Qatargas exporting LNG to the UK

10 April 2009

New liquefied natural gas facilities being built at Milford Haven will receive supplies from Qatargas II as UK domestic production declines.

It may be one of the most significant energy projects in the UK, but the liquefied natural gas (LNG) facilities being built at Milford Haven in southwest Wales been kept deliberately low-key. The five LNG tanks have been partially dug into the ground and the parts that are above ground have been kept low, limiting their visual impact.

Gas, and LNG in particular, is becoming ever more important to the UK. According to UK energy consultant Wood Mackenzie, in 2008, gas accounted for 35 per cent of the country’s energy mix, and LNG for just under 2 per cent of that.

But as domestic gas production falls, imports are rising. By 2020, gas is expected to account for about 43 per cent of the UK’s energy needs, and LNG could account for more than 50 per cent of the gas used.

Ofgem, which regulates the UK gas and electricity market, says gas is “pivotal” to the UK. “North Sea supplies of gas are depleting,” says a spokesman for the regulator. “An increasing amount of our gas is coming through imports.”

When LNG tanker Tembek arrived at Milford Haven’s South Hook terminal in late March, it marked the start of deliveries to the terminal, which has capacity to handle 10.5 billion cubic metres a year (cm/y). A second phase should be completed in late 2009 and will double that capacity. Between them, the two phases of the South Hook terminal will have capacity equivalent to 20-25 per cent of the UK’s gas needs.

Qatargas II is supplying the LNG to South Hook Gas Company, a joint venture of Qatar Petroleum (QP) and the US’ ExxonMobil Corporation. This in turn hands it to South Hook LNG Terminal Company, which is jointly owned by QP, ExxonMobil and France’s Total. It then regasifies the fuel, which will be sold by ExxonMobil Gas Marketing Europe to customers in the UK.

The UK has a relatively open energy market and, depending on the nature of their supply deals, suppliers can easily switch deliveries to other markets where prices are higher.

South Hook Gas Company says it has a long-term LNG sale-and-purchase agreement with Qatargas II, but the terms of the deal and the volumes of LNG it involves have not been revealed.

“Having regasification in place does not mean LNG will arrive,” says Frank Harris, head of global LNG at Wood Mackenzie. “Our view is there will be a certain base load amount from QP [to South Hook], but it is not clear how much.”

Asia in particular can be a more attractive market than the UK for LNG providers, with Japan and South Korea outbidding most other potential customers.

For now, pipeline gas is still the most important source of UK imports.

The UK imported a net 284,232 gigawatt hours (GWh) of gas in 2008. The figure has increased sharply in recent years, up from net imports of just 18,920GWh in 2004. Before that, it had been a net exporter.

The winter months are when energy demand is highest in the UK, with imports typically two or three times higher in the fourth quarter of the year than in the third. The highest level of imports on record came in December last year, at 37,640GWh.

Imports are increasing because of a combination of rising demand and falling domestic production. UK gas demand was up by 5.3 per cent in the third quarter of 2008, but production fell by 1.3 per cent compared with the same period in 2007.

The biggest single group of users are domestic customers, followed by industrial users. However, the next generation of power plants could further increase the need for gas imports.

The UK government estimates that it will need to invest in new generation capacity of 30-35GW over the next two decades to replace ageing power stations and meet rising electricity demand. It has yet to decide how to meet that demand, but gas-fired plants are one option, alongside coal and nuclear power.

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