Qatar crisis highlights rising UK energy reliance on imports

Qatar crisis highlights rising UK energy reliance on imports

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Fall in North Sea output means Britain imports nearly one-third of its gas from a small Gulf state whose transport links have just been severed by neighbours

Britain’s increasing reliance on energy imports as the North Sea’s oil and gas wealth declines has been highlighted by the diplomatic crisis engulfing Qatar.

Nearly a third of the UK’s gas imports are from the tiny Gulf state, the world’s largest producer of liquefied natural gas (LNG), which it ships to Europe and Asia, including to its three biggest customers: JapanIndia and South Korea.

Qatar’s transport links were severed by Saudi Arabia, the United Arab Emirates, Egypt and several other countries on Monday over Doha’s alleged funding of extremist groups. Ports, including refuelling hub Fujairah in the UAE, have been closed to Qatari-flagged ships raising concerns over cost hikes and delays to shipments.

A few decades ago, this would not have mattered to the UK. Britain was self-sufficient in gas from the North Sea until 2004 but declining domestic production means that 60% of gas is now imported. National Grid, which operates Britain’s energy networks, believes the reliance on imports could reach 93% by 2040. This means the Qatar dispute inevitably raises concerns.

However, Dr Bassam Fattouh, the director of the Oxford Institute for Energy Studies, said the situation would have little effect on gas exports. “I don’t see any impact on energy supplies to the UK and to the rest of the world,” he said. “Why would Qatar stop exporting LNG? The shipping lanes are open.

“The markets should not be spooked,” he added, although he warned the crisis could introduce some erratic volatility to oil and gas markets.

Analysts at Julius Baer, the Swiss bank, echoed that view. “Disruptions, especially of the seaborne shipments, are highly unlikely,” they said.

Ira Joseph, head of gas analytics at consultancy Pira Energy, said: “The UK market is the destination of last resort for Qatari LNG, so it would be the last and not the first place to have an impact.”

Norway provides nearly two-thirds of UK gas imports via pipelines, while Qatar provided 29% of imports in 2015. Italy is the second biggest European importer of Qatari gas, according to analysts at oil and gas group Wood Mackenzie. Poland opened its first LNG terminal last year, to import from Qatar and the US in a bid to reduce its reliance on Russian gas.

In Britain, the heavily compressed gas is taken by vast Qatari tankers to one of three LNG terminals, where it is stored, ready to be returned to its gaseous state to heat homes and fuel power stations. One terminal is run by British Gas owner Centrica in the Isle of Grain in the Thames estuary. Two are in south Wales – one owned by Shell and the other by Qatar, which also owns other significant UK assets such as the Shard and Harrods.

Proponents of fracking to extract shale gas said the problems facing Doha showed why the UK must develop its own shale gas industry, like the US.

“What’s happening [in Qatar] is quite unprecedented,” said Ken Cronin, chief executive of the United Kingdom Onshore Operators Group (Ukoog). While escalation in the Gulf and disruption of energy supplies seemed unlikely now, he said, it would have a broader impact on the world if the situation worsened.

“It’s important for us to insulate,” he said . “Maybe not so much for now, because we have the North Sea and Norway, but by 2030-35 we are going to be importing 70%-80% of our gas, and the majority of that is going to come from the LNG market if we haven’t started the shale gas industry.”

Exploratory shale gas drilling has been bogged down in the planning process in the face of local opposition for the past few years, but the Conservative manifesto pledged to remove the need for planning permission for small sites. Fracking involves pumping water, chemicals and sand underground at high pressure to fracture shale rock and release trapped gas to the surface – a technique opposed by environmentalists and local communities.

The first major exploratory drilling is expected to begin in the next two months at a site in Lancashire run by Cuadrilla, a leading British fracking company.

Cronin admitted that even if a commercial shale gas industry was up and running by the end of the decade, as he hoped, it was too early to say if it could compete on price with LNG imports. “That’s difficult to answer now,” he said.

Other customers of Qatar’s gas include the UAE and Egypt, two of the countries that cut diplomatic ties with Doha. Despite the row, Qatar is still supplying the UAE via a pipeline that provides crucial gas for the power stations that the capital Abu Dhabi relies on. The Dolphin pipeline supplies 35% of the UAE’s gas demand.

“So far there is no indication that either the Qataris or the Emiratis are going to disrupt the gas flows from the pipeline,” said Fattouh.

However, he said that if there was disruption of the pipeline, “it would be quite problematic”, especially during summer, when air conditioning and other factors meant electricity demand was high.

There is no sign either that Egypt is turning away Qatari LNG shipments. Cairo is bound by international agreements to keep the Suez canal open to Qatari tankers, though it could reduce the discount such LNG ships enjoy. Even if the Suez passage was blocked or rendered uneconomical, experts said, it would not add a huge amount of time if vessels had to go around the Horn of Africa.

While Qatar’s riches are built on gas, which it only began exporting in 1996, the country is also a member of Opec, the cartel of major oil-producers.

Doha is seen as unlikely to want to scupper a recent deal by Opec to extend production cuts to buoy up the oil price. Even if it did, or was ejected from the group as part of the diplomatic row, the ripples are likely to be minimal, as Qatar only accounts for 2% of Opec’s oil output.

“In terms of Opec, Qatar is a very small player,” said Fattouh. “Opec has had worse conflicts in past.”

The UK, nonetheless, will hope for a swift conclusion to the Qatar spat.

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