2020. Net imports of gas have stagnated since 2010 at 38-39 bcm a year, as demand has fallen in line with the decline in domestic production. There have, however, been significant changes in the origin of imports and in the size of pipeline exports in response to fluctuations in the world LNG markets. Indeed, the UK’s supply patterns are highly sensitive to the state of the LNG market because of the lack of imports by pipeline under term contracts,

the extensive regasification capacity (for LNG) in the UK and the liquidity of the NBP market. LNG imports rose from ten bcm in 2009 to 25 bcm in 2011, but then steadily fell to 9.4 bcm in 2013 as demand in higher value markets in Asia and Latin America diverted supply away from north west Europe. UK exports to the continent via the Interconnector pipeline reached a corresponding peak in 2011 of 9.3 bcm before falling to just 2.5 bcm in 2013. As new sources of LNG supply emerge from Australia and the US Gulf Coast from 2015 to 2017, there may be some alleviation of the post-Fukushima tightness of LNG markets. However, the impact on trade flows and price formation is still highly uncertain. The exceptional inter-regional price spreads prevailing since 2011 may ease, but the NBP market is still expected to set the reference value for supplies of LNG in the Atlantic basin that are not under contract.

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ECONOMIC REPORT 2014