Threats to Russian pipeline gas supply via Ukraine are pushing up prices in Europe, just as UK policy could squeeze domestic production. As a result, the country is more exposed to European gas and global LNG markets. Much rests on how fast the UK can shift away from hydrocarbons and into renewables.

Gas prices are a hot political question. Russia’s invasion of Ukraine in early 2022 sparked a new concern over the supply-demand balance. Prices spiked in August that year to a high of more than 300 euros (£252) per MWh on the TTF exchange. In January that year, before the invasion, prices had fallen as low as 62 euros (£52).

Speculation and alarm is on the rise again. Ukraine’s counteroffensive into Russian territory has threatened the physical security of export pipelines running into Europe. Ukrainian forces captured the Sudzha gas transit station in early August. The pipeline carries around 41 million cubic metres per day.

It is less than ideal that high-pressure gas infrastructure is at risk of the clash of armed forces.

And, regardless of the immediate impact, Europe’s gas supply future seems cloudy. A five-year transit deal for Russian gas supplies via Ukraine is due to end at the close of this year.

The Sudzha system delivered around 15 billion cubic metres of gas to Europe in 2023. These supplies account for 4-5% of consumption.

Ongoing dependence

The UK produces 40% of its gas needs and imports the rest, mostly LNG and pipeline supply from Norway. The country does not receive Russian supplies direct but reduced flows into Europe does heighten competition, driving up prices.

Firm prices in Asia have drawn US cargoes away from Europe, while the Red Sea remains closed to LNG traffic. As a result, the continent is more reliant on Russian LNG. Russia is currently Europe’s third biggest supplier after the US and Qatar.

LNG import capacity is ample, although most facilities are busy through winter. A reduction in Russian pipelines supplies to Eastern Europe may drive additional LNG appetite.

But at the same time, consumption is down almost 25% since 2021. High gas prices have destroyed demand, while renewables are ramping up.

Furthermore, European stocks are high. Gas reserves reached the 90% level on August 22, 10 weeks ahead of schedule. Alternative routes and arrangements avoiding Gazprom could help Russian gas reach EU markets, but volumes would be smaller, while Azerbaijan may also increase flows.

Gas supply from Norway, which is the UK and continental Europe’s biggest pipeline supplier, needs to remain steady to avoid major price spikes this winter. Norway increased its gas exports to Europe by around 10% after Russia’s invasion of Ukraine in February 2022. It meets about one third of the demand in the UK and Europe.

Domestic solution?

Aside from more LNG imports, lower Russian pipeline supply should encourage domestic European suppliers to meet the shortfall – upstream restrictions permitting. But domestic policy in continental Europe and the UK often discourages producers from developing fields.

Several countries, like France and Ireland, have an outright ban. In Germany, Green members of the ruling coalition oppose new upstream investment. They recently opposed gas drilling plans near the Dutch North Sea border after local authorities issued a permit to Dutch firm ONE-Dyas.

The Lower Saxony state had approved the 13 bcm N05-A project in 2022, after Russia’s invasion of Ukraine. It is unclear what the outcome will be, but certainly upstream developers face considerable risk in Germany.

Austria, heavily reliant on Russian gas, is advancing new field developments. These include the largest find in 40 years in 2023, which can potentially double output.

More gas is also expected from Romania. There, OMV Petrom and Romgaz will bring the 100 bcm Neptun Deep onstream in 2027, along with recent onshore finds. But Europe remains gas poor and these developments won’t significantly meet demand in the next few years.

Fortunately for European consumers and politicians, Norway’s government remains focused on maximising extraction and providing gas for its southern neighbours.

The Norwegian government recently asked its appeals court to lift injunctions against three oil and gas fields operated by Aker BP and Equinor. These had been in place since January after a ruling found the state failed to assess their climate impact fully.

This stands in contrast to UK Energy Secretary Ed Miliband’s decision not to contest legal challenges against the Rosebank and Jackdaw fields.

*The 1.2 GW Saltend Power Station. The Film Agency / Equinor.*

Feel the squeeze

The UK approach contrasts significantly with Norway’s, which cut upstream taxes in 2020 to encourage investment and new production during the pandemic. Meanwhile, the UK hiked taxes to punish producers for profiting from price rises.

The UK stands out as the only significant oil and gas producer willing to see domestic output fall. This is even while demand and imports remain strong.

The government has opted to increase windfall taxes, arguing that it will invest the additional revenues in the energy transition.

Offshore Energies UK (OEUK) has argued investment in the sector will fall as a result of higher taxes. A recent report forecast capital investment would fall from £14.1 billion in 2025 to £2.3bn in 2029.

The move risks 35,000 jobs, it has said, and tax yield will peak in 2026. It sees the sector’s total economic value falling by £13bn between 2025 and 2029.

Gas production fell by 7.1% in the first quarter.

Demand issue

The question comes down to one of where UK gas demand goes.

OEUK has pointed to the slow pace of change. Around 80% of UK houses use gas for heating, it noted. Should companies opt out of future investments, the UK would see its gas imports rise from 60% currently to 85% as of 2030.

DNV, in its transition report on the UK this year, said gas is still on track to account for more than 50% of energy demand from buildings in 2050. A move to support heat pumps – and move away from gas boilers – would be needed to accelerate this shift.

Furthermore, gas provides 36% of power required in manufacturing. DNV has said there is “substantial room for further electrification” in this sector, citing the example of Norway.

Change is coming. UK consumption of natural gas fell 10% in 2023, according to the government. Driving this shift was a move by power producers to incorporate more renewable energy, while households reduced their call on heat.

That 2030 target

But is change coming fast enough?

Ember, a think tank close to the Labour Party, suggested it was feasible to reduce the reliance of Great Britain’s power sector on gas from 40% to 1% by 2030.

To do so, Ember said, the country must add 90 GW of wind and solar capacity. The think tank’s report advocated for the acceleration of net zero power to 2030. Bringing this forward from 2035 would provide additional price security for the UK, it said.

Scaling up renewable energy plans this fast will be hard. Afry has carried out its own assessment of the aim for net zero power by 2030 and diplomatically called it a “challenge”.

While Allocation Round 6 was an improvement over the last year, it still fell short of confirming enough capacity. Afry said the government needed to award 5.9 GW of offshore wind in every allocation round until 2027. Only 3.8 GW of new capacity was approved in AR6.

As domestic production declines, the UK will be more exposed to natural gas prices – unless it can move away faster.

The Department of Energy Security and Net Zero (DESNZ) has asked Electricity System Operator (ESO) to plan out how to achieve the 2030 goal. Fintan Slye, executive director of ESO and the new CEO of the National Energy System Operator (NESO), provided some early thoughts.

Ember’s plan to decarbonise focused on a move away from gas. Slye’s response to DESNZ at least keeps the door open. In addition to renewables and flexibility he said, under consideration is the “accelerated delivery of newer low carbon technologies (e.g. CCUS)”.

Gas-fired power plants capturing emissions may count for tackling emissions, but they will also require feedstock – which is set to increasingly come from imports.

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