Energy Security in North West Europe
The world has watched the events unfolding in Ukraine with horror and the threat of a broader European conflict still feels very possible. What this dreadful situation surely tells us is that reliance on another country for energy is unwise at best and potentially catastrophic at worst.
We need to consider this in the context that Russia is the world’s second largest producer of fossil fuels and provides Europe with between 35–40% of its natural gas. The impact of worldwide underinvestment in oil and gas exploration and development, and a global revival from the pandemic which has seen commodity prices rise sharply, has been evident since this conflict started and is intensifying. At the beginning of March this year, Brent stood at US$113 per barrel, one week later it had risen above $139 and a current realistic scenario is that a large portion of Russian crude oil will no longer be palatable to the market and will create an even larger supply deficit for the duration of the armed conflict and likely far longer.
Whilst President Putin has chosen not to interfere with gas supplies to Europe (at least at the time of writing), this is clearly a possibility as European and American sanctions start to inflict real damage on the Russian economy.
The climate crisis has dramatically changed Western attitudes towards traditional fossil fuel energy sources, and particularly in the UK, this momentum may appear unstoppable. However, the war in Ukraine may cause UK and European governments to reconsider energy security and consequently, where these energy sources are derived from in the future (see the article on Responsible Upstream Investment in the UKCS on page 48).
More than 80% of homes in the UK rely on natural gas for heating and during 2021 40% of electricity in the UK National Grid was generated using gas turbine generators. Most of this gas is imported via pipeline from Norway (40% in 2021), and through LNG imports by sea (18% in 2021). The UK’s own production has gradually but substantially declined and is now only producing around 38–40% of annual demand. Norwegian gas production is at maximum capacity and the only way more gas could be supplied to the UK would be if exports were diverted from another export pipeline to mainland Europe. Gas storage is also a significant issue, with the UK failing to invest adequately for decades in storage infrastructure. To illustrate this, continental Europe has storage capacity for approximately 22% of their demand, while the UK has capacity for a mere 1% of annual demand (or roughly four days' worth of gas).
This situation exposes the UK to extreme gas price volatility, and the only way it can meet the challenges of variable demand, domestic supply decline, or changes in volumes supplied by Norway, is through LNG imports purchased on the spot markets. This is not the ideal recipe for energy security, even before considering the wider oil and gas supply implications of Russian aggression in Ukraine – time for a serious rethink in European energy policy?