What is natural gas?
Â In the UK gas fields you find around 93% methane, 1 or 2% CO2.
Europe has around 3 times as much gas but content is only around 80% methane, 17% nitrogen.
Â Hydrocarbon gases â methane, ethane, propane, butane etc.
These are the primary gases we want. Propane and butane tend to be stripped out and sold as liquid petroleum gases.
Â Impurities â Nitrogen, carbon dioxide, hydrogen sulphide.
These are inert gases which reduce the energy content of the gas fields and âtake up spaceâ.
Characteristics of gas
Voluminous i.e. it has a low energy content and you need a lot of it.
Comparatively clean burning (compared with coal)
It is easiest to measure gas by volume. Usually it is measured in cubic metres (cm), at standard temperature and pressure.
This is used for contracts, trading and billing and depends on the calorific value of the gas. Typically measured in therms (th), or kWh.
29.3kWh = 1th
Global gas reserves and production
The current ratio of reserves to annual production is 67 years (although it has been 67 years for the past 6 years.)
Major world producers, consumers and reserves
Western Europe has an increasing dependence on imports.
Largest sources of European gas demand
Germany â mainly central heating and industrial demand
Italy & Spain â dash towards gas fired power generation
Europe â most that is left is found in Norway and the North Norwegian Sea
Russia â massive reserves. There are worries about Russian ability to maintain current levels of production.
Nigeria â lots of associated gas i.e. mixed with oil or as a cap on top of oil so cannot get the oil out without the gas.
UK Supply and Demand
Supply â United Kingdom Continental Shelf
Most of the gas used in the UK comes from the UK Continental Shelf. (UKCS). Gas from the UKCS gas fields is of two types:
Associated gas (must run)
-Â Â Â Â Â Â Â Â Â produced at the same time as oil i.e. gas produced as part of co-mingled liquid flow.
-Â Â Â Â Â Â Â Â Â oil production is the main driver
-Â Â Â Â Â Â Â Â Â mostly found in the North (e.g. St Fergus).
Dry gas (swing)
-Â Â Â Â Â Â Â Â Â pure gas
-Â Â Â Â Â Â Â Â Â used to meet changes in demand.
-Â Â Â Â Â Â Â Â Â mostly found in the southern basin (e.g. Morecombe)
UK gas production peaked in 2000. The rate of decline of production has been much quicker than expected (the market had been expecting peak production to occur a few years later). As a result the UK is now a net importer of gas. In addition to this, the majority of the UKCS dry gas fields are in decline, reducing swing capability.
Demand for gas in the UK is subject to substantial fluctuations within day.
There is also significant seasonal demand variation in the UK, particularly affected by temperature and weather conditions (as well as price).
The National Transmission System (NTS)
This is owned by National Grid.
Gas enters the NTS at the seven beach reception points (i.e. terminals) or at the LNG reception terminal, is cleaned up and metered and then is transported around the system. The NTS is the high pressured (~70/85 bar) part of the gas pipeline transmission system. Around the NTS, there are compressors (~ every 40/60 miles), which pump up the pressure around the network (since gas loses pressure by friction around the pipes).
The offtakes from the NTS are:
-Â Â Â Â Â Â Â Â Â Around 60 customers that take gas directly from the NTS e.g. power stations.
-Â Â Â Â Â Â Â Â Â Local distribution zones (which operate at a lower pressure than the NTS)
-Â Â Â Â Â Â Â Â Â Interconnectors
-Â Â Â Â Â Â Â Â Â Storage facilities
Why is it necessary to match demand and supply?
The NTS is designed to receive flows at a constant rate. If supply is less than demand, then pressure in the NTS will drop and NGC will begin to invoke demand reduction.
However, there is some flexibility, or âswingâ within the system, provided by:
-Â Â Â Â Â Â Â Â Â the linepack (especially in the local distribution zones)
-Â Â Â Â Â Â Â Â Â gas storage facilities
-Â Â Â Â Â Â Â Â Â demand swing
-Â Â Â Â Â Â Â Â Â interruption
-Â Â Â Â Â Â Â Â Â imports/exports
This is the total amount of gas in the system. National Grid has a degree of flexibility between 275mcm and 305mcm.
The UK has around 14 (average demand) days worth of gas supply in total storage facilities.
Types of storage:
Depleted field storage
This uses existing infrastructure and is involves taking an old oil or gas field that is running down and pumping gas back into it. These can be either onshore or offshore.
These typically have a slow withdrawal rate and tend to be used for seasonal storage e.g. Rough.
Salt Cavity Storage
This involves pumping water into a huge hole (~ 20m wide and 80m deep) which dissolves the salt, and the brine is then pumped out. This can then serve for gas injection and withdrawal. This tends to be the medium sized, fast withdrawal storage e.g. Hornsea.
This is similar to depleted fields but does not contain hydrocarbons, just water. Specific geological conditions are necessary for this type of storage. These tend to be large, and have a comparatively slow withdrawal rate. Currently there are none in the UK.
LNG is liquefied natural gas that has been cooled to extremely cold temperatures (-160degrees) at special liquefaction terminals. LNG is 600 times denser than natural gas which allows it to be transported in tankers. LNG ships unload the LNG at degasification terminals. This is then converted back to gas before being released into the NTS. The Isle of Grain is of this type. They tend to be comparatively small and have very fast withdrawal rates, âpeak shaving storageâ. Currently this is owned by National Grid who uses it for balancing (operating margin) purposes.
These pipelines connect the UK with other European countries and give Britain access to gas from Norwegian and Dutch gas fields and the European gas market. E.g. Belgian-UK interconnector.
Commercial Gas Market
Types of Player
These companies bring gas from offshore gas fields (they drill the wells and flow the gas from the sea beds), interconnector pipelines, LNG terminals or from gas storage facilities.
Major North Sea producers include:
ExxonMobil, BP, Shell, Total, Centrica, British Gas, Conoco
Shippers bring gas onshore to the pipeline system from producers through the trading of capacity and gas. They employ transporters to deliver to the NBP or to customers. Shippers purchase a licence to have capacity on the NTS.
Producer affiliated shippers:
Statoil, Shell Gas Direct, Total Gas and Power, BP Gas
Electricity affiliated shippers:
RWE Innogy, EON UK, Scottish Power, Scottish & Southern Energy, EdF Energy
Goldman Sachs, Morgan Stanley, Barcap, Deutschebank, Merrill Lynch
These are companies that are licensed by Ofgem to sell and bill gas to customers.
Combined shipping/supply operators:
Centrica, BGT, Scottish and Southern Energy, Scottish Power
Ofgem issues Public Gas Transporter licenses. Currently National Grid operates and maintains the NTS and they and several other companies transport gas on the LDZs.
Interconnector operators are included in this category.
Ofgem are responsible for regulating all onshore gas activities.
The DTI are responsible for regulating the offshore industry.
The gas market is governed by the Uniform Network Code, which defines all the rights and responsibilities for all users of the gas transportation system.
Entry Exit Regime
Shippers can purchase entry capacity at around 30 entry points, which gives them the commercial right to enter gas into the system. The main aggregate entry points are at the big six beach terminals, though these are broken down into various sub terminals. So for example at St Fergus there are three entry points at the separate sub terminals St Fergus Mobil, St Fergus Shell and St Fergus Total. Other entry points include storage sites, Interconnector landings and LNG re-gasificationÂ terminals.
Shippers are incentivised to balance their contractual position in order to avoid imbalance charges. The gas market is subject to daily balancing, and the gas day runs from 0600-0600. Balancing occurs at a single notional point on the system, the National Balancing Point (NBP).Â
Shippers can procure gas from offshore gas fields, interconnector pipelines, LNG or draw from storage. In order to bring gas onto the NTS, shippers need to buy capacity on the high pressure pipeline system. This is done through auctions, and capacity can be bought up to 15 years in advance.
Shippers can buy and sell gas on the OCM (i.e. the On-The-Day Commodity Market, APX Gas), over-the-counter or on the ICE futures exchange.
A shipper will be in imbalance if there is a difference between the quantity of gas delivered to the system by a shipper and the quantity taken from the system. If a shipper is in imbalance at the end of the gas day they are subject to imbalance charges.
If they are short, they will pay System Marginal price Buy (SMP buy), calculated as the greater of the System Average Price + 0.84p/th or, the highest priced National Grid OCM trade.
If they are long, they will receive System Marginal price Sell (SMP sell), calculated as the lower of the System Average Price - 0.95p/th or, the lowest priced National Grid OCM trade.
The System Average Price is simply the volume weighted average of all within day trades.
Â National Grid Balancing
National Grid, the operator of the NTS ensures a balanced system by buying and selling gas on the OCM to meet demand. NGC will also use storage to meet maintain system pressure under certain circumstances, including immediately after a supply loss or demand reforecast before other measures become available, or in the event of plant failure, eg. pipe breaks or a compressor trips.Â